Walmart

0:00 I love how this book is called Made in America and the Sony story is made in Japan. Like I don't know who stole from who there or if it was just the natural title they both chose and did even consider it, but that's amazing. Ah, so so great. Who got the truth? Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you? Down!

0:27 Another story Welcome to season 11, episode one, the season premiere of Acquire. the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal and I am an angel investor based in San Francisco.

0:54 And we Are your hosts. When we did our Sony episode, we discovered that many Steve Jobs isms really started as Accio Marita isms. And in all of the research for today's episode, we learn that many of the mental models and quotes ascribed to Jeff Bezos are were really the original thoughts.

1:12 of Sam Walton. But of course, that is also not entirely true either, since Sam Walton's greatest gift was the ability to digest, learn adapt, test, and integrate new ideas. From others. Today we explore Sam's creation, which ushered in a new era of American retail and now global retail.

1:34 from the post World War Two period all the way to today. Some astonishing stats on the company. is the largest by revenue in the world, doing nearly$600 billion a year in sales. Although Amazon is close behind now.

1:50 It's true. It is the world's largest employer, other than public entities like governments employing nearly 2.3 million people around the world. It is still controlled by the Walton family, who owns just over fifty percent of the business a full sixty years. after it was founded. Oh, we're gonna get into how and why that is the case. One other fun stab for you.

2:14 Today. Ninety percent. Of America. lives within ten miles of a Walmart. But there are three places.

2:22 Where that is not true. And a fourth kind of where it's technically true, but not in spirit. Do you know what those places are? No. San Francisco. Seattle.

2:33 No way. Boston. And the fourth place is Manhattan in New York City. It is not technically true because there is a Walmart across the river in New Jersey that is less than ten miles away, but In spirit, that is true. What two and a half hours to get there or something. Yes. Wow. So you're saying it's not a company that uh is built on the urban core. Is that where you're going, David? It's the biggest company in the world.

2:56 It services all of America, except Where we live. Yeah, it's fascinating. This really is one of the most classic business stories in America or in the world, period. And I kind of can't believe that we're not covering it until now. So let's start season eleven with the bang.

3:12 There are so many lessons that are totally applicable today and every entrepreneur can learn from Sam Walton. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

3:49 So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done.

4:04 And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time.

5:01 Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million Eighteen months.

5:16 Mm. Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you.

5:42 Well, after you finish this episode, you should come discuss it with the twelve thousand other smart curious members of the acquired community at acquired.fm slash slack. And if you are dying for more acquired, go check out the acquired LP show. You can search for that in any podcast player. The next episode will be an interview with Patrick Campbell on all the juicy details. Of how his 200 million dollar acquisition of Profit Well went down step by step, deal point by deal point. And if you want that early, it is already live for paid acquired LPs at acquired.fm slash LP. Or by clicking the link in the show notes.

6:19 So cool, Patrick totally Bootstrapped. Prophet Well. Almost like Sam Walton, totally boots draft. Walmart. Yes.

6:28 Well, without further ado, David, take us in and listeners, as always, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. Indeed. Well, We do. Have to think. The man.

6:44 Sam Walton himself. And his co author is. John Huey for his autobiography, Made in America. Which is just Amazing. It's the backbone of the history we're gonna tell here.

6:55 We first got turned on to it. Going back and rereading the Everything store and finding out that it was one of Bezos' favorite books that form the blueprint of how he thought about Amazon in the early days. And I think what's cool reading it is it just struck me that Sam and the Walmart story. is like the bridge between

7:13 the business America that was John Rockefeller and Standard Oil and Amazon and Jeff Bezos. Like This is the connective bridge between those two realities. In many ways he was the last of the Rockefeller type Tycoons. But the first of the sort of modern

7:30 megacorp not tech business, but almost tech business era founders. Oh, very much tech business. This is what shocked me. reading the story is how much Walmart embrace technology and say I'm embrace technology. And I think they were arguably the first corporation In America to embrace computing as a business paradigm. Certainly to embrace their own private satellite network. But I'll save the spoilers. Okay.

7:55 We start. Back in March. Nineteen eighteen. In Kingfisher, Oklahoma. Which is right in the middle of Oklahoma.

8:05 Not too far from Oklahoma City. At the time. In nineteen eighteen, the population of Kingfisher was twenty five hundred People. Today

8:14 It is much larger. Bustling. Metropolis. Of five thousand people, but of course those five thousand people. Have just about every

8:24 retail need of theirs serviced in a first class way. By the local Walmart Super Center. That is located just south of town. Walmart grew at a much faster rate than the uh two X that Kingfisher grew in a century.

8:37 This is crazy. Kingfisher, twenty five hundred person Kingfisher around this time is also The birthplace of the Coleman company. You know, like the outdoor like camping. Yeah. Started in Kingfisher, Oklahoma. Didn't Jim Weber from our Brooks episode start his career at Coleman? Oh, I think that might be right. Oh yeah. We're on like an accidental CPG retailing kick here. I know. So great.

9:03 Well anyway. Back in March of nineteen eighteen. Yeah. One Samuel Moore Walton.

9:10 was born to Thomas Gibson Walton and Nancy Lee. Their first oldest child. And at the time of his birth, Tom and Nancy. were farmers.

9:21 But It was nineteen eighteen. This was right at the end of World War One. We're heading into The Roaring Twenties in America. People are raising their standards of living, the country's modernizing. They wanted to move.

9:33 Up in the world. And so his dad goes from Working on The farm himself. to getting into farm.

9:41 Financing. He becomes a mortgage broker for farms, working with his brother in the business. This is a Theme that's gonna recur in the Walton family. And speaking of brothers. In December.

9:54 Nineteen. twenty one. Sam gets one for himself. One James Lawrence Walton. Better known. His bud.

10:03 Shortly after Bud is born. The family moves from Oklahoma to Missouri. Where they move around a bunch. Before ultimately settling down in the lovely, we can personally say Truly genuinely lovely town.

10:16 Of Columbia. Missouri. Home of Capital Camp. Yes. Home of the University of Missouri Capitol Camp and

10:24 Permanent equity. And our friend Brent. These are there. Yep. So the twenties were good times for the Walden family.

10:31 Unfortunately though for Sam and Bud, maybe fortunately for Walmart, they don't really get shaped by the twenties, you know, they're still like little kids growing up in the twenties. What really shapes them Is The thirties. And the thirties were very, very

10:45 different for the middle of America. All of America. But the hardest hit part of the country during the depression. Was the Midwest. farming community because of the dust bowl.

10:57 Mm. So if you've ever read it. The grapes of wrath or any of the great Novel Steinbecker otherwise from that period. It was

11:05 Terrible people lost. Everything crops failed. And What was the Walton family doing at this time? They were like doubly leveraged. It wasn't just that they were Farmers.

11:16 They were Financers. of farmers. So They're living in this nice town of Columbia at this point. Tom has to go travel around to all these farms that he'd financed and

11:27 Forecloth on them. Literally. kick people out of their farms, out of their homes. And he would bring Sam and Bud along with him for this. I remember reading in Made in America. I sort of thought that what Sam was gonna say is

11:40 that his father worked with these farmers the best he could to help them save the business where they could or cut a deal. But no, what he actually just said was and he just did it in the most humane and decent way possible. And you're like, whoa There were nothing deals or negotiations to be struck. It is we are foreclosing and we just have to be a good human to you, well this is definitely happening. I mean, that's probably why he brought the kids along, right?

12:06 Probably hard for somebody to uh attack him or get too mad if he had his two little kids there with him. I wonder. Yeah. Crazy times. But yeah, so all of this makes an impression on Sam, and Sam says in the book in his very same way.

12:19 Quote. All of this must have made an impression on me as a kid. Although I don't ever remember saying anything to myself like I'll never be poor. But he says one thing my mom and dad sharely

12:31 was their approach to money after all this. Food. They just didn't spend it. I think we've already kind of made the point, but the Walton family goes on to be the wealthiest family in the world. Still.

12:43 All of Sam's future generations are worth a few hundred billion dollars depending on the day that you look at Walmart's market cap, since it's nearly all invested in Walmart, but it's a multi hundred billion dollar family. Yeah. Incredible to go from that.

12:57 to this in two generations. So Like many kids during the depression. Sam and Bud as they're growing up. They do all sorts of Odd jobs around the house to help out the family.

13:08 Their mom. goes in Columbia and gets some cows and sort of restarts part of the Farming business, she starts a milk. business that they help out, you know, milking the cows, delivering to Neighbors in Columbia.

13:20 Sam starts selling Magazine subscriptions He also starts selling rabbits and pigeons that he raises in the backyard. I don't know who was buying the rabbits and pigeons, but that's what he does. He learns retailing at a young age, though. Indeed. And then of course

13:36 Like every good acquired protagonist. He gets A newspaper route. For the Columbia Missourian. Just like

13:45 Warren Buffett. That's right. That was on Berkshire Part One, that episode we did. Yeah, I think that was part one. Yep. Oh, that's right,'cause he delivered the Washington Post. Before later going on to become a major shareholder. So besides all of these sort of proto

14:00 entrepreneurial. ventures that Sam is undertaking as a teenager. He also becomes at age thirteen The youngest Eagle Scout

14:10 Ever certified in Missouri history. Ben, you were an Eagle Scout. How old were you when you became a I got one just in the nick of time when I was seventeen and a half. You must get one before you turn eighteen. That is the last day that you can get one. You cannot become a boy scout, and this is the rules now. I don't know if it's the rules then, but until you're like

14:32 Twelve? Or eleven and a half or something like that is when you sort of graduate Cub Scouts. So Sam got his eagle at age thirteen. So It must have been the only thing he did for that year and a half or whatever. Like that's the fastest advancement to go through whatever five or six ranks in that short a period of time. Maybe he counted uh.

14:54 Raising the rabbits and pigeons. Yeah, that's right. May some error badges in there. So the other thing, this is pretty crazy. That young Sam as a teenager exhibits.

15:03 He becomes the quarterback of the football team in his high school. Sam if you've ever seen any. Photos or video. He's such an incredible folksy dude. Listening to his talks is just amazing. He's five foot nine and very slight. So you wouldn't think that he's gonna be a great football athlete.

15:23 This is incredible, though. I think they win the state championship every Year because He never loses a game.

15:34 This is crazy. had an important effect on me. It taught me to expect to win. To go into tough challenges, always planning to come out victorious. Later on in life, I think Kmart or whatever competition we were facing just became Jeff City High School, the team we played for the state championship in nineteen thirty five. It never occurred to me. That I might lose.

15:58 To me, it was almost as if I had a right to win. Thinking like that. often seems to turn into sort of a self fulfilling prophecy. And man. Was that Sam Walton?

16:10 there's like two sort of contrasting ideas that I've heard different VCs and different founders espouse on both sides. One is, you know, you learn from your mistakes and you learn from failure. The other is If all you've ever done in your entire career is be in really high performing, very successful environments, then that is kind of all you know how to do. And that's the bar that you hold yourself to. And I think there's totally merit to both. I think Both of these forces shape Sam, right? Like the depression, the Dust Bowl, foreclosing on farms, you know, his dad's struggles. And

16:42 He never loses a game. All of that goes right into Walmart. So much of Walmart is trying something, doing an experiment, watching it fail on some small scale, choosing not to roll it out, or watching it succeed, and then choosing to rapidly roll it out across as many stores as possible. We'll get into this, but the very first store opening, they put a whole bunch of watermelons outside. It was swelteringly hot. They started exploding in the parking lot and getting watermelon juice all over all the customers in their cars. That was actually Walmart number two. Oh, sorry. That was in Harrison. We'll get there, but yes, legendary story. So

17:16 After high school, he goes on to college locally at the University of Missouri. The only way he can go,'cause his family has no money, it's a depression, is he attends on a ROTC scholarship. So He's still Has to like pay his living expenses and mom and dad in the family aren't gonna

17:34 Help out. No money in the family. So he keeps his newspaper around. But like he's busy, you know, and he actually he has like political aspirations on campus. He becomes the president of the class, you know, he's greeting everybody, he's in R O T C, he's busy. So he hires

17:50 A few people. Under him to actually like do the delivery of the newspapers and help kind of scale the business. By the end of college, he's making four to five thousand dollars a year from his newspaper activities, which That's like huge. We're gonna get into what his first job pays him in a minute.

18:09 But four to five thousand dollars a year. In the thirties during the depression. That's a lot of money. Yeah, it's crazy. And there's a great quote in the book from the circulation manager.

18:20 Of the Missourian. says we hired Sam to deliver newspapers and he really became our chief salesman When school started, we had a drive to get the kids in the fraternities and sororities to subscribe. And Sam was the boy we had do that because he could sell more than anybody else. He was good. He was really good. It's so interesting that this story parallels Warren Buffett's story in so many ways, but the reasons that they're successful are different.

18:46 Warren's is about understanding the value of compounding. And it's not that Sam didn't, but it's that Sam was a salesman. He's a merchant. He's a retailer. Like he understands how to learn what people want and then go procure the thing in the way that they want it and deliver that to them. There are different superpowers that manifested Both in building. early successful periodical distribution.

19:10 sub companies. Warren basically. stayed an entrepreneur. Sam is clearly this natural entrepreneur. When it comes time for graduation, though. He decides

19:21 You know what? I think I'm just gonna go get a regular job. even though he's making so much money from his newspaper businesses. So he interviews with two companies who come recruit on campus. J C Pennies and

19:34 Sears. And he goes with the offer from JC Penny. Which is interesting because Sears was the dominant retailer. Everyone bought everything for their homes, including some homes from Sears. Yes.

19:46 I think the first house we lived in in Seattle was a Sears catalog home. Wow. Yeah, so like this is what's funny, and you know, and Sam is like he really keeps it real in the book. You know, you could tell this like backward looking narrative of he connected all the dots. He wanted to go learn retail, learn the craft from the best, in which case he would have gone to work for Sears. But no, he writes.

20:10 I had big plans. For after graduation. I figured I would get my degree and go on to the Wharton School of Finance in Pennsylvania. Buffett. Just like Warren. But as college wound down, I realized that even if I kept up the same kind of work routine I'd had all through college,

20:26 I still wouldn't have the money to go to Wharton'cause he would have had to pay. Tuition. So I decided to cash in what chips I already had. I visited with the two company recruiters who came to campus. Now I realize the simple truth. I got into retailing because I was tired. And I wanted a real job.

20:42 Wow. It would not bring him any rest, though. No, no, no, no. Maybe this first job at Penny's, or as he calls it Penny. I don't think he colloquializes the way that people did in our era. Like I always call J C Penny pennies. Right. Well he

20:58 Ultimately ends up getting to meet. James Cashpenny himself. Wait, the guy's name is James Cashpenny? I know, isn't that awesome, James Cash Penny. That's almost as amazing as Price Club being founded by a guy named Saul Price. Oh, we are gonna talk a lot about soul price.

21:15 Yes. So he's tired, he just wants a regular job. But he's this natural born. Salesman. So he goes to work. In the Des Moines, Iowa.

21:23 Store of J C Penny. As like a floor. Salesmen. And he does great. I mean, literally James Cashpenny comes and meets with him himself, and the story that Sam tells is JC shows him How to

21:36 tie, you know, packages, merchandise that is sold with the least amount of twine and paper possible, but still make it look nice. To save money. But of course, pretty quickly this only lasts eighteen months because in December Ninete one. Pearl Harbor happens.

21:52 And the US of course enters. World War Two. And Sam had been in R O T C, he's commissioned, he's gonna join the army. He was looking forward to this, so Bud, his brother.

22:00 joins the Navy, becomes a decorated bomber pilot in the Pacific. You know, Sam thinks he's gonna go probably off to Europe. But he fails. The physical exam.

22:10 For combat duty. Turns out he had a heart. Irregularity. And so he's kinda depressed, he's unhappy about this, Bud's going off to join the Navy. And Sam is gonna stay home in America at a desk job. So before he gets his commission.

22:25 He leaves Des Moines and he goes back to Oklahoma. I'm not exactly sure why he just sort of Traveled back to Oklahoma. He says in the book that he was sort of depressed at the time. And he ends up In Claremore. Oklahoma.

22:38 Which is a small town outside of Tulsa. Which It's interesting to point out we've mentioned f six, seven towns so far. And I don't think most people would have heard of a single one of them.

22:50 There's a parallel here between Walmart's success and the fact that most people haven't heard of most of any reference that we've made so far. And there one night And A. Bowling Alley and Claremore. He meets and falls in love with

23:04 With a girl named Helen. Robson. And Helen was from Claremore. But her. Father.

23:10 L S Robson. was unlike Sam's family. A very wealthy and successful Businessman, financier, trader,

23:21 in the broader Tulsa. Area. And he ends up taking a big shine to Sam and would become Hugely influential, along with Helen.

23:31 Because he marries Helen, of course. And Sam would say the Robson were very smart about the way they handled their finances. Helen's father organized his ranch and family businesses as a partnership, and Helen and her brothers were all partners. Helen has a college degree in finance, which back then was really unusual for a woman. And Mr. Robson advised us To do the same thing with our family. Which we did way back in nineteen fifty three.

23:58 And that partnership. That Helen and Sam set up. is today Walton Enterprises, which owns thirty six percent. Walmart. And then individual family members and and trusts, uh I think mostly Bud's family owned the other eleven, twelve percent.

24:15 Yeah. This is the interesting seed plant of Walmart being a family business from the very get go. They organized it interestingly. Each store was actually its own company, so that different people could sort of hold shares in each store. The management, different people who, you know, wanted to invest in the store, that sort of thing. But at a really high level. Walmart always was a family partnership. It was always something where the

24:41 Economic and spiritual ownership and decision making always was The Walton family. And of course. Sam's the guy, but There was a lot of family meetings to make decisions for the business.

24:54 And this is why because the family We're all partners. In Walton Enterprises, they couldn't just sell. They're stocked.

25:02 the partnership, the family as a whole, had to decide to sell, and that allowed them to keep majority control of Walmart. All through the history, Sam talks about this. He says he thinks it's the big reason why corporate Raiders or larger companies like Kmart never came and acquired them because The stock was never splintered. It was all within

25:23 The partnership. And he actually writes, One of the real reasons I'm writing this book is so my grandchildren and great grandchildren will read it. Years from now and know this. If you start any of that foolishness, like changing the structure, selling off stock, you know, going off and doing, you know, fancy things. Buying NBA and NFL teams. Buying NBA and NFL teams, which they do now. I will come back and haunt you. So don't even Think about it.

25:48 I love that warning. So Sam and Helen get married. And Sam gets posted in a bunch of places all around. the country doing kinda internal intelligence work for the army.

25:59 He goes to Utah, plenty of other places. And he decides that when the war ends and he gets out of the army, He's gonna go back into retailing. But now He has the support.

26:11 And they're financiers. So he knows I now have access to some amount of capital. Like I can be an entrepreneur. I don't necessarily have to work for somebody. So when the war ends L S initially wants them to move back to Claremore.

26:29 But Helen and Sam kinda decide together they're like, Well We want your support. But we don't wanna be totally Under your wing and In your shadow.

26:38 So Sam He's got big ambitions. He and a buddy. decide that they want to buy Hm.

26:46 Federated store. Department store. franchise in St. Louis. They're gonna be big, you know, he come from JC Penny and Des Moines. He wants to be a you know big city. Department store.

26:59 Owner, magnet. Entrepreneur. Helen. Vito's this outright. We would not be talking about

27:06 Walmart if Sam had moved the family to Saint Louis. So Helen says Look. One.

27:13 I don't want you doing any partnerships. with non family members. Uh Sam says her family had seen some partnerships go sour and she was dead set. on the notion that the only way to go

27:26 For yourself and for your family. And two. She says, I don't want to live in a big city. I want to go live in a small town like where I grew up in, just like Claremore. I don't want to live in Claremore itself. But We are not allowed to move to any town that has a population of more than ten thousand people.

27:44 I mean her whole thing was, I wanna raise my kids the way that I was raised. And she looked at Sam and said, You were raised the same way, small town, and like that's what we're gonna do. And so whatever business he did had to be family owned and controlled and have a small town base strategy. And so like What seems so intentional and so genius is Actually stems from the fact that She just vetoed his original idea.

28:07 Totally. I mean it's crazy. She had a an undergraduate degree in finance for woman at that time. I mean, she was very involved, obviously, in the strategy of the business. In the thirties and forties, the number of women with undergrad finance degrees in the US is probably

28:22 Tens of thousands? It could not have been a large number. Yeah. And also like kudos to The family and L S and his wife for

28:31 Encouraging her to say she had brothers, like it would have been easy for him to say, like, Oh, okay, the boys are all gonna take over the business. Right. Which is like what we saw in the New York Times family or Yeah. Or the Rockefellers too.

28:43 So Sam You know, he doesn't stay down for long. I think he was a little disappointed that his wife had o overruled him, but Yeah, he finds a way. So he goes back. to the company that owned

28:56 Federated, which has a company called Butler Brothers. They were franchisers of Federated, they were based in Chicago. And he asked. Well, do you have any uh department store locations that might be available in uh

29:09 Small town of say ten thousand people or less? And The Butler Brothers guys are like um We don't really do department stores in uh in towns like that. But we do.

29:20 have another, you know, sort of spin off operation that we run. Which is our variety store franchising business. Like there literally wasn't enough people, they believe, to support a department store. Variety stores are They're like glorified general stores. I mean when if you think about a town that's like two, three, four thousand people.

29:38 It really is like if you visited an old West Town and looked at a a general store. It's like that on steroids. You know, it's like that, but A few decades later. You know, variety store businesses. Yeah, that's exactly it. After the depression and after World War Two, that was how small towns and areas were service to retail. And they're mostly franchise operations. This particular one was

30:00 Ben Franklin was the brand name, like Benjamin Franklin general store type place. And when you say franchise operation, it's because it's way too much of a burden to like source your own inventory, carry your own inventory, maintain all those different vendor relationships. If you're in one of those towns, you're serving two thousand people, you're kind of the one store there. What you really want is to sign a contract and just get the shipment of the stuff that goes into the Ben Franklin stores in all the small towns. Yep. And just be Literally the merchant serving your customers. That mindset dominated, it's worth a pause here to talk about

30:36 What these stores were because it's a very foreign concept to anything we're familiar with today. These variety stores, they were also called Five and Dimes. You've ever heard. That term. Like a five cent, ten cent store.

30:49 And the reason for that Is that most of them Every item in the store was either priced at five cents or ten cents. That was the level of sophistication here. The other Big, big difference.

31:02 between how these stores operated and modern retail today, which say I'm really invented, was they weren't self service. Oh, he didn't invent that, he stole that. We're gonna get to it. We're gonna get to it. Okay.

31:15 So you would walk into these stores. And There'd just be a counter area up front. That had clerks. And you would tell the clerk.

31:23 What you wanted. And then the clerk would go back into the store, pick out what you wanted, bring it up to the front, and check you out. 'Cause like there wasn't really choice. You're like, I need a hose. And they would go get the hose. It's not like well let me see all the different brands and sizes and colors. It was like

31:41 I know you have hoses here. Can you get me one? the merchants weren't making the decisions on the inventory. It was all just being handed down On high from Butler Brothers back in Chicago. Yeah.

31:52 I did not understand. when reading this book, when he kept referencing stores, that they were not stores where you walked around and got your own stuff off the shelf, that that is a modern concept. That is crazy. I don't know exactly how the department store model worked. Like you know, J C Pennies or Sears. Where Sam had worked.

32:11 But I think it was also not really what we're familiar with. I think when Sam was working as a Salesmen and Des Moines had pennies, You know, it was sort of like an even higher touch version of this, I believe, where like a customer would come into the store the salesperson would greet them and then sort of like escort them around and Curate their shopping trip.

32:30 Very, very different experience. Yeah. So Butler Brothers. Sam's having this conversation with them. They're like, Well Probably you want a Ben Franklin franchise.

32:42 And it just so happens. We've got the perfect Store. For you. In the little town of Newport.

32:49 Arkansas. The current owner of the Ben Franklin franchise there. Wants to sell? And Newport. It's a little town, it's about seven thousand people.

32:58 It's in eastern Arkansas. Now if you know where Bentonville, Arkansas, and Walmart is today. It's not in eastern Arkansas. And Sam's like, Great. I'll take it. Sight unseen.

33:10 Now You have to ask yourself. It is Nineteen forty five. In America.

33:16 The war has just ended. And Unlike Ninete forty five in Japan, like we talked about with The Sony story. Retail in the US is

33:27 Booming. Everyone's coming home. There was the GI Bill. Everyone's got new homes. Everyone's starting families. Like There's a lot of stuff to buy. There's a lot of stuff to buy. It doesn't matter. If you're a department store in a big city or a variety store in a seven thousand person town, like

33:44 Everybody in retail should be making money. Hand over fest right now. So The question that Sam didn't ask himself and should have was why does this guy want to sell? And he says in the book, A guy from Saint Louis owned it. And things weren't working out at all for him. He was losing money, and he wanted to unload the store as fast as he could. I realize now that I was the sucker Butler Brothers sent to save him. I was twenty seven years old and full of confidence, but I didn't know the first thing.

34:16 About how to evaluate a proposition like this. So I just jumped in with both feet. My negativity about contracts and such Would later come back to haunt me. In a big way. Wow.

34:28 So He and Helen. Bye. This store. This distressed asset at not a distressed price. Yes. They buy it for twenty five thousand dollars.

34:39 Five thousand dollars of their own savings. And a twenty thousand dollar loan from L S from Helen's father. And uh Sam, you know, he says This isn't what I dreamt, but uh you know, I'm still gonna set big goals.

34:53 He decides that he's gonna set a goal. That this store is gonna become the most Profitable. Variety store in Arkansas. Within five years.

35:03 It's quite the turnaround. And is also the first Indication of Sam setting these big hairy audacious goals. He has this subsequent obsession with set a goal, hit it, set a goal, hit it. And that really does drive

35:17 all of his need for experimentation because he finds in these situations where he has a goal set and he must invent some way to hit it. Well, it also sets the stage for what was to come. He sets this goal. And then he gets there. This is not a realistic goal. He says, Only after we close the deal, of course. Did I learn that the store was a real dog? It had sales of about seventy-two thousand dollars a year.

35:42 But its rent was five percent of sales. Which I thought sounded fine at the time. But which it turned out was the highest rent anybody had ever heard of in the variety store business. No one paid five percent of sales for rent. And

35:56 It had a strong competitor. A Sterling store, which was another franchise. Across the street, whose excellent manager, John Dunham, was doing more than$150,000 a year in sales double mine. Yikes.

36:11 Is it unlikely that he's gonna be the most profitable store in Arkansas? It's unlikely he's gonna be the most profitable store in Newport. Yeah. So what does Sam do? He goes right across the street into Dunham store.

36:27 And he starts trying to figure out Why Dunham is twice as successful as he is. Yeah, and this is a thing that speaking of the first time Sam does something that he then does forever. he becomes notorious for going into competitor stores, bringing in a little notebook, later bringing in a little tape recorder, and just seeing what he can get away with, interviewing clerks, interviewing associates at these stores. Anytime he's traveling with the family on vacation or anything, he's just going into all these other stores and observing and taking notes and figuring out what their systems are, what's working, what's not working.

37:00 So here he learns that valuable lesson for the first time. So great. I was gonna bring this up later, but I think he says in the book that he believes He has spent more time in K Marts than than any non like individual store employee of Kmart. Including

37:16 Kmart Senior Management. Yeah. And also we keep referencing Kmart. When I was growing up, I was like Walmart, Kmart, I think Kmart's kind of like Walmart, about the same scale, same size, kind of a little lower end. Like that was my perception as a kid of Kmart. I didn't realize that Kmart for a very long time was much, much larger. Than Walmart.

37:36 They were kind of Walmart's big brother and Incumbent. Oh they were the gorilla. I don't remember what year this was, but I remember some quote from Walton where he's talking about when

37:47 we reached five percent the scale of Kmart. And it's like whoa, that that really puts it into perspective how big a lead they had. So you mentioned Nopad. It's actually a yellow legal pad that Sam uses. Sorry, sorry, David. Famously he has his yellow legal pad and he's going into competitor stores He starts like diving in dumpsters trying to get sales receipts and like inventory orders and stuff, figure out how these stores are operating. And he quickly from

38:13 Both. Done'em across the street. And also he's doing this all over the countryside going into you know, small variety stores all over Arkansas just trying to learn. He realizes That's

38:26 Price. And running promotions, cutting prices on big marky kind of attractive items like uh health and beauty aids, toothpaste, mouthwash, makeup, that kind of stuff. Like that really Drives customers in. So he's like, okay, you know, he starts doing that, he has some success. But

38:43 There's a problem, right? Like we talked about Butler Brothers is the franchise, or They're controlling all the inventory. You know, Sam is the merchant. is just getting whatever they send to him.

38:56 At whatever cost they prescribe. And Butler Brothers, they're doing great. They get about a twenty five percent. Markup. on all the inventory and they don't even do Anything. It's almost like they set up the whole system just to keep these prices high out in the countryside and they just get a you know twenty five percent skim off the top. Yep.

39:15 So What does Sam do? He starts. Figuring out who the manufacturers are of some of these goods.

39:23 And for manufacturers that are also located there, kinda in the south in the Midwest, he starts driving around and knocking on Their doors. And asking if they'll do side deals with him and just like sort of, you know, clandestinely sell him Some of the merchandise that he otherwise would be ordering from Butler Brothers and that they would be selling to Butler Brothers. They just give, you know him and deal directly on that.

39:46 And you know what, like he's operating at a small enough scale that Butler Brothers doesn't really notice and to be frank, like there wasn't good tracking or accountability at this point. I mean there wasn't computers yet, so there's no computerized inventory here. You'd have to really be paying attention to figure out, oh, maybe Sam's not ordering quite as much of this stuff from us as he should be. He's driving around himself. There's no management. He has some clerks working in the store, but It's just Sam and you know Helen running the place. So he's out.

40:15 He drives to visit them. He's got to get a deal done. On the spot. So he goes, he knocks on the door, meets these people, and is like, I want to buy it right now. I've got a trailer hooked up to my pickup truck outside. Can you just load the inventory right into the back and I'll drive it back to Newport. Yeah. So he says, I bring them the inventory. I bring it back. Price it low and just blow that stuff out of the store.

40:39 Which this is an invention. Like this is a brand new concept that we kinda take for granted now, but is totally a Sam Walton invention to meet his own needs, which is Create something that is astonishingly low price to get people in the store, take no margin on it, make it a loss leader, who cares? But get people in the door spending time in your store and they look at other stuff. And this would become a cornerstone of Walmart forever after this, and for every other retailer. Even a pricing of SaaS products now where you look at it and it's like oh I'm on the free plan. Right.

41:16 It's not that he invented lost leadership as a category, but he figured out how to make it work in the retail model. Yes. He figured out how to really merchandise, operationalized, you know. Dunham's across the street was running promotions, right? But

41:32 Dunham wasn't thinking about Oh well maybe I could sell even lower if I go all my pickup truck out to these manufacturers and get Goods at a lower price. Right. And of course once you're hauling your pickup truck to go meet the vendors directly, it's not that far of a cry to say, Well what

41:47 Don't I have in the store that I'm getting from Butler Brothers. Like what could be interesting, you start getting good at doing these direct deals. and sourcing your own inventory and figuring out how to merchandise products that you personally believe will sell. And this is really where he started to hone that. skill craft and sixth sense for deeply knowing the American consumer or let's say consumers in this area in his communities and having a real spidey sense of What would make them

42:17 go crazy and have really product market fit in people's homes. Price selection convenience, right? That's the holy trinity of of retail. But nobody really knew this yet. And Frankly. All of those things are important.

42:30 But for the majority of people out there in the world and in America at the time, and certainly the vast majority of people in these small towns Yeah, like selection and convenience. Life was inconvenient, period.

42:46 So like Yeah. You were gonna and go through some inconvenience to get things. Selection there wasn't much of no matter what. And we just came out of the Great Depression. Price is very important. Customers will go to great, great lengths.

43:00 To get. Lower prices. People would make day trips. People would drive five hours to other cities. To get a deal on goods. It's crazy. He says here's the simple lesson we learned.

43:11 which others were learning at the same time, and which eventually would change the way retailers sell and customers buy all across America. Say. I bought an item for eighty cents. I found that by pricing it at one dollar. I could sell three times more of it.

43:27 than by pricing it at one twenty. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much. Greater. Simple enough. But this is really the essence of discounting. By cutting your price, you can boost your sales to a point where you can earn far more than

43:45 at the cheaper retail price than you would have by selling the item at a higher price. Had Always low prices. Always. Walmart. There it is. So we're not quite at Walmart.

43:57 Yet though. Did you know their slogan for a long time was always the lowest price, always, but then there was like a FTC lawsuit against them where they changed to always low prices because it was like false advertising that they didn't always have the lowest price. Once they got to a certain scale at Walmart and it was bigger. I think the original company wide slogan was Always Low prices always.

44:20 And then at some point they changed it, I think in the seventies to always the lowest price, like we're gonna push it even farther. And they got away with it for like five or six years. And uh the government had a little something to say about that. Yeah. So all this Sounds like Sam says there, it sounds simple, right? But like people didn't know this stuff yet. Like retailing And not professionalized. We're not that far removed from

44:43 Rockefeller, like the general store, like post World War Two, this is all new. So This is incredible. He actually hits His goal.

44:53 So by year five of the Newport store. He's doing a quarter million dollars, two hundred and fifty thousand in sales. at a thirty to forty thousand dollar annual profit. Remember he bought the thing for twenty five thousand dollars. And that's including the crazy five percent. rent charge in his expenses. So his operating margin on this is twenty four percent.

45:13 He's making very, very real profits on This little store that he's got. If he had a better. rent deal. It could be like twenty eight percent. But at those numbers.

45:24 It is the most profitable store. In Arkansas. And the biggest store. by sales not just in Arkansas, but like the whole Midwest and South.

45:35 region. So like He has found A winning formula here. Which is interesting because I'm pretty sure at this point he's got a bunch of direct deals cut with The suppliers.

45:46 and he's added a bunch of products of his own. He's really merchandising. So he's really showing up on Ben Franklin's radar, on the Butler Brothers Corporation's radar. And they kinda know what he's doing at this point. But it's good for them. Even though it's good for Sam, it's also good for them because volume and customers. Right.

46:04 He's by far the best performing Ben Franklin star. In the country at this point. Unfortunately though. Like I said, there's a reason that Walmart is not headquartered in Newport, Arkansas.

46:15 Butler Brothers wasn't the only related party to Sam who figured out what was going on here. His landlord that had pulled one over on the previous owner and had the Super onerous rent terms. Also figures out, of course, how great Sam is doing despite

46:32 You're having the deck stacked against him. And he decides. He wants to take over. The store. So he goes to Sam in year five is when the lease expired.

46:42 And there wasn't an option in the contract. to renew the lease. So the landlord goes to Sam and is like You know what, son? You've done a great job. I thank you for turning this property of mine around. I'm gonna take it from here. And like just to contextualize this.

46:57 It's a seven thousand person town. There's not really uh many other available storefronts. He's got tons of shelves in there with tons of goods. I'm like a meaningful amount of inventory that's being carried on the business. It's not like you can be like, oh cool, I'll move next door. That option does not exist. So his landlord comes to him and says this and he's like

47:15 Wait. Uh oh my God. Oh my god, I have no other options. He says it was the low point of my business life. I felt sick to my stomach. I couldn't believe it was happening to me. It really was like a nightmare. I say this is a saving grace, although the reality is Helen's father would have financed Sam's next venture, no matter what. But sort of the saving grace for Sam's pride, at least.

47:38 buy out. The value of The Ben Franklin franchise license and the hard assets, the inventory, the fixtures, et cetera, in the store. So he pays Sam and Helen.

47:50 fifty thousand dollars to take over the store. I mean I guess that's sort of a what Two X return. And what was what was the operating income from the previous year? Thirty to forty thousand dollars. Yeah, wow. Brutal.

48:04 But at least they get The fifty thousand dollars out. So this is now nineteen fifty. And Sam and Helen. Hit the road again. Looking for a new town to bring their uh traveling circus to.

48:14 And have a little bit more knowledge on lease negotiation. Yes. So They Go up to the other corner of the state in Northwest. Arkansas. Where they start looking around for The next place to set up shot.

48:29 For two reasons. One. closer to Helen's family in Oklahoma and Claremore. And two, like I said, Sam keeps it real. He was like. You know, there's some really good quail hunting up there.

48:42 And I really wanted to be closer so I could drive my bird dogs out and go hunting. Yes, and more specifically, it's not just that there's good quail hunting, it is that he will be very close to four states. Which each have their own quail hunting season so that he can get the maximum amount of quail hunting in with an easy drive from his house. Yes. So great. Lots of business decisions being made here on family. We need to be in a small town. We need to only work with family. Sam, I need to be able to hunt quail in the maximum amount of time that I possibly can.

49:17 So the opportunity that they Fine and Settle on. Is in a Little town.

49:25 Of three thousand people. So less than half the size of Newport. That already in this town of three thousand people. Had three.

49:36 Variety stores operating. Newport had two. For seven thousand people. This town has three. For three thousand people. As uh Sam says he loves competition.

49:46 And that town. It is Bentonville. Arkansas. Yes. Sam probably, almost assuredly, is rolling over in his grave right now.

49:55 The new Walmart campus. The new Walmart campus that they're building. It looks absolutely gorgeous, which I'm sure he would be furious about. Yes. If you thought Warren was You know, a penny pinching, very plain, no frills, no fancy things. Entrepreneur. Sam Walton.

50:14 Hard to argue who's sort of more frugal and less showy. I mean Sam eventually got into airplanes for very you know, practical use, but Sam is not a showy guy. Actually. The anecdote that he and John Huey open made in America with is I think it's nineteen eighty five when Forbes ranked him the richest.

50:35 Man in America. And all these reporters you know start descending on Bentonville. They want to go interview the richest man in America. And uh He still drives an old pickup truck that has cages in the back for his bird dogs'cause he Goes, you know, hunting in the four states nearby.

50:51 And uh it's this big sensation that the richest man in America drives a beat up old pickup truck with cages in the back. And he's like, Well, what am I gonna drive my uh my dogs around in? A Rolls Royce? All right, so they arrive in Bentonville, Bentonville and the world are forever changed, but it doesn't happen all at once. No. So the store that they buy is another Ben Franklin franchise that had done thirty two thousand dollars in revenue.

51:16 the year before, quite a distance from the two hundred and fifty thousand that they left. Newport with. And uh Sam decides he's like all right, well this is a small market. This is a Small store. There's a lot of competition.

51:29 But I have big ambitions. He's got his ear to the ground in retail and particularly in the Ben Franklin franchisee, you know, sort of network. He hears through the grapevine. That there are two

51:41 Ben Franklin stores up in Minnesota. That we're trying a radical New concept. They are Redoing the whole way.

51:50 The store was laid out, the way it worked. They were removing the upfront counters. Or turning them into checkout counters. And letting customers. Go into the store.

52:01 Browse the merchandise, pick it up themselves, select it themselves. And then Check out. So he's like I gotta go. I gotta go see this. He takes

52:10 The overnight bus. Up from Arkansas up to Minnesota. And uh Checks them out. He's taken notes the whole time on his, you know, yellow legal pad. And uh

52:20 He says about that trip. I liked it. So I did it too. I love how he's so obsessed with firsthand experience. He couldn't just hear about this and then implement it. He's like, I must see it for myself, because he so fervently believes that he picks up insights from like actually spending time in stores and actually talking to customers. It seems like he does that

52:41 sort of more than any other entrepreneur we've ever talked about on this show. This obsession with firsthand experience. I think everybody can apply this to their business. I was thinking about it reading the book. You know, I starred so many passages like this. I'm like I already listen to lots of other podcasts. Unlike when we started acquired and I didn't listen to any other podcast. We should find the best ideas and incorporate them, yeah.

53:03 There's a great quote about this when Walmart actually gets started later that I'm gonna tease it for now. So On july twenty ninth. Nineteen fifty.

53:12 Just about what is that, seventy two years ago? The Reopen. The Ben Franklin store. That they bought.

53:21 Still a franchise. Still a franchise, still a Ben Franklin franchise, still working with Butler Brothers for most of the inventory, quote unquote. But they wanna send a message that this is you know a new era. Doing the self service.

53:33 New store in Bentonville. So they rename it. Walton's five and dime. And It becomes the third self service variety store.

53:45 In the entire country. And it's fascinating that The Picked this name. Because

53:51 Part of the reason why you do a franchise is the brand. Sure, it's nice to get the inventory and the negotiated relationships and prices and all this stuff, but really what you're buying is People know what a Ben Franklin is. And so they would come to the store and what Sam is saying is eh. I feel pretty good about building my own brand. I know I'm in one way or another paying to use the Ben Franklin brand, but we're not gonna use it.

54:15 It really was rational because even though Sam on the margins is doing his own direct deals with manufacturers at this point. It's a ludicrous concept that somebody in a little store in Arkansas could source all of their inventory and do all of their logistics by themselves. Like that is completely freaking crazy that uh store servicing Three thousand people. In a little town.

54:40 would handle all of that themselves. But they launch with the new name. You know, it's the new concept, it's self service, it causes quite a stir. Now I believe I couldn't find this exactly. But I believe

54:53 In that first year. when uh Walton's five and dime is open. Remember the previous Ben Franklin iteration of the store. had done I think what thirty two thousand dollars I said a year in revenue, something like that. Walton's five and dime.

55:06 Does ninety thousand dollars in sales. the first year. Now I don't know what the competitive dynamics were between the three stores. In Bentonville? But remember the town only had three thousand people. So if you assume The previous three stores roughly had equal market share. You know, it's a big assumption, but let's just for argument's sake.

55:25 That would mean that the whole market size Of Bentonville, the whole Tam. is ninety thousand dollars. And they did ninety thousand dollars in revenue. Mm-hmm. So what was happening here? Yeah, is there a massively expanding TAM? Did they expand the

55:40 market because people are just buying more stuff than they otherwise would have. I don't know what happened to the other two stores. Whether they went out of business or not. Certainly they wouldn't have right away. I think what happened was this caused such a stir. That people started

55:53 Coming to shop at Walton's Five and Dime. From other towns. I think it was the first time that Sam realized that shock value would bring customers Much like I didn't need anything the first time I went to an Amazon Go to like try the cashierless checkout. people sort of came for novelty value here. And that taught him the lesson of

56:14 Oh. Maybe we should always have novelty value. Maybe there's like reasons why people should be coming to Walmarts Even if they aren't necessarily looking to buy something. Yeah.

56:26 And if you think about it, right, like put yourself in the Shoes of customers back then. And Sam talks about this a lot in the book, you know. for so long we'll get into the competition with Kmart. Everybody thought

56:38 Walmart, Sam, all their customers, they were just like hicks in the sticks, right? Just Completely like Morons out there. Nothing could be farther from the truth. Like he he says like My customers were also sophisticated retail customers. They knew about what was going on in the cities. They had relatives there, they'd go visit.

56:56 It's not like they didn't want first class shopping experiences in their own hometowns. So clearly this makes a big splash. So Sam realizes that he might have a tiger by the tail here. And so he starts looking unlike in Newport where he was satisfied, you know, the store kept going, he did two hundred and fifty thousand dollars a year in sales. He starts looking to open up.

57:17 More than Locations. More five and dimes. He also doesn't want to have All of his eggs in one basket and one lease like he did in Newport. Right.

57:26 Didn't he open a store directly next door to one of his competitors just so that his competitor couldn't expand their store. Yes. It's like it wasn't a high performing store for him, but he was like, at least it didn't let them get the square footage. Yes. Clearly he's a Very competitor. Focused. Yeah, it's funny, like there's so many

57:46 Jeff Bezosisms that when you read this book and you learn about Walmart and Sam Walton, you realize that they were originally Waltonism's, Sam Isms. But the whole Amazon, like we're customer focused, we're not competitor focused. Sam would have said, absolutely not. We are absolutely competitor focused. We are focused on Picking the best stuff from our competitors and implementing it here.

58:07 Alright, yeah, while we're here, we have to say it. So eventually a Walmart does go in back in Newport, and there is a little store that is run by a family member of the landlord that screwed over Sam that does get put out of business by that Walmart going in. And Sam makes the point You can't say we ran that guy, the landlord's son, out of business. His customers were the ones who shut him down. They voted with their feet. To me, this is that perfect overlap of are you competitor focused or customer focused?

58:35 Well both. You have to win in a market by counter positioning in some way, and Walton did it by discounting. But that obviously has an impact on your competitors and you need to be able to counterposition against someone like a competitor. So when the big realization is, oh, customers always want lower prices. and satisfaction guaranteed and all the other Walmart isms. that will have impacts on your competitors and you have to pay attention to those competitors, but ultimately the customers decide.

59:03 Sam is willing to blame the customer for putting the competitor out of business. So In nineteen fifty two Just a short while later. Sam opens up.

59:13 A second store in nearby Fayetteville. Arkansas. Because again, like it's just Sam and you know, Helen when she can, you know, helping out with the bookkeeping managing The first door. Sam needs to hire

59:26 Somebody to go manage. Fayetteville,'cause he's working in In Bentonville. So he brings on a guy named Willard Walker. Who was managing a variety store in Tulsa.

59:36 Before that. And the way They convince him to move to Fayeville and take over this sort of new concept, and is they make him an offer he can't refuse. They

59:46 Make him a partner. in the store. Then this is what you were referring to earlier. They give him a percentage of the profits that that individual store makes. And in fact They set up that store and all future stores as their own. Partnerships. This is

1:00:01 Something I didn't understand until reading the book becomes a huge part of the playbook for Walmart for decades. It's Which was Every Store manager. in a new store opening was given at first equity and individual partnerships and then later profit sharing incentives.

1:00:17 In that. individual store. So like that sets up A true alignment of incentives. I don't think anybody else was doing this at that point in time. And then even better. So

1:00:29 All the pool of existing store managers Whenever they open up another store Sam and Helen give them the opportunity to invest dollars in the new stores and the new partnerships. So now you're incentivized. on success of the whole

1:00:47 Network and you're incentivized to information share and you want everybody to do better. They get carry and they should make a GP commit. Exactly. And I actually think this is super brilliant. I was thinking about this. With regard to tech companies today and everything and like

1:01:02 Even though employees of tech companies. Yeah. much better economic deals with stock options. I think psychologically this is a better way to do it, what Sam was doing. You're putting your own money at work and you're incentivized

1:01:18 both on your own personal performance in the store Which is like an RSU type equivalent. You can't really do this in a tech company, but it's scoped to your performance. Like it's independent of other store performances. But then you also in the you know the equivalent of tech company equity.

1:01:37 It's not just that somebody gave that to you or the company gave it to you. You put your dollars into it. Which is what a stock option is supposed to simulate,'cause later you later you put your dollars in if you feel that it's a valuable But I don't think people think about it like that. No. Well, people think about options like it's direct equity. That's the biggest problem with options is most people do not understand what they're actually getting. But yes, no employees are ever asked to invest in the business. That is definitely not.

1:02:03 what seems to happen in ninety nine point nine percent of startups. And then reading more in the book about this. So During this period and in the early Walmart. Corporation period.

1:02:15 It was just the store managers who were doing this, not the hourly employees. There was a gigantic chasm. I mean, there's still a big chasm today, but two completely different classes of humans in those early days between the store managers who were salaried and employed by the partnership, and of course the to be called associates, but the hourly workers who were not. And so there's a couple interesting things. One, the people who were the store managers, this wasn't quite like White collar.

1:02:41 workers get somewhere in between. Most of these people didn't have college degrees. They were salaried And then they got equity in these partnerships, but You know, it wasn't like these were Wharton graduates that were coming in and doing this. Intentionally not. Those folks were kinda discriminated against in the Walmart culture, especially in the early days of like, You think you're better than us college boy? Totally. One of the first managers was nicknamed The Bear and he had one eye. There's some crazy stories out there. They were, you know, bringing donkeys into the store, like All right, all right. We're talking Walmart, so like take us to Walmart. How did we get from the Walton's Fime Dime?

1:03:17 On the employee front. After Walmart went public. See I'm instituted. Both. Profit sharing at the store level.

1:03:25 with the associates with the hourly employees. But then also An employee stock purchase program. And this is cool. So

1:03:34 Home depot. Modeled. They're Employee stock program. purchase program after Walmart.

1:03:42 And it's brilliant. It's the same thing. You put up your own money, but you can do it. Pre tax dollars out of your paycheck. Add a 15% discount to the stock price. This is what Microsoft let me do when I was a PM there.

1:03:55 In addition to your stock base compensation, they call it an ESPP at Employee Stock Purchase Program. Microsoft only let us have a ten percent discount, so very kind of Walmart to give a fifteen percent discount from market price. So there's stories in the book of hourly associates that made millions of dollars in the seventies and eighties. off of uh the employee stock purchase program. It's pretty cool. Wow. Speaking of Home Depot, did you know that's a venture capital backed company? Yes, it's an amazing story.

1:04:22 Yeah, we should do that at some point. And totally inspired by Sam and Walmart and Everything. Okay, so back to the fifties in Arkansas.

1:04:31 Remember we talked all the way back in the beginning of the episode about Sam's brother, Bud. Well, Bud had gotten into the Ben Franklin. business himself after the war. In Missouri.

1:04:44 One day Sam is visiting Kansas City. And he hears about a new Suburb development. Going in. Just south east of the city.

1:04:54 Called Rushkin Heights. And it's gonna have a shopping center. This new fangled concept. Right in the middle of this suburb subdivision. And there's gonna be a grocery store and a drug store. And real estate for a big Ben Franklin store.

1:05:09 So Sam calls up Bud and he's like We gotta go in fifty fifty on this. This is a Huge opportunity. And they do. And it is a

1:05:19 Banger. Two hundred and fifty thousand dollars in annual sales the first year. In Ruskin Heights. And then three hundred fifty thousand dollars the year after and just keeps Growing and growing. Sam says, When I saw that shopping center catch on the way it did, I thought, man, this is the forerunner of many

1:05:36 Many things to come. The only problem was Rushkin was actually Kind of a red herring. This was the future. This was the forerunner of many things to come.

1:05:48 But it was still a little bit ahead of its time. Mm. This is really a nineteen sixties thing, not a late fifties thing. Sam is convinced though that it's the future. So he starts going around in Arkansas and in Missouri

1:06:01 Evangelizing. About putting in These shopping centers. for which they would be the anchor tenant.

1:06:09 But it's super slow going. Dealing with Local governments, you know, it's hard, it takes a long time. He wants to move fast. So he starts trying to put his own real estate deals together. For multi-tenant.

1:06:20 shopping centers and fails. And so eventually he goes back to Helen's advice. He's like, Well These multi tenant shopping centers I see the power in Rushkin, but it's dependent on too many.

1:06:33 Other people. But If I'm willing to invest. Some capital. I could just put bigger stores in.

1:06:41 In these same locations myself. Hm. And That's what He starts to do

1:06:48 Does he become his own landlord then and just buy the land or what requires more capital? That's a good question. I don't know at this point. If they were doing real estate themselves, but certainly that like building out.

1:07:01 Bigger. store concepts required capital to build the stores. You know, it's not like there were existing structures there. And then to outfit them with All the fixtures and all the inventory for the larger. Stores.

1:07:13 But he and Bud together. start doing this, they call these new stores quote unquote family centers. And they start doing like Unheard of numbers. A million dollars. Two million dollars. And are they still sourcing the inventory from

1:07:29 Ben Franklin from Butler Brothers. Yes. So they don't yet have their own distribution, inventory, logistics network. set up. That was the big step. of Walmart. These were still just like much larger versions of Ben Franklin's and they were working with

1:07:46 them to get all the inventory to them. And they've already at this point, they've been so many rules with Ben Franklin, like changing the store layout and concept and where they're going and starting to dictate more terms, naming them on their own. And so at this point, they're really starting to treat Butler Brothers as more of a component of the Walton business rather than Walton being a franchisee of Butler Brothers. Exactly. So these

1:08:13 quote unquote family centers that Sam And but we're building. They're still not going to be able to do it. Ben Franklin franchises. They're just you know, the Waltons are now taking over more and more of

1:08:25 control of the concept, their self service, their larger format. But it's still part of the Butler Brothers cartel. Shall we say. Yes.

1:08:35 And because they were Part of Butler Brothers. Sam and Bud were limited on how much discounting they could really do. They were aggressive on pricing, probably more so than

1:08:47 other merchants at the time and they had Self service, the large format, you know, all this interesting stuff. But the prices weren't like that much different. Than other stores.

1:08:59 It's worth knowing that We don't think about the notion of discount stores today being counterpositioned against something. Like all big stores have things at kind of the lowest price you can find them. Because they're all discounters now.

1:09:15 I think it's eighty seven percent of market share in America is discounters. Yeah. So there's either like specialty high end retail, which is often directly from the manufacturer, sort of like vertically integrated or specialty sourced or something, or if you're buying things at what we consider a big regular store, they're all discounters. And at the time There were no discounters. Everyone was marking up. their goods by about forty-five percent.

1:09:42 Which means that the gross margin, like if you're buying something and then marking it up 45%, it means your gross margin is about 33%. As a retailer. And that was on top of the markups in the middle from the franchise operators. The competition was so low

1:09:59 That You totally could just do this for reference, just so people have a sense today. Walmart probably has a gross margin between twenty and twenty four percent at any given time. And every store had like a thirty three percent gross margin. Even the like

1:10:16 Target is sort of like a high end discounter. It's sort of like a Nicer stuff, more expensive. They're in the twenty nine percent category, but everyone was thirty three percent or above gross margin at this point in history. before this episode I didn't think of Target as a Discounter. Right. But that's what it is. It's a discounter. It is this model that Sam Is about to perfect here.

1:10:41 Yes. So You said there were no discounters. Yet at this point in time. Just like with self service.

1:10:50 That's not totally true. And actually even more so, you know, self service, there were the two Ben Franklins in Minnesota that was doing it. You could argue they were first, but Sam was really the first to bring it. to market in a real way. There were folks bringing This new

1:11:05 Discounting model. idea to market. Was it Anne and Hope? Was that the most successful It was Ann and Hope stores in New England. And Contemporaneously.

1:11:17 At the same time. It was Fedmart. And Sol Price. Down in San Diego in southern California. Which I didn't know Sol Price had a

1:11:26 I mean, I should have known this, but I just haven't been a student of Saul Price. I didn't realize he had a big venture before Price Club. that Fedmart was his first very large successful thing. I didn't know. I bet. Ninety percent of our listeners. Didn't know you probably did know.

1:11:41 Sole price. You know, Fedmart and then Price Club, which he starts later. That's Costco. Costco was a merger. of Costco in Seattle in the Northwest. With Price Club.

1:11:53 Costco is the legacy of Saul Price. Isn't there something like Jim Senegal worked at? Price Club or was like a disciple of Saul Price? Yes, and then left to do the same concept up in the Northwest, and then they ended up merging together. Like it's all the same DNA. Like that's Costco. So Basically everyone's marking up their goods forty five percent. And nobody has done

1:12:15 other than Annan Hope and a few other select folks that haven't really rolled it out at scale or really popularized the movement. No one has done discounting. But what is discounting? Two major components. One is Big loss leadership. So Blow it out in order to get people in the store, do it in dramatic fashion and then people buy other stuff.

1:12:34 Two is We make it up on volume. Just don't mark stuff up that much, period, across the whole store. Decide that you're only gonna mark things up. twenty five percent instead of forty five percent. And then, you know, when you do that. Of course, you don't make as much money per item, but everybody buys more stuff in your store. This hadn't really been proven yet.

1:12:54 Yeah. Well and there's another component. What you're saying, which is Sam's original lesson of You actually make more Profit dollars. Selling items. At a dollar than you do at one twenty,'cause you sell three times as many.

1:13:06 Yep. But there's also the piece in the middle. The franchise or the Butler brothers piece. Remember, they're taking twenty five percent from the manufacturer to Butler Brothers and then out to the stores. And that's how most everything operated. These discounters.

1:13:22 They're like No no no. We're gonna go direct to the manufacturers for everything, just like Sam was starting to do in this, but on the margins, we're just gonna completely not be a franchise operation. We're gonna own and operate everything, and we're gonna operate our own back end, our own supplier relationships, our own distribution. There's a great quote. This is again later in Walmart's development. And it's when Sam Walton is sort of informing the Walmart vendor relations team and merchandisers on how to deal with vendors. And he's telling them, Don't leave in any room for a kickback, because we don't do that here. We don't want your advertising program or your delivery program. Our truck will pick it up at your warehouse.

1:14:01 Now what is your best price? And if they told me it's a dollar, I would say, fine, I'll consider it. But I'm gonna go to your competitor, and if he says ninety cents, He's gonna get the business. So make sure a dollar is your best price. If that's being hard nosed, then we ought to be as hard nosed as we can be. You have to be fair and upfront and honest. But you have to drive your bargain because you're dealing with millions and millions of customers who expect the best price they can get. If you buy the thing for a buck twenty five, you've just bought someone else's inefficiency.

1:14:33 Totally. I love that I mean it is brutal, but That encapsulates The philosophy so well. And there's so much baked into that that people don't even realize to get to the point where you could do that.

1:14:46 you need to operate the entire back end of retail yourself. Sam and Bud and Walmart, they're starting from they don't have anything. To get to a point where you can have conversations with suppliers like that. You need Your own

1:15:01 Shipping. Carriers, trucks. You need your own distribution centers. You need your own ordering systems. You need your own technology. Like they don't have Any of that. You need to forecast. You need to be able to understand we're gonna sell enough of these units to go buy a crap ton at this super low price. We need to be able to be so confident in that that we can tell the supplier to spin up new inventory and so that we will buy it to increase their production. Okay.

1:15:26 That's all the future. So in this moment. Okay. So in this moment Sam of course goes out.

1:15:33 He goes and shops, he travels to the northeast, he shops in Ann and Hope, he goes out, he meets Saul Price, who he already knew. And we're in like nineteen sixties. Late fifties. Okay. Late fifties, early sixties at this point, before nineteen sixty two. And he sees what they're doing. You know, they're doing This proto discounting. In big cities.

1:15:52 And you know, rings around big cities, not necessarily in like the primo real estate downtown, but like where you have access to logistics hubs. And you can sort of scrounge together and make this work. The idea that Sam could copy this and go do it back in Arkansas. It's crazy.

1:16:09 What manufacturers are gonna ship stuff to Arkansas. Especially big volume stuff. Yeah. So He goes, he meets with Saul.

1:16:18 And Ann and Hope, and he's like You know what? I think I can make This work. I think I can

1:16:25 Do it. Now even he knows what a huge undertaking this is. So he actually goes Back to Butler Brothers. And he's like, We've been great partners. We've really innovated on a lot of stuff together.

1:16:40 I've seen this discounting model. I think it's the future. I know customers like low prices. I've got these new large format stores. Why don't we work together on this? I need you.

1:16:54 to handle the back end. You have the scale to be able to do this. You already distribute out to small towns like mine. Let's partner on this and do it together. And Butler Brothers. Says no.

1:17:06 By the way, this is like when Vitalik goes to the colored coins guys and says, Hey, uh, let's partner on this thing together, distributed world computer. I think it's the future. And they're like, No. And he's like, Okay, I'll go start Ethereum. Yes. That is this moment for Walmart. And you know, in Butler Brothers defense They signed their own death warrant here. But that was the rational

1:17:27 Do you think that's the same. This is like a counter positioning thing. If they had done this They had all these other Ben Franklin franchises out there. So if they had done what Sam is proposing And essentially. taken out their markup.

1:17:40 on goods that they would provide to SAM stores. What are all the rest of their franchisees gonna say? It is literally the innovator's dilemma,'cause they have too much baggage to actually pull this new thing off. And to be more specific about that, there is too much ongoing revenue that they would cannibalize in the short term. Bye.

1:17:59 messing up all those relationships they had with their other franchisees. where they would probably churn too much of that and risk the whole business. So they could not take advantage of what could be the new wave. Yeah. And the thing that Sam No.

1:18:13 the minute he saw discounting was All of those stores are dead anyway. Yeah. Just a matter of time. somebody is gonna come bring discounting to Arkansas and Missouri and Texas and Florida and everywhere else. And those stores are dead.

1:18:28 It's that insight that people far out from cities want the same thing as people in cities. And so They're just as bright. They want the same things in life. They just happen to not live in cities. And so let's not be pejorative. Let's Serve them with high quality retail experience. Totally.

1:18:45 So Nineteen sixty two. Salmon Bud. Secure a site. In Rogers, Arkansas, which is

1:18:53 Pretty close to Bentonville. It's got the say, you know, they're gonna do this. It's gonna be chaos, like, but they're gonna figure out the back end. do this, you know, new discounting concept. They just need A name.

1:19:05 And Sam's got a bunch of candidate names for what to call this new retail concept. And he's talking with one of the early store managers who Bob Bogle. About

1:19:16 His ideas. And he says, What do you think? And Bob says, you know You've got all these fancy names, but it's pretty expensive building the neon signs of, you know, Walton's Five and Dime and Ben Franklin. Like that's a lot of letters. What if you just take part of the Walton name, keep that. And make it a place to shop and call it.

1:19:36 Walmart. Seven letters. That'll be pretty cheap. I love it. Oh, and the legend is born. And uh you know, Sam's basically Not mad about this. Obviously saving money on Neon was appealing to his nature.

1:19:51 But the other reason he really liked it was he really admired Sol Price. And Salt Price Head. Fedmart. Yeah. And so that's why he really took a shine to it. So July second

1:20:03 Nineteen. Sixty two. Which we should say At this point Sam is in his mid forties.

1:20:10 I think he's forty four, I wanna say. Yeah, it's worth pointing out people often say like Sam Walton didn't start Walmart until he was forty four, but as you can tell, because we are very deep in the story and in this episode here, and we are just now at the formal founding of Walmart, Everything that Sam had done in his whole career was leading up to this moment and It's a gradient. It's a slow start. Walmart in some way started twenty years before.

1:20:37 Yeah, totally. Did it start in Newport? You know, Sam's education. Well started well before then, but Yeah. Retail entrepreneur education started then, but I think Bentonville is Walton's five in time, I think is When you can say really started. Yep.

1:20:52 But anyway. July second. Nineteen sixty two. The very first Walmart opens.

1:20:58 And Rogers, Arkansas. And As you can imagine, it was like Chaos. You know, Ben, you were telling the story earlier about the watermelons popping. That was actually at store number two, which was Harrison.

1:21:10 Is this the one with the donkey rides? Yeah, they had donkey rides and Trying to pull together a back end for the first time on their own. Total. Total freaking chaos. Right.

1:21:21 So not only are they sourcing all this stuff on their own for the first time, but they're also opening a store that is a pretty unfamiliar store concept to people. But an appealing one. Come here and you can get everything that you're used to, but for less money. Like a lot less money. And it's a large square footage store. So it's also bigger than most people are used to for a shopping experience. So

1:21:43 I think you think about run into a Walmart today as kind of a chore, like oh it's this big parking lot and it's a big standard store. The goal was to make it anything but. The goal was to make it like uh UFO is landing in your small town, come see it. Totally. And they did all sorts of crazy promotions and circus carnival type stuff. But at the end of the day it had Low prices. On everything. Every day low prices, David. Always the low price.

1:22:08 Always. And Boy did customers just love it. So there's a quote from Charlie Kate, who was the store manager of that first Walmart in Rogers. And he says, From day one at Walmart. Mr. Walton made it clear that this wasn't just Ben Franklin with low prices on some items. He wanted real discounting. He said we want to discount.

1:22:32 Everything we carry. When other chains around us were discounting, he said we advertise that we sell it for less and we mean it. So whatever anyone else did, we always had to sell it for less. If an item came in and everybody else in town was selling it for twenty five cents. We'd sell it for twenty one cents. Literally

1:22:50 Everything in the store. Is the lowest price. In the whole area. That was the value proposition. Which

1:22:58 should ring eerily true to Amazon. Forty years later. So that store does a million dollars in the first year. Which was great, but now remember some of the Family Center stores were doing

1:23:10 Two million dollars. So It was very promising, but Rogers was still a pretty small town. So Either later that year or the next year, they open up two more Walmarts.

1:23:22 One in Springdale, which was a much bigger town. And that pretty much immediately becomes the highest. Sales store. in the whole Walton Empire. And then a third Walmart, the second one technically in Harrison, which we've been talking about. And that was also a smaller town.

1:23:36 And um Sam puts it, they were basically trying to answer two questions with each of these, like one Would people in a small town defect and start shopping in this new crazy chaotic environment just because of price.

1:23:51 And then two in Spring Dale. which was a larger town, like would this idea scale up to a larger town too? And the answer to both of those was emphatically. Yes.

1:24:02 So at this point they do know they have a tiger by the tail. And so they sort of have line of sight to okay, I bet we can get to like ten stores. And I think Sam even gives an interview where He talks about that that's all he would ever want to expand to something like ten or fifteen stores that he doesn't have like a global ambition. And in part

1:24:25 The reason for that is He is extremely into overseeing these stores himself. He wants to be able to visit every single one. He wants to be able to really understand what's going on in the ground. He wants to be able to take the best ideas from one and bring them to the other. He's not really a control freak as much as he's uncomfortable with being disconnected from what's going on in the stores. And so His belief was

1:24:51 Well, if we expand outside of this state or this tri state area And we start getting more and more stores I don't know that it expands beyond 10, 15, 20 somewhere in there because I can't run it the only way that I know how to run it if it gets bigger. I mean, for the longest time, we've already said it, but there was no middle management. It was like

1:25:11 Hourly employees in the stores. Store manager. Salmon Bud. That was it. And This is how the

1:25:18 sort of legendary. Anybody who knows about Walmart corporate culture knows about the Saturday morning meeting. Which they actually Made monthly, I think, in like the mid two thousands, and then now it's optional. Again, Sam would be rolling over in his grave. Oof. But this was a mandatory Saturday morning meeting.

1:25:36 For all of the store managers in person, either in Bentonville or like they do it in some motel around the region where they're operating. Where like They'd all get together. Every week and they would share PL information, what's working, what's not working.

1:25:53 Certainly Kmart wasn't doing that. And Sam, despite objections from a lot of people, including his wife, didn't feel bad about it'cause he was like, Look, you're working retail and you got hourly employees that have to be in your store today. I feel like you can come to a meeting today. And A big part of this was He was obsessed with getting numbers as fast as possible, getting the sales numbers in his hands so he could understand them and pour over them, then immediately getting them into the management's hands as fast as possible so they could look over them and make changes in their stores.

1:26:25 But then as they got more and more stores, it was really about how fast can we incorporate things that are working into stores in other places so that we can very, very quickly learn. Yep. And remember, all these managers were equity owners in their own stores. And in most cases. In the stores of all the other managers too.

1:26:44 Yeah. So yeah, okay, we keep talking about Kmart. This is crazy. Also In nineteen sixty two.

1:26:51 The same year as the first Walmart, Woolworth? Launches Wolko. Which obviously doesn't exist anymore, but as a discounting concept store. Their attempt at discounting. Yep.

1:27:02 The Dayton Hudson Company in Minneapolis. Launches. Target. In nineteen sixty two. Which does it Target feel like a newer company than Walmart? I know, right

1:27:13 Literally started the same year. Yep. And S S Cresge. Which was a huge nationwide

1:27:21 Variety store chain based in Detroit. They Start. Their own new discounting. Concept.

1:27:29 Kmart. But it's worth knowing all three of these are existing variety store. Chains. that were used to making thirty three percent on every single item they sold in their store. And

1:27:41 If you look at four horses, this wolko, target, Kmart, which would come out of SS Kresge. And Walmart. You probably wouldn't have bet on Walmart to be the dominant

1:27:54 one that wins in the discount wave. But they steamrolled the other three. those other folks because they came out of existing companies, they weren't as willing to discount as much. There may be some truth to that, but I think the story is actually a little more nuanced. I think especially like Kmart, they were the gorilla and they were really well run and

1:28:16 I think the parent companies, especially Kresge. were willing to take losses and have lower margins. In Kmart. The way Walmart won, and that is just this amazing story we're gonna tell now.

1:28:29 All of those others, like the problem wasn't the mindset of margins. It was that they came to the Out of the These existing operations and they used The existing

1:28:40 logistics back end and distribution backend for their stores. And at first that was by far the best. So within five years, you know, by like nineteen sixty seven ish. K Mark. has two hundred and fifty stores all across the country. doing eight hundred million dollars in sales.

1:28:56 And The new Walmart concept. Walmart revenue was still only around ten million dollars at that point in time. So they are like a a gnat five years later. And Kmart is like Darling of Wall Street. 'Cause they're having to build everything from scratch. Like go negotiate with every single manufacturer of every item that they sell, try and figure out how to warehouse it, figure out the logistics network for the very first time.

1:29:19 Yeah, and they're like in Arkansas and Missouri and like a a regional area. Kmart's now everywhere. Like they could just Leverage this network that they had. all their distribution back end and like go everywhere. All at once. But the problem was

1:29:34 That all of their existing distribution backend was tailored to The old model. It wasn't tailored.

1:29:43 Two This new model. of store. And that worked fine when there was no Competition. But it wasn't lean and mean, focused on getting the lowest

1:29:53 cost the most efficient operations possible. Because they weren't that worried about margin on the back end. So As Walmart starts to build out on their own, going from chaos to building out their own

1:30:07 distribution network, they're always A hundred percent laser focused on lowest cost possible, most efficient possible. As much cash flow, as much inventory turns as possible. Like they had to be. The only way they were gonna grow. was if they could get excess cash flow. to grow, to invest in new stores, the only way they could do that while keeping prices low was to make their operations as efficient as humanly possible.

1:30:34 'Cause they were not taking outside capital, so they had to only reinvest cash flows coming out of the business. Totally. Sam has this amazing quote. He says The things that we were forced to learn to do are because we started out underfinanced and undercapitalized in these remote small communities, contributed mightily to the way we've grown as a company. Had we been capitalized, or had we been the offshoot of a large corporation the way I want it to be, because remember, he wanted to do

1:31:02 The deal with Butler Brothers. We might not ever have tried. the Harrison or the Rogers or the Springdales or all these other little towns we went into in the early days. It turned out that the first big lesson we learned was that there was much, much, much more business out there in small town America than anybody including me had ever dreamed of. And of course that they built their own logistics. Network to service it.

1:31:26 It's very clear that what they did was to quote Chaithan at benchmark the sort of go slow to go fast. they had to build a lot of infrastructure early, but they're really obsessed with getting the operating costs down on a sort of per unit basis. As much as possible. So that as they do reach big scale, they can continue to be very, very profitable.

1:31:48 It's interesting that there's a dual pronged approach here between lean, mean Focusing on getting your costs Every penny you possibly can down. because your margins on selling these items are gonna be so thin. There was a second component though, which is be a great merchandiser. You both have to be super operationally efficient, but you have to be a good merchant, too. And part of this was

1:32:12 Sam's spidey sense for what consumers wanted and making sure that they were sourcing that from vendors, that they were putting stores in the right places. I mean, we haven't talked about the planes yet, but this is probably a good time to Oh yes, let's talk about the planes. So Bud was a pilot in the war. And pretty early in the book, Sam talks about that he and Bud owned like twenty planes over the course of Walmart's life, but only one was a jet, or sort of later they became jets because early on when they didn't have any pilots. They had no pilots. So early on what they would do is the two of them would

1:32:45 Take prop planes. Fly. to places to survey where they want to put a store, they would identify from the air what seemed like an interesting location. By flying sideways. Sideways. So they could look out the window down at the town directly below them, and then they would go and figure out who owned that land and negotiate with them. And it was this we can do it ourselves, we can do it super lean. And we're not gonna like hire any middleman to like

1:33:12 Go around all the towns for us and identify spots. Now we'll just fly over'em and figure out where we want to put a store and we'll figure out how to reach consumers. In a way that is like Bringing them the best merchandise at the absolute lowest operating cost to us. Totally. When I read that story, I was like, Oh, this is Amazing.

1:33:29 CEO of company decides he needs a plane to be able to travel around faster, spending too much time in the cars. And you're like, Okay, here we go. And then Sam's like, I'm gonna buy a secondhand prop plane with a washing machine motor and I'm gonna learn how to fly and fly it myself. Amazing. I was thinking also About this whole

1:33:53 incredibly important piece of the Walmart story. Where they literally build their own infrastructure. for everything from scratch. You know, and it reminded me of what we talk about all the time on the show, right? Of the Jeff Bezos. Don't build your own infrastructure. Focus only on what makes your beer taste better. And uh I think

1:34:11 We now have to have a caveat. To The Bezos Law. Ooh. Which is that

1:34:18 Yes, that is true in most cases, but But If we You're doing is like in a whole new area.

1:34:26 And best in class infrastructure. For what you need. Doesn't exist. In a case like this, the infrastructure actually can make your beer taste better. Oh, if it's actually your core competency?

1:34:38 Yeah, I mean this is new. Core competency that actually did need to be done in house. Most of the time that argument doesn't hold water. But if it truly is Core. Which this did become core to beating Kmart and all the others and having much better economics at them at scale.

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1:36:47 Alright, so Discounting. Well They grew the number of discounting stores pretty dramatically up through their nineteen seventy IPO.

1:36:57 And people still weren't really paying attention'cause they were this company in the southern Midwest, they seemed regional. But let's just take you through some figures. By nineteen sixty eight. They had

1:37:09 Twour stores. They filed to go public in nineteen seventy. With thirty two stores. And around a thousand employees. And

1:37:20 Public markets. the reception, the bankers, like this was not a household name. So even though it was a consumer brand, you would sort of treat it the way that you treat it like an enterprise IPO today. It's not like the Airbnb IPO that gets a lot of reception. Some stats on the actual IPO. Well, first of all, it was postponed because the market fell apart on them, much like many startups are going through right now. But in October first of nineteen seventy it went public. only eight hundred shareholders participated in the IPO.

1:37:51 They sold 300,000 shares at$15. So that's sort of the actual IPO the night before. And some quick math shows they raised four and a half million dollars in that IPO. It started trading for around fifteen sixty, so they had a modest little pop the next day. But They really were not having meaningful research coverage. A lot of the research coverage they were getting was kind of skeptical. It sounds a lot like Amazon's research coverage early days, as if this whole house of cards could fall apart and at any given moment. The next year in nineteen seventy one, they did grow top line revenue seventy seven percent. So despite the Walmart that we know of today, where they're

1:38:31 A very slow growth company. And I say that not to criticize them, but because we're often talking about Pretty new. tech companies on this show. But if we look at you know the Twenty ten's

1:38:43 The annual growth rate for Walmart is in the like two to three percent range. So not a fast growing company by top line revenue by any standards now, but shortly after IPO, despite not attracting a lot of attention, that was not the case. No. We'll link to it in the show notes, but I pulled open the nineteen seventy two annual report, which is a gem. Oh, such a good find. And compared to the stuff that you need to write now for your annual reports, which is like

1:39:08 mostly compliant stuff that you don't want to even Page through this is like remarkably legible. It's a pretty thin document. Most of it is seems to be written from Sam himself. They grew 77% their first year after IPO. In fact, by nineteen seventy seven The market cap was still only one hundred and thirty five million dollars as a public company growing quickly seven years after IPO. In in nineteen seventy seven, they did half a billion dollars in sales growing at that rate.

1:39:37 I did some math on the Kager by decade. So Walmart's Compound. Annual revenue growth rate for the whole decade of the nineteen seventies.

1:39:46 was forty point one percent. Four zero point one percent for the whole And then in the nineteen eighties. It was thirty two point four percent. And that was starting from like a twenty five billion dollar revenue base. Those

1:40:03 Two decades propelled them to be and somehow still hold the crown for the highest revenue company in the world. If you look at Amazon and some people that you think might be approaching them. Approaching, but still not Better. Still.

1:40:19 Walmart is King. Yeah. So There's Really two.

1:40:25 last really important pieces of the story that I think we need to fill in here. during this period, actually starting like right after those first early years of the first Walmarts. And that is

1:40:39 Computers. So this is wild. In Nineteen sixty six. So just four years after the first Walmart. Goes in.

1:40:50 Sam. Walton, who at this point is what, nineteen sixty six, he's Just about fifty. He's like forty eight years old, I think. Yep. He Starts hearing about computers because he's always got his ear to the ground. He's talking to everybody. He's always looking for new ideas. He's cheap, so he doesn't want to spend money on computers, but he's starting to get the sense that in the same way that discounting disrupted everyone that came before in the variety store era. computer back end retailers were probably going to disrupt

1:41:19 the classic retailers today who don't use computers. So he and enrolls himself as chairman CEO of Walmart in a seminar at IBM On how to

1:41:33 Use computing technology in business. A guy named Abe Marks, who was president of the National Mass Retailers Institute and was also at that seminar. He says without the computer. Sam Walton could not have done what he's done. He could not have built a retailing empire the size of what he's built, the way he built it.

1:41:53 He's done a lot of other things right too, but he could not have done it without the computer, it would have been impossible. And then Sam right after that says Much as I hate to admit to something like that, I expect Abe is probably right. I love that. I literally had that in my notes too. So I'm glad that you grabbed that quote. This was the start of Walmart becoming a technology company. They were always interested in experimenting with the most cutting edge stuff.

1:42:18 But Sam didn't understand technology well, but he understood the benefits of technology. And so the way that he made sure Walmart could sort of benefit from this is he always left the door open for smart tech savvy younger people to come and have big jobs at Walmart. And then he would push back aggressively on their plans and say, like, Do you really think that we need to

1:42:44 move our whole inventory system over to computers. That's super expensive. Like convince me that we need to do that. But the fact that he went to these conferences, enrolled in this stuff, created this headcount meant that he was open to it. He just wouldn't be the one to make the decision because He probably wouldn't have picked the right technology choice or might have done it too early or too late. And so I think this was like an interesting compromise for him to do this. Later on there was a proposal made for a twenty four million dollar Satellite network.

1:43:15 private satellite network specifically for Walmart. This was like pre-dialogue. This was in the seventies, right? Was it that early? Seventies or eighties. Yeah, I think this was in the seventies and eighties. Oh, yeah, you're right. 1987. So Let's see, market cap at this point is probably around Ten, twenty billion dollars somewhere in there.

1:43:35 So They invested four million dollars to link all stores with a two way voice and data transmission and a one way video communication from Bentonville. And basically There was not enough bandwidth available on Any other communication lines. Yeah, whatever was being used at the time.

1:43:56 To sink back. in a very fast manner, all of the sales data from stores. And, you know, we talked about how Sam is obsessed with getting the data as quickly as possible and learning from it and disseminating those learnings. They ended up okaying a twenty four million dollar proprietary satellite network. And then because Sam had this philosophy, remember he thought it couldn't scale past fifteen, twenty stores.

1:44:19 of needing to sort of visit all of the stores himself and have that personal communication. The satellite network enabled Sam to sort of virtually visit these stores from the home office and broadcast. satellite transmissions of himself. And they eventually instituted this for the Saturday morning meeting too, where he would broadcast over their proprietary satellite network. In nineteen eighty seven. So the satellite network becomes part of this, but

1:44:44 this whole technology investment, computerization, it's even more than just information sharing. It gets back to what I was saying about logistics. about efficiency, about margins, about keeping prices low and about beating competition. So As they start to invest in computers and they start to bring the talent into the company to do this, including

1:45:03 The first person who Sam. brings in who he meets at this conference, guy named Ron Mayer. Who ill fatedly, Sam would briefly make CEO of Walmart. Then discover he was not ready to retire. Yeah, exactly. Which is a very T S M C story.

1:45:18 Totally. Similar to Morris Chang. And he he's very gracious to Ron in the book. You know, he says, Like, look, the problem was me, I was not ready to retire. But Ron and the team that he builds in and the technology. They build the first concept of a distribution center.

1:45:31 you know, think be a cm artist like great they have warehouses, right? Like you would order goods from your vendors, from your suppliers, coming into a warehouse. You know, and then you chip'em out. elsewhere, but like they just sit in the warehouse. And then you'd pick stuff up from the warehouse and go elsewhere.

1:45:46 Walmart as they're investing in technology They start taking daily individual orders. for custom, you know, whatever skews and whatever amounts each store in the Walmart network needs. They buy in like Big big bulk in big packaging from their vendors.

1:46:05 That comes into what used to be called a warehouse is now called a distribution center in one side. Walmart does a whole bunch of stuff in the middle of the warehouse. They unbox all the stuff. They take it out of the packaging, they rebox it up. into the individual orders for each individual store every single day. And then they ship it back out the other side, customized to each

1:46:27 Store. And then originally they were doing this with common logistics carriers like UPS, FedEx, or other Carriers. Then they start

1:46:38 building their own trucking lines. And so they can just get so efficient with this. So this is how as Walmart starts to expand out from the south and from the Midwest across the country, and Kmart is just going off city by city extending their supply lines. Walmart's got this behemoth of a distribution network that is way more efficient. And so when they go head to head in a geography.

1:47:03 Walmart can price lower, still be making a profit, and Kmart just bleeds cash. In those stores. Yeah, it's amazing how far Walmart has come because the first store didn't use a distribution center. They would have to order from all the manufacturers. And all the vendors. Drop ship directly to the stores.

1:47:23 you can only sell what you have in the store. And so when they opened the first distribution center What they basically did was because They saw the growth of cities moving outward. So like the suburbs are starting to happen. They would build a distribution center. sort of like hub and spoke. They would pick the city that they wanted to go into that was furthest from that distribution center. And they would build a store there.

1:47:47 And then they would start Building slowly back toward the distribution center. So you basically planted your flag out in the middle of nowhere, but would become an area where a lot of people lived as suburbia sort of blossomed. There's w one day drive of a truck from the distribution center, right? Yes. And so then at some point they've got dozens of stores that are driving distance filled in this whole sort of radius back to the distribution center, so they could make a lot more margin because they could get the price down as much as possible because they could negotiate these huge discounts with vendors because they have the distribution center, which will send all the stores that are connected to it.

1:48:25 It's a pretty brilliant methodology. And I don't really realize they invented this concept of a distribution center. I always forget that before Walmart, there was the franchise variety stores, but there really wasn't large scale discount retail that used this sort of model. So Bye.

1:48:45 Nineteen ninety. Walmart. Passes Sears to become the largest. Retailer. In America.

1:48:52 Again, all through the seventies, all through the eighties, Kmart was the gorilla. And then By the early nineties. Kmart, which had been so dominant. They start

1:49:03 Really feel in the squeeze. 'Cause now Pretty much nationwide at this point. Pretty much, but still not yet. In nineteen ninety they finally opened a store in California.

1:49:15 It took until nineteen ninety two for Oregon and ninety three for Washington. So all these quote unquote postal elites who are like underrating Walmart It's kind of for lack of exposure. The first store opened in Washington in 1993 and Amazon was founded in 1994. Wow. Of course on the coasts and then in the big cities you kinda don't feel

1:49:37 the dominance of Walmart in the same way. So Here's some really fun history that I had no idea about. in the mid to late eighties, Kmart is at the height of its power, the height of its pride. Right before you know, Walmart is finally gonna

1:49:53 Tip him over. During that time they go on a sort of drunken Acquisition spree. Did you know about this? No. So Kmart between the mid eighties and the early nineties

1:50:04 acquired Sport authority. Office Max. Builder Square. Walden books.

1:50:11 And borders. And this just had all sorts of light bulbs going off in my head. Kinda reminds me of the New York Times during that era, too. Right. Knowing my uh tech history, knowing our tech history here on Acquire. Louis Borders. The CEO and founder of

1:50:26 Started. Web then. during the tech bubble. And I always wondered, I was like, why on earth did Louis leave.

1:50:36 Borders that he started and was founder of And then go start this web van thing. It was because Kmart bought his company. Wow. I never knew what happened to borders.

1:50:47 And so by the time like kinda early mid nineties when the writing's on the wall, Kmart starts selling off. all of these acquisitions that they had made to just try and raise cash, they ultimately file for bankruptcy in January of 2002. And then In Two thousand four.

1:51:04 Kmart and Sears merge. Wait, Kmart and Sears merged? Yes, in two thousand four. We're gonna take these two legacy, you know, previously biggest retailers out there. storied brands and we're gonna merge them together and it's gonna work. And I, you know, vaguely was aware of this and I thought like oh well, the Amazon killed them all. No, Walmart killed them. There's no way that Kmart or if God forbid Sears at that point could compete against

1:51:29 Walmart. So that combined entity itself went bankrupt in twenty eighteen. But Walmart by this point in time.

1:51:37 This is like the Sony PlayStation version of Walmart, like the last big hurrah. They had launched. Super centers. This is nuts. In fact

1:51:48 Supercenters is so dominant now that they've actually deprecated the name. Walmart super centers are just called Walmarts now. Walmart's were the legacy of the variety stores. They didn't have Groceries. They had hard goods.

1:52:02 And Groceries was always this very attractive category. It's the biggest category of retail in America. Dude, it's an enormous amount of consumer spend. After house and cars. I think grocery or at least food as the next category. is the largest thing that households spend money on.

1:52:20 Yes, this also explains why I've always wondered. Why is Amazon so obsessed with grocery over the years? Which they haven't cracked, by the way. famously they've sort of struggled to nail it. Yep. And they bought whole foods and you know, Whole Foods is great and all that, but basos always talked about

1:52:38 We're always trying to crack grocery. This is why it's Enormous. But difficult. There's a cold supply chain that you need to nail that's totally different than shipping plastic around.

1:52:50 And Walmart nailed it, but it wasn't Sam. So Sam passed away. In Nineteen ninety two. Before he did in the late eighties, he was on a trip in Brazil.

1:53:03 Whenever he would go around the world and Walmart had started to expand internationally at this point. Of course he would go. Check out other retailers. Shop the competition. And in Brazil. Carafor the French company, their operations in Brazil, they had these

1:53:18 Big centers called hypermarkets. And these hypermarkets were like a combination of a Walmart. And a grocery store. Dude, we should open a merch store and call it the acquired hypermarket.

1:53:30 So I actually tweeted this on the fourth of July. When I was doing research, Sam, just like he had with self service retailing and then with the discounting model, he was like, I've seen the future. I'm gonna come. Bring it back. We're gonna do it.

1:53:43 Yeah. Walmart. And again, he was right. And again, like some of the others, he was wrong on timing. So he

1:53:50 Launches a spin out. in the late eighties and early nineties. called Hypermart USA. And there are photos you can find online. This is what I tweeted on July 4th. I think they only built three of them.

1:54:03 It is the most nineties America thing you have ever, ever, ever seen. It's a great logo. Red, white, and blue all over the place. This just enormous, enormous footprint store square footed like a cathedral of capitalism. They were pretty amazing, but they were too big. It didn't catch on. So then

1:54:22 He battled cancer for the last few years of his life. As his health was failing, he had already handed over the CEO role to David Glass. the company and then after his death started a smaller scale version of a hypermarket. That they called super centers. That was like not

1:54:38 as blown out as what Terrafor was doing in Brazil. But combined. Grocery, like a traditional grocery store. And a traditional Walmart.

1:54:48 Dude, I lived right next to one in North Carolina in two thousand and eight, and it was awesome. It was the only thing in my like little suburb off the highway where I live for one summer. There was a you know some other stuff in the shopping center, but you kinda had like the Walmart super center and it was amazing. You go and you get all your groceries, they have everything else. I'm so sold on that concept. It's not surprising at all to me that that massively took off.

1:55:13 Well and Not only that it was so convenient to have it all in one And you know, entertainment value, all of the things. They brought The Walmart.

1:55:22 Approach. of low prices to grocery, too. So most items, by and large, on average across the board The grocery items in a Walmart super center. Or fifteen percent cheaper. Than a comparable

1:55:35 Grocery store. Which If you're like a Middle or lower income family. That's Hundreds of dollars a month.

1:55:44 That you're saving. Which is incredibly meaningful. to you as a family. So Walmart goes from zero percent market share in US grocery. at the beginning of the nineties.

1:55:56 To I think by the end of the decade in the nineties they had become the largest Grosser in America. Which they still are. They are the largest

1:56:05 grocery store in the United States today. Well now. They are not just the largest grocery store. They are the largest grocery store by a factor of over two X. The number two player.

1:56:16 Whoa, which is Kroger? Who's two? Kroger, yep. So Walmart has over twenty percent market share of US groceries.

1:56:25 Kroger has under ten percent. And then Albertsons and Costco. Are tied at five percent each. Wow. And is Alberton Safeway now? Do they merge?

1:56:36 I think that might be right. So if you add up all of those together. They're still less than Walmart. Oh my God. Crazy. That's like Amazon's dominance in e-commerce.

1:56:47 If you add up Two through nine. in e commerce and Walmart is second place to Amazon. It is still not equivalent to Amazon's total sales in a year. And in fact, I think it's something like Two through nine.

1:57:03 added together. are still fifty percent shy of Amazon's e commerce revenue in a year. In the last most recent fiscal year. Grocery accounted for fifty-five percent of Walmart's total revenue.

1:57:18 Which is over three hundred billion dollars alone just from grocery. For a part of the business that didn't exist for the first thirty years, I mean, that is an iPhone scale company reinvention. And barely existed when Sam died. It reminded me of Ted and Todd. within Berkshire Hathaway buying Apple. The best Berkshire Hathaway investment. Probably ever. Yes. That happened. In the public markets after Warren It. Brought on dead and dodged.

1:57:44 Crazy. One last I think the war was already won with Kmart. But this was really the death knell with super centers. Because Kmart

1:57:55 tried their own hypermarket concept called Super K Marts. Oh, I remember that. And this is where The Walmart Distribution.

1:58:04 Strategy. Just completely trans Kmart. It turns to Kmart in hard goods. But now you're talking about groceries. The items need to be fresh. They expire after a few days. You need to figure out how to preserve. It's also an even lower margin business. Yeah. So like Here's Walmire.

1:58:20 With Better logistics, getting better fresher items. in their stores at lower prices. It's totally game over for K Martin.

1:58:31 Frankly, it's kinda crazy that a lot of the Other traditional. Gross. even have the market share that they do. I mean I can understand like specialty and higher end stuff like Whole Foods or Sprouts or

1:58:42 the like, but Walmart is just so dominant in the grocery category. Okay, so we talked a little bit about technology at Walmart and They We're undoubtedly the best at putting in back end systems to build a real impressive data network.

1:58:59 and use that data in the eighties and nineties. But of course so the internet happens. And Walmart is pretty slow. to adapt to that. I spent some time on the Wayback Machine kinda looking at their website over the years and They did not take the internet very seriously at first.

1:59:18 All the way through the nineties, all the way through the early two thousands. I don't think they thought it was an existential threat. the way that it truly was for the business. So they make a few really big moves. to try and bolster this team. You say they didn't realize it was an existential threat.

1:59:37 And that's true. But just telling the Walmart story now and their DNA. They hadn't historically been a company motivated by threats. They saw opportunities and they pursued opportunities like super centers. Why they didn't pursue the online opportunity is really puzzling.

1:59:55 Yeah. It's almost like no one made the compelling enough case for why they need to invest in building out the internet team. until it was kind of too late. That really was the style of make the pitch to leadership of why this needs a massive investment. And Amazon was poaching executives from Walmart left and right. Totally.

2:00:16 So the first Step that they take here. Is do you remember the company Cosmics, David? K O S M I X? Yes, yes, I do. I remember using it. Walmart bought them in twenty eleven for three hundred million.

2:00:29 Do you know what the founders did beforehand? No, I remember it was like a meta search company. Yeah, it was called Jungly. It was not for US search. It might have been like meta search for e commerce in India or something like that. So Amazon had bought jungly.

2:00:46 And then those two guys, Venki and Anand, inside of Amazon started Mechanical Turk. Uh, cool. So interesting Amazon history there. So they leave, they start Cosmics, Walmart buys it for three hundred million. That becomes Walmart Labs. which was run as a totally separate company and is now sort of merged into Walmart's global internet division. But that was where this sort of like

2:01:11 Okay, we need to start taking this really seriously. this e-commerce thing is gonna be really disruptive. And you know, they've acquired a variety of other companies over the years, including Bonobos. Or bonabos, I've never exactly known how to say it other than I like their pants. And of course then in twenty sixteen we did an episode on this. Now we're entering the timeline where acquired was already a thing by the time this happened, which is crazy because now it means more dinosaurs.

2:01:35 They bought chet dot com. For three point three billion dollars. I would love to talk to Mark Lorry about all this. Yeah, so obviously Mark started

2:01:46 Quizy Diapers dot com sold that to Amazon. Got into a nice TIFF with Jeff Bezos, left, started jet. Did he raise a billion dollars or was it a billion dollar valuation? There was some ludicrous for the time. pre launch financing that happened and it basically didn't work.

2:02:03 The actual jet.com thing, Walmart shut down. It was a club, right? It was more like Costco. Well, it changed. It originally was and then I can't remember if it wasn't that it wasn't or it wasn't that it was, but there were multiple strategies. And the quote is we tried a lot of things, we innovated, not all of them are going to work. We learn from our failures. and the party line from Mark and from the Walmart team were that Jet served its purpose to

2:02:29 get a bunch of really talented e-commerce focused engineers and product people together. And then it served as a great vehicle to serve as the at the core at this point of Walmart's e commerce business. And they really have made a good Come back, right? Yeah. So Mark Lurie left in twenty twenty one and Walmart's current CEO, Doug McMillan, does credit him for jumpstarting their e commerce business.

2:02:52 Which I think is growing And this is before COVID, because COVID statistics messed up everything for e com, but in twenty nineteen, I think grew thirty-seven percent. Which when Walmart itself as a whole was growing like two percent. Yes, and at this point Hard to say if this is a small number or a big number, but only about thirteen percent of

2:03:13 Walmart's revenue comes from e commerce. Now that's seventy five billion dollars. Right. And it is growing much faster than Amazon's e commerce business, but it's because Amazon's e-commerce business is at ludicrous scale. You know, it's five or six times larger than Walmart's e-commerce at this point. But the Walmart strategy here is quite interesting because it leverages their distribution centers and their stores. They want to make e commerce Not a separate thing.

2:03:41 They really want to make it feel like you're shopping at Walmart, whether you're shopping online or in person. And there's sort of a seamless experience between the two. And so they leverage their stores to do things like same day grocery delivery or pick it up at the store or buy it and we're flexible whether you sort of feel like you bought it in the store and you want to come grab it from us or whether it wants to arrive at your house. We'll have to see how that strategy plays out versus Amazon coming at it from the other direction and having to build physical infrastructure to come through on those promises. They're doing some cool stuff. They launched Walmart Plus. Which is a prime competitor.

2:04:20 Like you're saying about this sort of like Integrating it all into one experience physical and e commerce. One of the cool things about Walmart Plus I wish there were a Walmart. In San Francisco, A, so I could save money on stuff I buy, but B, so I could try stuff like this.

2:04:36 I'm very curious if you would shop there. That's a good question. I mean I love trader jazz. Yeah. So

2:04:42 I should have it. Whole Foods and Trader Joe's. I bet I would buy. Stuff at Walmart. But one of the cool things that's part of Walmart Plus

2:04:51 Is You can Shop with your phone in the store. You can scan, check out, buy stuff as you're going through the store on your phone.

2:05:03 all done seamlessly and then just walk out. Which I think is obviously Amazon's working on this too with their just walk out technology, but to me that's like a big value prop. Like one of the reasons I don't like Shopping at Trader Joe's target whole foods too, like physically anywhere is The check out lines. It's just like

2:05:22 Yeah, like I hate it. Yeah. Yeah, but I'm not used to waiting for anything anymore'cause the internet makes it so I don't have to. I think about stuff like this and I'm like, why am I doing this? It's not just like the waste of my time. It's that like this is unnecessary in this day and age. Right. And I'd be happy to check out on my phone as I go through a store.

2:05:39 I started in preparing for this episode trying to understand like how is the digital experience of Walmart these days versus Amazon's experience,'cause I obviously am well versed in Amazon packages arriving at my house every day. So I started buying some stuff on Walmart. I bought some like garden lamps'cause I needed to install some lights and I will say The consumer perspective so far for me has been Pretty identical. To Amazon.

2:06:05 I don't think the selection is as large, but I'm not convinced that I take advantage of Amazon's sort of infinite selection. I think I look for Amazon's choice or the wire cutter pick or is that something that has five stars and over a thousand reviews and just buy that thing. And that methodology is very available on Walmart. And I was trying to dig in like And study. from a technology perspective, what are examples of things that

2:06:29 Amazon is more advanced on. And actually this was a great use of Tegus. Good friends of the show over there. I read a uh transcript from a call with a former Amazon director. It's an interesting quote. It's just a a little microcosm says I can tell you at Walmart, it is almost exclusively just the title and the product description used for search. And as far as I can tell, there's no metadata that's put into their search algorithm today. Amazon absolutely has the additional metadata that they've built into their algorithms. And it's a constantly changing and ongoing process. They're very sophisticated in what they do for search. There's tons of stuff hitting keywords, user generated content, all that seller input is totally baked into the search algorithm. And that sort of makes sense that on Walmart it would be sort of like a focus on a

2:07:12 crude implementation first, make sure it works well enough. But they also just have less historical data than Amazon does on all the shopper behavior and all that stuff to incorporate into functionality of the website. I suspect we will talk a lot more about this dynamic throughout the season. But Amazon, right, is you know, both a first party seller and a marketplace.

2:07:33 because of that marketplace dynamic, there's just exponentially more SKUs. On Amazon, then on. Walmart dot com. Right. So Amazon had to do this. Walmart does have third party sellers online and they do actually

2:07:47 lease space in stores to vendors. That's another part of the modern Walmart business model is you can just basically lease square footage Stock it, you have your own people who work there. on your own payroll and they're the ones who put all that merchandise in there. And of course they can check out conveniently at the Walmart checkout, but the revenue goes to you and you just pay Walmart for that space. This was so fascinating. I knew that there were McDonald's and Subways and Walmart's like sort of the store within a store concept and like Target has those two and

2:08:19 Also brilliant way to Increase your margins as a retailer. Or Allow you to sell at lower prices in Walmart's case. But what you're saying is even more than that, which is super cool. Items on the shelves and like Display.

2:08:34 areas in Walmart's That are integrated into the store. Especially like greeting cards, that sort of thing. Things that require like heavy customization in the way that it's presented. Those are owned Operated and run by third party vendors.

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2:10:38 Well We want to get to the final figures on the business from today, and then I want to do a bear case and a bull case on the company from here. And then we'll do the playbook and go through and talk about what the things were that made Walmart successful. And of course we have to do

2:10:54 Powers analysis. And powers. We got a good amount of episode left here. I know. Alright, so Walmart today. We have talked.

2:11:03 recapping what the shape of the company is actually at this point. So They're In twenty four countries, which we haven't discussed, they're a global empire at this point.

2:11:17 There's ten thousand five hundred stores. Each week Two hundred and thirty million customers. Visit. One of these stores.

2:11:27 Two hundred and three million customers. That's wild. The super center concept is basically Walmart now. Mm-hmm. It wasn't like some of the stores are super centers. Most stores

2:11:39 are now super setters. If you just think about the like standard Walmart discount store in nineteen ninety six, there were about Two thousand of them. Now there are three hundred and sixty eight. Because the super center is the new thing.

2:11:53 So The businesses super centers, they did close to six hundred billion dollars of revenue last year. They did twenty five billion dollars of operating income. That's only about a four percent. Operating margin. For those counting at home.

2:12:08 They do have a twenty four percent gross margin. Which is interestingly higher Then in Sam's heyday w what he sort of believed the discounting business model should bear.

2:12:21 If I were to sort of postulate, I think Because discount stores have just become stores, I think there actually is room for a little bit more margin to than sort of originally believed. The other piece of the business that we haven't talked about at all But is a

2:12:39 Interesting. Both piece of Walmart's business. And competitive vector to Walmart. is Sam's Clubs. Which

2:12:47 Were started in nineteen eighty three, I believe. And successful part of the company. I believe what is like ten, fifteen percent of revenue of Walmart today. It's been a pretty successful part of the company, but it's losing to Costco. Yes.

2:13:03 Costco. Has been this amazing Story. That Is like

2:13:10 The Walmart of Walmart, you know. And Walmart has it too with Sam's Club, but it's interesting you bring up margins. Costco does two hundred and seventeen billion dollars a year in revenue. Sam's Club does about 75 billion. How is it that they have all of Walmart's advantages? And yet think it's like eleven percent of Walmart's revenues, which is obviously very material, but somehow they did not become dominant in this category. Especially, you know, we were talking about Walmart Plus and this

2:13:38 Membership option, you know. Costco doesn't really have much of an e commerce. digital business these days. I'm sure they're investing in it. But Walmart really was kind of positioned to have best of both worlds here of membership, subscription business with Sam's Club. Plus e commerce. It feels like there's a lot more that they could be doing.

2:13:58 And there are some crazy stats about Sam's Club. Like somehow in the nineties, one in three US households had a Sam's Club membership. I'm Don't know if you have the numbers, but I bet it's way less now. I think it's declined, yeah. Okay, so it's worth

2:14:14 a little bit of a margin analysis here. And in particular gross margins, because We were citing some numbers earlier. If you look at Walmart's 24-ish percent gross margin, so that's basically what they get from the goods that they sell on the shelf. you see, okay, it's less than target, which makes twenty nine, thirty percent of anything that they sell on the shelf. Well Costco's gross profit margin.

2:14:37 is only around thirteen percent. And that's come up like when they first went public in I think ninety two it used to be like ten percent. But the whole business of Costco is totally

2:14:50 doing what Walmart did to the variety stores. to Walmart and the other discounters. It's really the idea that Well, what if we have even less promises to customers about the experience that you get in store and we give it all back to you in price? So like, what if you can't buy small quantities of things? What if there's not really someone to help you get something off the shelf? What if it's all just in a freaking warehouse?

2:15:14 It's all about What can we take away and will customers still deal with to get the lowest price? So Saul Price, of course, as we talked about, and Jim Sinegal who worked for him. We're

2:15:27 big pioneers of the shopping club, you know, Costco Price Club. Sam's Club. Model. The original target market for it was not consumers і was small businesses

2:15:40 Oh, I didn't know that. And that was the core of the market. And then over time, I think As Costco grew, I think they realized Oh. Consumers like this too.

2:15:49 Yeah. Yeah, it's interesting. We cite Jeff Bezos saying your margin is my opportunity. That was totally Sam Walton's thing to variety stores and totally is Jim Senegal's thing to Sam Walton. while we're talking about things that Walmart has not Executed on to um

2:16:05 Sam's level of rigor, shall we say, over the years. You know, international. Again, it's like Sam's Club. It's A decent Part of the business. It's eighteen percent of revenue. eighteen percent of revenue, it's about half of the stores.

2:16:19 our international stores. They have some success stories. I think Mexico has been extremely successful for Walmart. Canada has also gone well. But they have some big losses in Europe. They pulled out of Germany, right? They pulled out of Germany in the UK. They bought

2:16:35 The big retailer chain Asda for about ten billion dollars when I think that was in the late nineties, I believe. And They operated that and they were a decent sized player, but never as big as Tesco and some of the other retailers in the UK.

2:16:51 They actually ended up trying to sell it a couple of years ago to Sainsbury's four ten billion dollars. the UK government blocked that deal. And then they ended up selling it off to private equity, I think for about six billion dollars. Just a couple of years ago. So, you know. Neutral at best.

2:17:10 We'll see how Flipkart plays out for them. They own what seventy five percent of that. Right. So then there's India and Flipkart. Walmart bought seventy seven percent, I think, stake in Flipkart.

2:17:22 Back in I think it was twenty eighteen. for over sixteen billion dollars, which was a huge, huge price. I think part of it was I'm not as studied on the history of this.

2:17:33 Think Walmart had wanted to enter India for a long time. had been negotiating with the government, trying to make it happen for years and years and years. Couldn't I think Part of the idea, I believe, of buying Flipkart was This will be our

2:17:47 Vector to bring Walmart into India. Hm. I don't think it's gone super well. I read I believe they're about Twenty or so, twenty or thirty, you know, Walmart.

2:17:59 owned physical locations in India now, but You know, that's not worth a sixteen, seventeen billion dollar purchase price. No, definitely not. Well I mean the last thing that I think is important to understand about Walmart is

2:18:14 Their growth has really just come down. If we look back All the way back to let's see, nineteen eighty two. They were growing about forty to fifty percent a year. And that has basically been on a slow, steady decline. All the way until about twenty thirteen where it's been about flat at three percent since then.

2:18:33 So They're trying to make all these big investments. And this is revenue, by the way. So it's not like Oh, well that's just because they're reinvesting in E commerce and no, like

2:18:44 the top line is just not moving very far year over year these days. No, to be fair. It is the biggest top line of any company in the world, so the law of large numbers is at work. But as we've talked about, it's not like they fully saturated The TAM if you include e commerce and you include international. Had they executed well on both of those. And grocery.

2:19:04 Well and well they did on grocery, but on um Discount clubs in the Costco in Sam's Club. If they'd executed well on all those, their growth could have been Much, much higher. Yeah.

2:19:15 All right, let's do power. And then we'll get into bear case bull case. Right. Power. So for New listeners in the show and as a reminder for

2:19:24 All of us old timers. Hamilton Helmers, Seven Powers. There are Seven of them and what he's identified as Persistent differential returns. So basically what enables Walmart to be

2:19:38 more profitable than their closest competitor on a durable basis. Yep, and the seven are Counter positioning. Scale economies. Switching costs.

2:19:47 Network economies. Process power. Branding and cornered resource. We gotta separate the takeoff phase from where they are today because I think it's a totally different set of powers. Hm, okay, okay.

2:19:59 In the takeoff phase. No doubt that it was counter positioning. I mean this small town strategy They were just doing something that all of the big established companies couldn't and wouldn't do. They were not set up to do it with their distribution chains.

2:20:13 They were not, frankly, set up to serve those customers well. They didn't understand those customers well. They kind of ignored them. And it didn't seem like a big opportunity. No. And in fact It kind of reminds me of DoorDash, thinking back on that big episode we did the day of the DoorDash IPO, where they sort of looked at the suburbs and they were like, Wait, this business, even though everyone's doing food delivery in the cities, it actually makes more sense in the suburbs.

2:20:35 Walmart realized that same thing. They were like Mm. The cities are gonna build out and those people are gonna want something like this in their towns. And so we can serve the people who are there now and we will be positioned to serve way more people as those suburbs build out. Yeah.

2:20:52 Totally. So massive counter positioning, I think. Such a good point in the beginning here. Absolutely right. I think as they built it up though, I mean Scale economies. Yes.

2:21:03 This is the perfect example of scale economies. Literally the perfect example. I mean, Hamilton uses Netflix in the book, which is another great example, but this is the single best example of scale economies in the world. They can price lower because they have the power of scale and the distribution and logistics network and the operations that they built behind it. There is no reason why anyone should be able to have a lower price than Walmart. Walmart is going to buy in larger quantities than any other retailer for basically any item that they sell. They're gonna have

2:21:34 more locations to get that thing to consumers in the most convenient way to them. So they're going to have the most consumers excited to buy it, which kind of feeds back into that quantity thing. They own and operate their own logistics fulfillment distribution network. So even though they've taken on a lot of sort of risk in doing that and a lot of fixed cost.

2:21:56 to the extent that they're utilizing all that at a hundred percent utilization or as close to a hundred percent as possible. they don't have to pay anyone else margin to use their network. Every element I can possibly think of has all of the Margin squeezed out of it. Which is also

2:22:13 Interesting when you think about Amazon and Everything Amazon has been doing for the last especially five, ten years. They're doing all the same things. Amazon Air, building their own logistics, all the Amazon vans that you see around. Yep, absolutely.

2:22:27 Okay, do we have any others on here? Switching costs. I mean with Walmart Plus, you know, maybe, but like not. They interestingly don't have branding. And this I think is a place that they're different than Amazon. Because

2:22:40 For Walmart, the definition of branding, as Hamilton puts it out there, is would you pay more for a good that came from this brand than a different brand? And at Walmart, no. You go there because it is the lowest price. And I will not buy something for that's more expensive at Walmart than somewhere else. Walmart brand does not mean that to me. But at Amazon. They have kind of moved away from the we always have the lowest price. They have convinced you that it is so convenient to shop on Amazon.

2:23:08 that even if they're a little more expensive in price, that's kind of okay. And I think it's really interesting that they've taken a different path there. I don't think Amazon was ever just about being the lowest price. I think it was more about We are the best combination of Price selection and convenience.

2:23:27 Yeah, it's the customer centricity. They're both deeply customer centric. Bezo sort of adopted the centric part of customer centricity, or at least that is the way that he refers to it. But Sam Walton in about eight different ways in his book tells you that the only thing that makes Walmart tick is listening to the customer. And it just so happens that the vector that they optimized for more than anything else was price and Amazon was convenience. I think it might be worth a minute to discuss process power.

2:23:55 Hm. Do we think Walmart has Process power. And there are two areas I'm thinking about with this. One is Die

2:24:05 Operations. themselves and everything we've talked about. I don't think you could airlift that out of Walmart and put it somewhere else. Now you could argue that it's a outgrowth of scale economies that they have it. But I'm also wondering.

2:24:20 There's this DNA at Walmart, or at least there used to be under Sam. Of what you just said, the lowest price is the thing that matters the most. And they could have, and I think most other companies would have Taken.

2:24:37 They're distribution and operation advantages. and increase their profit margins and That is like anathema at Walmart. It's always like We will keep the lowest prices possible for our consumers.

2:24:53 And we will take the absolute bare minimum margin possible, pass it all along to consumers. Rather than taking it. For the company. And the question is, is that still true? Or are they looking for opportunities to keep margin now given growth has stalled?

2:25:09 Right. And at the end of the day, public late stage CEOs are paid to get more earnings per share. Right. Did you see what they were doing with gas stations in the last few years?

2:25:20 No. They used to have this partnership where there was a gas station company that operated in Walmart parking lots. And Walmart has said going forward we will be operating our own gas stations in those parking lots. The speculation on that is that They just want some of the margin.

2:25:34 from selling gas at this point. They're big enough where they think it's worth it to invest in owning that. And I think there's probably some truth to that at this point in their growth and saturation. Walton Enterprises and the structure of the family and the ownership of the stock I think did go a long way to reinforcing this mentality. Even after Sam passed away.

2:25:57 But now that we're mostly onto the Third generation of Waldons. As you said, I think Walton family members own more professional sports franchises than any other family out there. Them and their spouses, yes. Yeah, right.

2:26:11 So The focus on keeping all the money in Walmart. keeping prices as low as possible because we don't care about profit margins. We care about winning and keeping customers. Uh it's not necessarily there as much.

2:26:26 Agree. Okay. Baron Bull, we've hit a lot of these points already, but in my bull case, there's they kinda should win same day grocery delivery since they have these super centers everywhere. You can make a bull case from the blending of e commerce and in-store to the one seamless experience. You could make a bull case based on how well they've done in groceries, that they'll continue to r execute really well there.

2:26:47 There's another one that is, especially in this environment we're going into. Walmart? Is kind of recession resistant and in some ways even counter cyclical. Because of their obsession with the lowest price, they actually should do great in a economic down term.

2:27:04 Which I believe they did in two thousand nine. I think so too. Walmart's average customer is below the average income of the US broadly. Which to me basically means they just don't have the top one percent shop there and that drops their average below

2:27:22 the average of the country. That's sort of an interesting way to look at it is averages are stupid, especially at this scale, because they hide all the interestingness of the distribution, but their average customer is far more price sensitive and far more likely to be in a unfortunate economic position in a downturn. than other companies. So they serve those people well. Mm-hmm.

2:27:46 Those are my few ball cases. That makes sense to me. The bear case list is unfortunately long. We've hit a lot of it already. One of which is just competition everywhere and good competition everywhere at this point.

2:28:01 Costco wins on lower margins and lower prices. Amazon wins on convenience in most cases and is far more competent at e commerce and technology.

2:28:13 Kroger and Safeway and Albertsons are extremely compelling businesses in the grocery segment. I mean old. But very stiff competition. And then you have this other movement happening, which is the gigantic proliferation of family dollar and dollar general. where there's a different customer base that especially in these sort of food desert type locations. Those businesses have done tremendously well.

2:28:36 And are kind of It's not that they're pushing Walmarts out, but there's lots of scenarios where someone would opt to choose to shop at a family dollar versus going to the bigger Walmart experience. So I think. I don't know that I a hundred percent have the full history on the dollar store.

2:28:54 industry. But I learned a little bit of it through Walmart research. I believe that dollar stores as we know them today grew out of the remnants

2:29:06 of the old variety stores, like the Ben Franklins. Really? Like when they got disrupted by The discounters. Butler Brothers and Ben Franklin didn't survive. But I think kind of the shell of what All of those stores were Especially'cause remember, they were fixed prices. They were the five and dimes. Right. So like

2:29:25 I think that eventually became The dollar store industry. Fascinating. Well, I have a whole new internet rabbit hole I need to go down after this. Listeners, if you know anything about this, definitely hit us up in Slack and uh

2:29:38 We'd love to chat about this. Yes. For sure. I think there's a bare case around e commerce, even though they're growing quickly thirty seven percent pre pandemic.

2:29:47 Ecom is still not a profitable segment for them. It's crazy to think that you could be doing seventy five billion in e commerce revenue and that hasn't reached scale that makes it profitable. I guess it's just a massive, massive fixed costs on the employee base to make that happen. I don't know, but When I have in the past used Walmart e commerce

2:30:08 It's because they run some crazy deals. So I wonder if they're also like running really low margin or even discounting below cost on some stuff. And because they don't break it out, I don't know if that means it's not profitable. I don't know where what profit we're talking about there. Amazon for a long time was not profitable'cause they were reinvesting in more distribution centers and you know stuff like that. So maybe it's That but

2:30:32 There's a work in progress going on with Walmart e commerce. Yeah. They have in recent years been closing A large number of Sam's clubs. And I think a lot of that real estate they've been converting into

2:30:44 E commerce distribution centers. Yeah, I know they did in Washington. There's a labor point to make here, too, which is that I think in closing all those Sam's Clubs They basically lay off all the employees and then say, All right, now you can interview at this building that will be converted into an e commerce distribution center and we can figure out if you're a fit. It makes sense, but I think it's like One of one hundred

2:31:07 death by a thousand cuts things going on between Walmart and Labor right now. Oh boy. Well we'll do value creation, value capture in a minute and uh There's a whole nother episode we could do on um Is Walmart good or bad for the world? All right.

2:31:22 Playbook. We'll do playbook and then I want to get to that point. I'll go first'cause I have one I realize that I had teased this quote. hours ago in the beginning of the episode. And then I never actually said it, but this Perfectly encapsulates. So many wonderful, great

2:31:37 playbook lessons to take from Sam Walton and the Walmart story, but this is my favorite. And this is a quote from Charlie Kate. The manager of that first Walmart store number one. Mm-hmm.

2:31:49 Where he says he's talking about. Sam. Saying. I remember See, I'm saying over and over again.

2:31:56 Go in and check our competition. Check. Everyone who is our competition, don't look for the bad. Look for the good. If you get one good idea, that's one more than you went into the store with, and we must try to incorporate it into our company.

2:32:11 We're really not concerned with what they're doing wrong. We're concerned with what they're doing right. And the reason that this grabbed me so much. Organizational dynamics and behavior and just human behavior is such that your competitors you always want to like look for what they're doing wrong and make yourself feel better by like, Oh, like they suck. Look how much better we are than them. Oh, that's such a good point. Especially I don't know if you see this, but being VCs and you know, we invest in so many wonderful founders and work with folks, but This is really like a disease that I've noticed over the years that startup founders and management teams, they look for the worst in their competition and they they make themselves feel better about how great they're doing. We're guilty of it too.

2:32:52 But that is so the wrong way to look at it. Right. It doesn't matter what they're doing wrong. Look at what they're doing right. And steal it. Most time you talk to a founder, and of course, like most times we talk to founders, they're pitching for investment. So they're gonna be have a different posture, but it's

2:33:09 Oh yeah, that is another company in our space. Yeah, here's why they're doing it wrong. Here's why that's the wrong approach. If you look at A Jensen Huang. Take on this. His would be like Oh it turns out

2:33:21 Actually everyone else doing three sided polygons, that was right. So we're gonna do everything we can to immediately move to that. You're right. Sam woke up every day and thought, how can we go find something a competitor is doing right and steal it? No. A core part of being a founder, I think especially these days, is Identifying something that

2:33:40 you don't like in the world or that could be done better. And then doing it better. That's how companies and products get started. Yes.

2:33:50 But Once you've done that. You've done that. You're doing it. Now go make it better. Like it doesn't matter what Everybody else is doing wrong.

2:33:58 So I just love that one. Agree. There's one that we've talked about a bunch, so I'm just gonna like summarized it. Identify a wave and ride it. I never would have known that discounting

2:34:10 was a wave. that happened. before starting this research. And if you were operating a variety store in nineteen fifty five, you may not have known that discounting was a wave that was going to come. But Sam was in the right place at the right time with the right insight and then built the company to ride the discounting wave.

2:34:30 And it's fascinating to me how just in the course of fifty years or seventy years it can go from Wait. Will this even be a thing to There was ever a point in time where it wasn't a thing?

2:34:42 It was different? He both rode that wave. But also created that wave. Yeah. Ah reminds me so much of uh

2:34:51 Jeff Bezos sitting in the offices of D Shaw in the early nineties. Being like Holy crap, the internet is going to be a wave. Yep. For sure.

2:35:01 Big one is don't buy anyone else's inefficiency. If you're gonna compete on price, you must avoid buying anyone else's inefficiency at all costs. And it means having often very contentious relationships with your suppliers. PG and Walmart were enemies for years, even though PG had to sell in Walmart and Walmart had to be buying PG products before they kind of figured out how can we both do this? Cause we do both need to serve the same customer. And that took a long time. And so

2:35:31 That ruthlessness of being willing to not buy anyone else's inefficiency, even though it can create tension in the relationship. If you're a business that's winning on price, somebody will be doing that in your space, so Uh You kinda have to if you want to win. Yep.

2:35:46 I don't know that this is a playbook per se, but Any industry Like retailing. And Walmart's business. And Amazon's business and the like.

2:35:56 Price really, really, really matters. Selection and convenience, you know, matters too, and that's why Amazon's a thing and whole foods exist and specialty retailers and all that. The price really, really, really matters. And so what you're saying is absolutely applicable in cases like that. When price really matters. Your margins really matter and your margin is my opportunity and

2:36:17 exploiting inefficiencies and being as efficient as possible is so important. But not all industries are like that. There's danger of over rotating to that. Say you're in the media industry. That is a high margin industry. Or the software industry. That is a high margin industry. Not to say prices don't matter. Of course they do, but like there are other dimensions that matter more.

2:36:37 In those industries. You need to think about what industry you're in before you start. Applying this stuff. Yeah, that's a great point. The last one is an ill formed thought.

2:36:47 But I kinda wanna Just get it out there and it might be a word vomit, but Walmart in so many ways is a microcosm of America.

2:36:59 Or really at this point of the world. There are so many customers, there are so many employees. They touch so many facets of life and they have such a large share of wallet for a lot of people. Yeah.

2:37:15 Everything that can happen will happen. And so like labor problems, yes, for sure. Significant tensions there. Environmental impact. Employees doing everything you can think of because there are two point two million of them. So If you come up with some statement of like Walmart employees are so wonderful, that is true.

2:37:34 And Walmart employees steal is also true. And Walmart employees hate their boss is also true. You and I did some serious spelunking on the Walmart subreddit. I spent a couple hours on there and It's easy to get depressed because the most vocal people

2:37:49 create threads there and you're like, God, is this a terrible, terrible corporation? It's one of these things where you realize at this point in the world and at this point in the company's history and at their scale, they are just everything. Yeah. You walk into a store and you get a microcosm of America. At this point, it's not even a microcosm. It's a macrocosm. You're talking about two point two million people that work there and what you say, two hundred and forty ish million people shop there every week. Yeah. Walmart is where you witness humanity.

2:38:16 Yes, in all of its glory and the opposite of glory. Alright, I got one more. Which Is Again, I said earlier in the episode, but

2:38:30 I think we now have to institute Mm. caveat or an exception to what has been our most golden uh lesson on acquired, which is the uh Focus on what makes your beer taste better. I guess it is still always in service of making your beer taste better. Dude, Walmart building a logistics network made their beer taste better.

2:38:51 Fair point. But that wasn't obvious, I don't think. That's true. In fact, it was completely non obvious. In uh Kmart just borrowed Kresge's.

2:39:01 Distribution network. And everybody thought that that was the way to go. Yeah, and it certainly was for the first decade. First probably. Two decades. Yeah, that could help them get a massive lead, and there'd be some very, very credible argument that I totally would have bought, which is

2:39:17 If you think you can get Two decades of lead with this strategy, there probably will be something that materializes during that time where being that far ahead means you just win. Yeah. And Sam says in the book.

2:39:31 His name was Henry Cunningham, I want to believe, who was the CEO of Kresge. when they launched Kmart. He says that Cunningham was like an amazing retailer, brilliant and great competition, and that Sam believes had Cunningham still been running Kmart. As Kmart started to decline.

2:39:50 The company would have. Made different choices. Fascinating. They had a whole bunch of CEO turnover and

2:39:57 All sorts of controversial stuff. Alright. So we're onto the segment. where we're gonna make a case to each other for Walmart being good for the world and bad for the world. It's almost like a bowl and bear on the business, but

2:40:09 the global impact. Let's save the employees thing for the moment and first talk about impact on communities. Because I think there's an easy narrative to paint, kinda the same narrative that got painted with Starbucks of bad for communities because it puts the local store out of business. And certainly I don't think

2:40:26 Sam Walton would say that they didn't. I think that he would say that we put a Walmart in a community and it was better for consumers. And so then people needed to adapt. Of course, existing merchants hated us, but did consumers hate us? No, I don't think so at all. I think it was better for them. Well especially for Customers and Well, everywhere. Saving money and saving significant amounts of money on your everyday purchases. That's huge.

2:40:50 If you are living in middle class or lower class, that is enormous. That makes a huge difference in your life. Yeah. That said There's probably more interesting things you could buy that have more soul in the local stores. merchandising that may not show up in a Walmart supply chain. There might be more meaningful personal relationships you could build with people who run the stores than you would have the opportunity to at a Walmart.

2:41:15 I'm trying to think of all the things in a consumer experience. That are better from a locally owned store. There's the fact that when you buy something, the equity that gets built From that transaction happening happens in your community versus the equity accruing 50% to the Walton family and 50% to a bunch of public shareholders. every transaction any business makes accrues either positive or negative equity to the business that participated or facilitated the transaction, even if that Walmart employs a bunch of local people,

2:41:44 the equity still being built by other shareholders. So There is A lot. I think I said we could do a whole nother three, four hours on Discussing this.

2:41:54 I read The book The Walmart Effect as part of research. It's really good. It's really even handed. Really well done. It's about uh I think it was written in two thousand six. And

2:42:07 It goes really deep into All these questions. Labor, impact on communities. All sorts of stuff. Highly recommend reading. Frankly, we're not gonna be able to do anywhere near as good a job discussing all that. As the book does and as other forums do.

2:42:21 But To my mind, like the biggest takeaway I had from it was If you just look at individual communities, I think you can make a pretty good argument, and this is Sam's argument, like you were saying.

2:42:35 That Walmart is good on balance. A because saves consumers money. That's super important. Provides a lot of jobs. We could argue about the quality of those jobs, but a lot of jobs that otherwise would have gotten destroyed. Discounting was gonna happen. Yeah. The local shops were not gonna survive the local variety stores.

2:42:54 And it could be someone that doesn't have the types of incentive programs that Walmart has. Right. maybe it's not enough, but they do offer the ability for part of people's pay to go into Walmart stock and that can appreciate over time and you can decide whether to cash it out or take it in Walmart stock. Like there are ways to make hundreds of thousands of dollars on top of your pay by being a Walmart employee. Yep.

2:43:16 Now Here's the way though where Walmart's impact is a little more unambiguously uh pernicious. Both for

2:43:26 the world and Specifically for America. Despite all that great stuff. And that's actually in the supplier relationships. And the vendor relationships as Walmart got so big and got so much leverage, and they're so unrelenting on pushing down prices.

2:43:43 And then as the relationships you talked a little bit about the P and G relationship, but with all their vendors. You know, Walmart is the biggest customer of all of the vendors and suppliers that they work with. They exert so much pressure. For vendors to lower their prices.

2:44:00 Ultimately that leads to A couple things. led to offshoring of American manufacturing. Walmart was a huge contributor. At some point the majority of items sold in Walmart were made in China.

2:44:14 I think during the eighties it went from like six percent to like forty percent and now like I mean, if you take out grocery, I'm sure most stuff in Walmart is not made in America. Yep. Yeah, and Walmart recognized that this was a problem and tried to address it, but if you're a supplier and there are a bunch of examples in the book of lawnmower companies, Vlasic that makes pickles, all sorts, like you just At a certain point you cannot pay American labor the wages that you need to pay them.

2:44:38 and price products where Walmart needs them priced. Like it just does not work. You have to offshore it. So that's one issue. And you know, you could argue about whether that's good or bad. But certainly now, you know, post COVID here in twenty twenty two. All sorts of reasons why.

2:44:54 We see there's a negative side of the ledger of offshoring American manufacturing. That's one. Two. is quality of products, which is also related. Like the other thing that whether you're making stuff in America or elsewhere

2:45:08 If you keep pushing down those margins so far, like you've got to use lower quality materials in your product. There's just this constant barrage to push down quality. push down labor cost. And all that like comes at a real cost. And quality was an afterthought. I mean, even in ninety two when Sam published his book, it was only in the last decade where they were realizing how important quality was in addition to price. Now one area where

2:45:32 All of this had a huge Pretty much unambiguously negative externality. That I think has gone a long way towards being corrected was environmental impact. You can just imagine all the dynamics. We're just talking about like having a positive environmental impact does not fit into that equation. Right. You're not using the slightly more expensive power source when you're a vendor to Walmart. You're using the cheapest, no matter how dirty it is.

2:45:57 Now for current management and the previous generation of management of Walmart. To their like big credit. In the mid two thousands, they got religion on this and embraced Sustainability. and positive environmental impact as a way to generate more efficiency.

2:46:13 So like Walmart, I think is now the largest US commercial producer of solar power. Whoa because they put solar panels on the roofs of the Walmarts and then now in parking lots too. And then it ends up being cheaper. They also invested a ton in more efficient truck fleets, both in the type of fuel, the shape of the trucks.

2:46:34 I wanna say they literally doubled the efficiency of the trucking fleet over a decade by just yep. little things they did here and there to chip away. And that makes a huge impact'cause they're one of the largest trucking fleets in the world. I mean, if you look there's those graphics fly around there, like, what's the largest employer in any state? And like

2:46:53 most of the lower Midwest and Metro much of the South is Walmart. And then there's the other ones that float around that's like, what's the number one profession in every state and for half the states it's truckers. And you're like, hmm, I wonder who those truckers work for in a lot of those states. So yes, it's a massive part of not only the American economy, but of our Energy usage. I think it's worth bringing up now, especially given everything that's happened recently and where we live and whatnot. Walmart is one of the biggest

2:47:20 Well, was and still is one of the biggest sellers of guns in America. And they've paired back the AR fifteen and the ammo and the you know, they stopped selling some things, but like only after there was a shooting in their store. Right, right. Now They still sell guns, obviously. Sam himself obviously was an avid hunter, he'd use guns all the time. Yep. But it wasn't just after the shooting in the store. They've required background checks for a long time, well before that.

2:47:47 They stopped selling handguns in the nineties. And Now after the shooting in the store, they don't sell guns to people under twenty one. In twenty fifteen, they stopped selling assault rifles. So I'm sure it's one of these issues where like

2:48:00 People on both sides say They're not doing nearly enough or they're doing way too much. Too much. Yeah. But it is I think it is a good example of a middle ground. You can argue whether it's enough or not enough or too much, but it like it's a middle ground. All these things really come back to that point of Walmart operates at such scale that it is literally just a snapshot of humanity. And so If it's a facet of our national conversation or things happening in the world, it's gonna be happening at Walmart. All right listeners.

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2:48:52 It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you ship next. This is where StatsIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Let's move on to grading. How do you think we should grade this one?

2:49:32 Yeah. I think we should go for it. I think we should give An overall grade. Two Walmart.

2:49:40 The company. Encompassing the whole body of work. The Walton early days. The first several decades, the forty point one percent Annual compounding in the seventies, the thirty two and a half in the eighties. Three right now.

2:49:55 Yeah, three two. I think it's less than three now. I think it's growing slower than the American economy. Well, maybe not this year, but in recent years. I think let's do the whole totality. Well, I mean The way to

2:50:09 Do it on a year by year or annualized or even decade basis would be the same way that we did Berkshire, which is effectively look at their annual growth rate. set some hurdle rate and then decide what constitutes an A plus and what constitutes an F, and do it on a fine grade basis year by year. We're not actually going to do that. And

2:50:28 Is it a cop out to say that like it's an a plus plus from founding through the eighties and mid nineties, and then it's been Uh D On exploiting the next big opportunity since then. That's how I feel. It feels weird to roll those into one letter.

2:50:45 Well, I think if we were gonna break it out into Subgrades for I think I would actually do three arrows. I would do The Walton era, including the seventies and eighties.

2:50:57 A plus plus plus. Yeah. Plus. Right. You can't say enough pluses there. Then I think that actually the nineties is also an A plus. And like literally grading for shareholders. We're not grading for the multi stakeholder world that we live in of their communities. The grading just purely the business and for shareholders. I think the ninety is also an A plus. The super centers like Amazing. What a huge innovation. And that was not really Sam that led that. And

2:51:27 was also a big part of driving the nail in the coffin of Kmart. And is now fifty five percent of the business. Dude. So let me In nineteen ninety two they w came in

2:51:40 Growing thirty four percent. And by Nineteen ninety seven they were growing at twelve percent. Mm-hmm. Okay. Okay. Fair.

2:51:50 That was like the quintessential decade of their decline. Did Growth Reacelate at all? A Super Centers came online? It accelerated from Ninety seven.

2:52:02 It was down at twelve percent and then Yeah. peaked again in two thousand at twenty two percent, but then it's been all downhill from there. Interesting. Interesting.

2:52:12 I mean you could say All their job really has been since Two thousand and two. Is To stay the same size.

2:52:22 as e commerce became a thing. literally just defending the castle would have been an A plus. And maybe that is actually a pretty reasonable way to analyze it. Not that it would have been a good idea to invest a dollar necessarily in two thousand and three and pull it out today, but what is a win if you are already the world's largest retailer? Stay the world's largest retailer through a transformational technology wave.

2:52:46 Which they've done. I mean uh Sears didn't do that. No, but we'll put this graph up on the screen. If you look at the gap that Amazon closed. in total revenue since the time they were founded to Walmart. They're gonna catch them. No doubt about it. Oh yeah, for sure.

2:53:01 And it's a little bit of a deceptive graph because part of it is AWS. So there's high margin revenue in there. There's a completely second business. Oh. It all counts. Like Walmart could have done that. Right. Scoreboard, right? You look at the scoreboard. Right.

2:53:15 Okay, so maybe then Nineties is not an A plus. But I still like the super center innovation is huge. But I yeah, and then I do think that the two thousands and particularly the twenty tens. Pretty uninspiring for Walmart. It's a little silly'cause like what actually should you be going for?

2:53:33 If Sam Walton cared about the acquired scoreboard, they should have been done in like nineteen ninety five, or even two thousand and two. We're penalizing them for continuing to exist and doing worse than they did before. So I don't know. I'm unwilling to grade this as one single thing. I'm willing to say it was an A plus up through Sam Walton's death and then since then I'll go from like a D to a B because they have actually continued to be the world's largest retailer through

2:54:00 Tremendous upheaval in the world. And stayed nimble enough to do that. Alright, have a perhaps a less controversial or more Straightforward. Way of creating.

2:54:10 I would grade. Made in America. as an A. Among the canonical tomes that we've used as main sources on acquired.

2:54:21 Okay. Like shoe dog made in Japan. Yeah. Of that elk. Yeah. Sure. So

2:54:29 Sam's co author. Who we've mentioned of Made in America. John Huey. Do you know anything about who John Huey is.

2:54:37 No, no idea. He After writing the book. became the editor and chief. Of time.

2:54:44 Oh wow. And do you know who he Replaced. As editor in chief of Time. Is it someone else's co author? Walter Isaacson.

2:54:54 No way. Yeah. Totally. No one's co author, but Wow. You know, it was written as and because Sam was dying of cancer. So it really has a feel of Steve Jobs and Isaacson's Steve Jobs book. And like you know reading it, like Sam knows.

2:55:10 The end is near. He's writing this as he's dying. It's really good. Just highly recommend. For sure. Okay, I'm sick of this. grading that's not really grading. So let's do carve outs. And also I just got a text

2:55:24 Your Walmart order was delivered. Thanks for shopping with us, reply Hell for More. So I have to go around and pick up my Walmart order. Oh, you got to go get it. My Carve Out is a podcast that almost certainly no one has listened to. because our audience overlap has to be approximately zero. Which is the I am home podcast. which is the official podcast of the Nebraska furniture mart.

2:55:48 which many of you will now know is who listen to our Berkshire episodes will know is a Berkshire Hathaway company. And this is the venue that Ted Weschler chose to go and give a wonderful interview. And so it is so cool to hear one of the big managers at Berkshire these days, and I think Ted's the one that did the Apple investment. to give an interview, a very rare interview on the Nebraska Furniture Marts I Am Home podcast. So that is my carve out. So good. It's in my queue. I haven't actually listened to it yet, though. Dude, he even talks like Warren. It's crazy.

2:56:20 So okay, here's what I'm curious about though. Is the content of the podcast About discussing furniture. No. It's about what's your day to day like. Give us your story. How did you find your way to virtue? Oh so fun. I mean, that's obviously better, but I'm kinda curious what Ted's you know furniture preferences are. I think he does talk about that he bought a bunch of furniture for his house from the Nebraska furniture mart. I love it. Is he like a modern guy? Is he a classic guy? Listen, tune in and find out. I don't think Mediterranean, if I had to guess. My carve out. Is a carve out that has been

2:56:53 Acquired before. It was your carve out. But in a different form. Ooh. And that is

2:57:00 The Godfather. The film. You did do it as a carval, right? Parts one and two. Part one and two. Yes.

2:57:07 Both parts. So good, which I also have recently rewatched. So good. But you know what is even better? That I read for the first time. And I can't believe I hadn't read it until it's a little bit more.

2:57:18 The last month or two. Is it the book? The Godfather. It's So good.

2:57:25 I think it was better. Than the movies. Yeah, I don't know it's as good as the movies. Yeah, careful there, buddy. And I watched both After that. Reading the book.

2:57:34 As with anything, when you read the book, you understand so much more about what's going on, why motivations. In movies made back then. You can argue whether this is good or bad. I see both sides, but They left a lot more ambiguous. Like they didn't like explain everything as much as movies do now. Which is great. Which is so great.

2:57:55 It's back when film was an art form. It reminded me not as much as this, but I also did the same thing with Two Thousand One of Space Odyssey a couple years ago. I read the book. And I had never understood like the movie. I was just like, this is crazy. You're like, what the hell is the last scene? Yeah. But then you read the book and you're like, Oh, now I totally understand what's going on and I get it and it's awesome. It's a little bit like that with the Godfather. With the book.

2:58:20 And large parts of Godfather part. Two. Are interspersed in the book in part one. It was never intended to be a series. Like it's all just one book. So you get a lot more kind of like As you go like Vita's history. Like the Italian backstory is actually part of the first

2:58:39 Main volume. And When Michael is off. Yeah.

2:58:45 Cicely hiding after he murders the Turk and the police captain. Alright. On my list. Adding it. It's good. It's good.

2:58:53 With that listeners, thank you so much for being on this journey with us after you finish. come discuss with the other twelve thousand smart, clever, kind appreciative members of the acquired community at acquired. If you want more acquired, I know this episode's gonna clock in like three and a half hours or something insane. But if you're like

2:59:13 You guys, I need more. We just dropped an awesome awesome interview with Patrick Campbell going through like things that don't often get discussed about acquisitions for his over two hundred million dollar acquisition of Profit Well by Paddle. that will be coming to the public feed soon that you can find by searching acquired LP show in the podcast player of your choice and is already live at acquired.fm slash LP for paid subscribers. And we've got a job board. Go check it out at acquire.fm slash jobs.

2:59:43 We here on the acquired team look at every single one of those and our jobs that we think are interesting. So if you're looking for your next Steck. Consider that. Alright, David. Anything else?

2:59:56 I don't know what else we can say at this point. Alright, listeners, with that, we'll see you next time. We'll see you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now?

3:00:10 Oh.

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