Company description and history
Tractor Supply Company (TSCO) was founded in 1938 as a mail order business selling tractor parts. They now have 1,450 stores and revenues of $5.7B from everything farmers and ranchers could want besides tractors. Their product category split can be seen below.
Tractor Supply Company’s business model is to “be the most dependable supplier of basic maintenance products to farm, ranch and rural customers.” From a people perspective, their mission is “to work hard, have fun and make money by providing legendary service and great products at everyday low prices.” They joke that “TSC” also stands for “Totally Satisfied Customers.”
TSCO has been growing rapidly, opening >100 stores in 2014. Their goal is to grow another 79% to 2,500. While expanding they maintain disciplined focus on margin growth beyond sales growth (12% revenue, 13% gross profit, and 21% operating income CAGR Dec. 2010 – Sept. 2015) through effective alignment of their business and operating models.
TSCO creates value for consumers by playing in a niche space and providing products at low prices with excellent customer service. They capture value for stockholders by controlling costs, leveraging economies of scale, and driving sales volume. Markets have recognized this, as their stock price has risen 81% $48.49-$87.93 (12/31/2010-12/7/15), outstripping the S&P500.
Product and customer focus
Focusing on recreational farmers, tradesmen and those who enjoy a rural lifestyle, TSCO owns a niche differentiated from general merchandise and home center retailers (e.g. Wal-Mart, Home Depot). This focus protects them from economic downturns as many of their products fulfill basic needs for their consumers. While discretionary items could experience lower turns in a poor economy, they also surprise and delight customers. TSCO’s products are well diversified–no SKU drives >10% of sales. This assortment helps TSCO deliver on their mission to get great products to their target customers. It simultaneously ensures they are making money and growing in a sustainable way. As they continue to grow sales volumes, they will increase purchasing power, thereby driving down costs.
TSCO’s operating model includes a strong commitment to customer service, employing sales professionals from farming or ranching backgrounds. Employees are educated about their products and enjoy the rural lifestyle. Sales professionals go through extensive training often in cooperation with suppliers, aligning incentives and knowledge throughout the supply chain. This wealth of knowledge helps TSCO be a dependable retailer and shared interests make the shopping experience more enjoyable.
Due to the seasonal nature of some products and customers’ desire to touch and try out the merchandise, stores have an open format. Store staff can flex space to optimally display seasonal items, push promotional products, and move small-size equipment around. They also flexibly utilize outdoor space, increasing inventory flexibility while constraining costs.
70% of merchandise is distributed to stores through TSCO’s distribution network, 30% is shipped directly from suppliers. TSCO is expanding distribution centers (DCs) and increasing automation to support growth. Two new DCs will cross-dock to minimize costs on high volume, low value items. Cross-docking re-mixes supplier shipments without using labor and space to break down pallets. This reduces handling costs, enabling TSCO to make more frequent deliveries, minimize inventory and out-of-stocks, while maintaining low prices.
TSCO uses a combination of Every Day Value Pricing and promotions to drive traffic. They advertise through newspapers, direct mail and email, and internet offerings. This is consistent with their business model to offer great products at low prices.
TSCO engages customers through several points of contact including email and their website. Online customers can research, compare, and purchase products. Customers can choose to have products purchased online shipped to their home or office, or a store for pick-up. TSCO is increasing products available for vendor direct to customer shipment. They have also improved their mobile and tablet platforms. They are continuing to push toward a more seamless omnichannel experience without letting the costs of this customer convenience grow out of hand. For example, 30% of online purchases are shipped for pick-up, so supply chain costs are minimized and the customer is brought into a physical store, encouraging additional purchases.
As TSCO continues on their path of rapid expansion, staying true to their values, maintaining strategic and operational alignment, and communicating these priorities to new stores will be key to their success. Investors will expect TSCO to continue to expand their margins through the plans they have laid for operational efficiencies and for improving customer service through an increasingly omnichannel experience.