CEO Interview – Jim Wright

Tractor Supply
Interview with Jim Wright, Chairman and CEO of Tractor Supply

Tractor Supply has made tremendous progress over the last decade and transformed itself in terms of the customer target and growth. How have you done that, especially in the last few years amidst such a challenging retail economy?
We’ve done very well since 2008 and continue to do so through the first three quarters of 2010. Margaret, the primary catalyst for us was as retailers, we have a tremendous amount of data. Early in 2008 we noticed our consumers’ behavior was changing. The average ticket began to come down and cash and debit became a more preferred tender type, as opposed to credit. So early in January of 2008, we “called” the fact that we were in a recession. Of course, we weren’t positive, but we saw the signs of a recession and determined that if we made that call and were wrong, then we would do well, and if we made that call and were right, we would be OK.

We got the full team together to be inclusive so whatever decisions were made involved our team members from our store managers up. By March of 2008, I had personally spoken with the top 1200 people in the company and had a plan.

First, we were going to be committed to helping our customers save money during the recession and we would do that primarily on the items that they bought most frequently (which we define as CUE items, which stands for consumable, usable and edible products – that includes large animal feed and pet food).

We increased our inventory allocation in those categories, increased the amount of display space they received, and increased our advertising allocation to those categories. Concurrently, we eliminated all of our TV advertising. In my retail career, I have never been able to correlate spending on television to a sale. Some of that we converted to direct mail, which we can measure. Much of it went to the profit line, which allowed us to lower our margins on consumable products on the philosophy that “if the stores were right and the interaction with the customer was right, then the brand is right”. We will build loyalty by giving customers a great deal every day of the week, not just when we advertise.

Then we announced “Project Trim”, which included a “hiring frost”. If you announce a hiring freeze, and you replace a “mission critical” person in one department but not a position somewhere else, people get upset. The frost allowed us to continue to make strategic hires. Part of “Project Trim” was to watch over every expense and get everyone on board. We asked people to check their offices and if they had more than two pens, to keep them and to turn the rest in and if they had more than two post-it note pads keep two and turn the rest in, and so on. Frankly we needed to find places to store all the things that got turned in. It wasn’t meant to be a money saver in supplies; however, we saved tens of thousands in office supplies over a year. It was successful in getting peoples hands and hearts involved in finding ways they could contribute in beating the recession. Probably the most significant component was the pledge to the company that my personal measurement of success through the recession was this “If they are with us that day and they are contributing and they continue to contribute, and if I did my job, they would be with us at the end of the recession regardless of all else.” So we pledged to them that we were going to reduce everything else, but not productive head count and, as a result, we didn’t have to. During 2008 and 2009 we opened 167 stores and added about 1500 new positions – most of those at store level.

How did same store sales fare?
We were up 1.4% in 2008 and down 1.1% in 2009. This year, through the third quarter, we’re up 4.8%. However, while many people look at same store sales as the metric for retail, it’s a bad metric. During the recession we decided not to pay attention to same stores sales because it was only a proxy for the right metric. In my mind, the right metric is comp store margin dollars net of the advertising spent to produce them. That’s how we managed our business.

When you go to your merchants and marketers and say “this item is going to produce a margin day in and day out and when you mark it down it produces this amount of margin, your unit lift has to be this big; and by the way, the ad costs this much and the page in the ad costs this much.” The gross margin lift, during the ad period, has to exceed the cost of the advertising. If not, then something was wrong with the item selection, the time of the ad, pagination of the ad, theme of the ad, whatever the case and we do a correction of errors on every ad and we get better. So even though our comps were up 1.4 and then down 1.1, our gross margin dollars were significantly up in both of those two years.

What kinds of things do you feel are going to be necessary for Tractor Supply to do to maintain performance or even excel further?
We have repositioned our business in the last 10 or 11 quarters to improve our earnings and grow our business. We would very much enjoy a recovery, but if this is the “new normal”, if things don’t change significantly, we are in a position to continue growing our business 8%/year. We have continuous improvement projects in place and have been able to leverage our expenses much better. Very few consumers would confuse us with being a luxury retailer; we sell basic goods that are fundamental to the lifestyles of our customers. They are going to continue repairing equipment, fencing their animals in or out, and taking care of their animals’ health. They will continue to work the land and harvest what they plant and we’re well positioned at the intersection of the lifestyle and geography of where these consumers live and their needs.

How much consideration have you given to what seems to be a growing trend among retailers to have a meaningful presence online?
We are online today. We view our online activity through three significant platforms.

The first, and what we feel is the most important, is content. By content, I’m referring to information on lifestyle and products that our customers can find on our website. We are proud of our content but not nearly as proud as we’ll be in one or two years. We want to be great at content, which is information and advice.

Next, we want to be great at community. The scenario would be that if we have a customer who is raising draft horses in New England and another who is raising draft horses in New Mexico, we would like to put them together, host a conversation and be quietly in the background as the sponsor of this bridging of people who would never meet geographically, yet share the same passion for a lifestyle. We are just beginning to build “community”.

The third would be commerce or ecommerce – selling online. While we want to sell goods online we need to recognize that due to the products we sell, that only a subset of our product will ever be able to be purchased or shipped online. So we really look at commerce as using the web to support our sales and our stores and to eventually create some transactions.

I understand you still have ties to Kansas City. Since I have offices there as well as Nashville, I am interested in the story that brought you to Nashville and Tractor Supply.
Actually the story is longer than that. I came from Wisconsin to Detroit to Kansas City to West Palm Beach, FL to Nashville and Tractor Supply. Immediately preceding my time in Nashville, I was the CEO of a private equity owned chain of tire stores in West Palm Beach, FL. We repaired the company and sold it. Two weeks after we sold that company, I received a phone call that there was a search for a President and COO of Tractor Supply. I was curious, so I had them send me the information and I began to visit the stores to prepare to meet with the executive team and the board of directors. It was about a four month long courtship. Tractor Supply had a strong foundation of mission and values, as well as clarity and agreement around what is ethical. I visited 30 or 40 stores, I saw the ethics of the company, and people carried a card with the mission statement and values in their pocket. The first store manager I visited witnessed to me for 10 minutes about the ethics and values of this company. I found that true of the executives I met, as well as the board of directors. Having that foundation in place makes everything else possible. If a company is lacking in positive culture it takes years to develop one. Having that foundation in place has made it easier to create and sustain a high performance company.

How would you describe the leadership style you brought to Tractor Supply and did it create any changes from how the culture was implemented or interpreted?
I would say no, on the culture side; it changed very little. I probably took every opportunity to shine light on it. What I brought was a dedication to servant leadership, which I practice, and demand of others, and a spirit of “relentless dissatisfaction” of the status quo. We practice BHAGs at Tractor Supply, and, in addition, we have put the stability of process in place; translating vision to the store level. As an example, the first thing we had to do in 2001 was reduce our store manager turnover; it was 44% in 2000 and it’s been in the teens now for the last several years. Without a stable work force at the store level, everything else is unsustainable. You can advertise to pull people in but they might have a bad experience. You can’t promise something at the national level and not be able to deliver it at the local level. So stabilizing the work force was our number one issue.

I often refer to the challenge of selecting and managing the people as the ‘fifth P” of running a great business and it appears to be growing increasingly important. It would seem particularly so in retail as the brand happens at the point of transaction, translated by the hourly people that touch the customers. In visiting your store, I saw a sign that read, “Satisfaction guaranteed, every team member has the authority to do whatever it takes”. So how much autonomy do they have?
We empower our team members by telling them that a vote for the customer is always a vote for their career. Simply put – take care of the customer. The worst thing that can happen is we will tell them how they could have done it at lower cost the next time. If they ethically take care of our customers, they can not get in trouble. If it’s a store associate, we ask they get a partner if it’s an unusual request, such as the store manager.

Everybody has a great customer service story. Can you share with us a story about above and beyond customer service by one of your team members?
It’s probably more important to share what happens when we see above and beyond customer service. We tell success stories in our company. For example, if a disappointed customer arrived at one of our stores, and worked with one of our team members, who did a wonderful job of satisfying the customer, that store manager might write an email to his/her district manager saying “guess what Sally did”. Now, if Sally did something really remarkable, the district manager would send it to the regional manager and say “look what Sally did”. The regional manager, if it’s a great story will say back to Sally and the entire region, “You did a great job and I’m really proud of you”, and then I get copied. I get dozens of them per week. So we have a methodology in our company of trying to catch people doing things right, both on the sales side and the customer satisfaction side of things. We celebrate them widely.

Here is an example: In the last three weeks (this was on YouTube), a tornado hit a town and the power was out for a few large retailers and us. The local news camera showed the one store’s members out front saying, “I’m sorry we have no power, we’re closed”. Same with the next retailer. At Tractor Supply our team members were greeting customers with flashlights. In the back, they had found an old manual credit card imprint machine and we were open for business. Now that didn’t happen because someone called for permission; it happened because the culture of our company is “take care of your customers”.

In order to conserve expense, some companies are spending less on service or adding costs—like hotels starting to charge for internet connections again or airlines charging for bags. How do you manage your customer service approach—the cost vs. the benefit?
We believe in the lifetime value of customers. Some retailers believe in the transaction, as opposed to the relationship. We know that our average customer shops at least 7 times a year and if that becomes 8, our sales go up 15%. We know that customers who are truly loyal are twice as likely to repeat, twice as likely to refer, and much more likely to try our private brand products. They will give us a share of their wallet. We have strived for a number of years now to improve customer satisfaction and we’re in the top two deciles of hard line retailers with regard to the number of customers who give us a 5 out of a possible 5. When we correlate that over time to same store sales, we believe that it is a leading indicator, as opposed to same store sales being a lagging indicator of what’s going on in an individual store.

I agree with you that revenue and profits are very important but lagging indicators. The activities that drive them are behind you. So measuring those drivers can help you navigate your way to achieving goals. Many studies correlate strong customer service companies with high performing revenue and profit companies.
The book “The Loyalty Effect” discusses that. We believe it starts by having loyal team members. We know that if we have them, then we have a chance of having loyal customers. We also want long term loyal shareholders. We do not make decisions for the quarter. We make decisions based on the opportunity, and over time that value compounds.

You’ve discussed how the entire organization is a part of the team and striving to create employee loyalty and commitment to company values. How does that fit into developing future leaders? Do they come from within the company, do you hire externally?
We do both. Speaking of store level, today about 2/3 of our newly promoted store managers were internally developed. We have developed a very deep bench. The vast majority of our district managers are hired internally. We have a “Tractor University” and there are several classes that we use to develop the competency of our store managers, and our multi-unit managers. When it comes to executive disciplines, we do both. The last three years, about half of the top 15 were new to the company or new to their position. We look at it on a case by case basis. In our last marketing search, we found it very beneficial to go to the outside, looking for a point of view that we simply didn’t have. We hired a general counsel and our CIO from the outside. Today we are a three billion dollar company and 10 years ago we were a three quarter of one billion dollar company and we’re growing towards a five, six, seven, eight billion dollar company. We need a team who has the skills to get us there.

What is your vision for Tractor Supply in the year 2020?
In 2020, we will have 1800 stores or more. Our revenue should be approaching $9 billion dollars, that’s a 150% increase over a 10 year timeframe. We’ll become highly respected as an employer of choice.

Who has influenced you the most in your leadership style along the way?
Most of my mentors have shown me what NOT to do. I think Ernest Shakelton is a great model. He was a courageous individual to take an open boat across the Southern Sea from Elephant Island to South Georgia Island and safely return 22 sailors after a terrible shipwreck. He did it facing tremendous adversity, including some people he didn’t like very much, but he needed their skills and they formed a team. That’s a remarkable story. (Endurance; Shackleton’s Incredible Voyage by Alfred Lansing)

On the business side, Ken Iverson is a great story from Nucor Steel. Although Ken passed away five or six years ago, the story of how he took Nucor, that wasn’t originally a steel company, to greatness is a good one. He attacked niches the integrated companies in the steel industry believed were of low value or low growth and as he got bigger, and began to move up the value chain, he attacked margins. He had a very small corporate staff, and broke the paradigm by putting steel mills in southern towns. One of his quotes was, when asked why he was moving the steel industry south, he said something along the lines of “I can teach a farmer to make steel, but I can not teach a steel worker to work like a farmer.” He had a philosophy of hiring 6, paying them like 8 and working them like 10. A steel worker for Nucor had the ability to increase their pay by 80% through incentives based upon productivity.

Another is Andy Grove of Intel – a great story – he had the courage to walk away from 70% of their business. They made the decision to “sell” 70% of the business, and focus on the computer chip. He has interesting sayings such as “fail often, early and cheaply”, which is something I quote in the company all the time. Another one is “success breeds complacency, complacency breeds failure and only the paranoid survive” and “run like you’re being chased, because you are.“

Leadership style evolves over personal trial and error, personal study and what makes sense. You mentioned Jim Collins earlier, and I read Jim Collins “Good to Great”. I agree with everything he said—I see it in action. We just had the team read his last book, “How the Mighty Fall”.

If you were going to give advice to an up and coming executive that you felt would eventually be in a CEO office on the subject of leadership, what advice would you give?
First of all they have to set the tone from their chair, which means they have to lead in frugality, they have to lead in effort, they have to lead in humility and if their going to win in today’s business environment they better be passionate. They are entitled, entitled to work longer and harder and bear more weight than anyone else. They are going to turn the pyramid up side down and serve those who serve those who serve those who serve the customer. It’s a very simple philosophy.

Jim Wright is the Chairman and Chief Executive Officer of Tractor Supply Company, a $3.5 billion, NASDAQ Traded (TSCO), retail farm and ranch store chain based in Nashville, Tennessee. He joined the company as the President and Chief Operating Officer in November 2000, was named CEO in 2004 and was appointed Chairman in 2007.

Before moving to Nashville, Jim was President and Chief Executive Officer of a 150-store chain of tire stores headquartered in West Palm Beach, Florida. Jim is a career retailer having held executive positions with Western Auto Supply Company in Kansas City, Missouri and K-Mart Corporation in Troy, Michigan.

Jim is a board member and lead director of Spartan Stores, a NASDAQ traded $2.8 billion food distribution and retailing company. He is also a Board Member of the National Retail Federation. Previously Jim was chairman of AAIA a 1,700-member trade association.

He and his wife, Susan, have been married for 41 years. Their two grown children, Christopher and Samantha, have blessed them with 5 wonderful grandchildren.

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