Walmart

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 didn't 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 say it straight another story on the way welcome to season 11 episode one the season premiere of a choir it's a 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 and we are your hosts when we did our Sony episode we discovered that many Steve jobsisms really started as Akio maritisms and in all of the research for today's episode we learned that many of

the mental models and quotes ascribed to Jeff Bezos were really the original thoughts 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 from the post-world War II period all the way to today some astonishing stats on the company it is the largest by Revenue in the world doing nearly 600 billion dollars a year in sales although Amazon is close behind now 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 50 of the business a full 60 years after it was founded so we're gonna get into how and why that is the case one other

fun step for you today 90 of America lives within 10 miles of a Walmart but there are three places 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 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 10 miles away but it's 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 is built on the urban core is that where you're going David it's the biggest company in the world 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 11 with the bang

there are so many lessons that are totally applicable today and every entrepreneur can learn from Sam Walton for our presenting sponsor this episode we are going to break some news about a fascinating new product and strategy that is very relevant for all the founders wondering where their next round of capital will come from it is fundrise longtime listeners know about their real estate investing product but their company journey and philosophies are absolutely fascinating and their CEO and co-founder Ben Miller is with us here today welcome Ben thanks for having me guys you built the largest private investment platform in the world for retail investors and just so listeners have some numbers around that that's over 350 000 individuals invest with fundrise totaling seven billion dollars of real estate you've done this with zero institutional funding so can you tell us the story of your Capital

journey and how it leads to this big announcement we started fundrise shortly after the great financial crisis and the goal was to try to build a better Financial system that was different from what just blew up the last bubble happened because of imprudence incompetence bad incentives and a little bit of greed so I was concerned when we started fundrise that if we were owned and funded by the same types of financial institutions they would actually prevent us from doing what we were trying to do so I know that you raised from sort of one individual early on and then by the nature of the product fundrise lets individuals invest in real estate you basically looked and realized we can actually fund our business instead of raising the traditional Venture route from our customers I think I have this number right you've raised 155 million dollars into fundrise the operating company itself from your customers right

I mean it was a complete regulatory Innovation from a scale point of view we dwarf most Venture funds so why would we turn around and raise money from a venture fund with all of their incentives for short-term you know flips they have to raise their next fund our customers they're clearly like our business right they're invested in our product why can't they also basically participate and help build the company so what I understand that you're doing now is you basically said oh my gosh it worked raising from these individuals on the fundrise platform for fundrise was great I suspect we can do this for other companies too so what are you launching so we are launching a registered fund called The fundrise Innovation fund and what we're going to do is take all the advantages that we got which is long-term capital a line from the customers all the benefits of being public without actually having to go

public will handle all the regulatory burden and invest in private tech companies it's awesome there's a lot of Founders that listen to the show many that will raise a growth stage round you know here in the next six 12 18 months why is it interesting for them to raise from the fundrise Innovation fund so the fund is a billion dollar fund offering it's a Perpetual life fund so it has no incentive to ever sell you go public we're a long-term holder right Google Facebook all these companies why would you sell when you're in public the only reason is because the Venture investors had to pay their LPS and take their 20 carried interest we don't take a 20 carried interest and we don't have normal LPS it's just 1.85 asset management fee a year which is much less than the 220 of a typical Venture fund so we're just structurally better incentives I think it's the future of venture capital the listeners if you're

considering raising a growth round in the next year you should definitely definitely explore raising some of it with fundrise and their Innovation fund just shoot an email to uh not VC at fundrise.com that's notvc fundrise.com and if you're an individual looking for exposure to growth stage tech companies especially in this new more interesting climate potentially to be a growth stage investor you can go to fundrise.com Innovation are huge thanks to fundrise well after you finish this episode you should come discuss it with the 12 000 other smart curious members of the acquired community at acquired.fm 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 profitwell 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 LP or by clicking the link in the show notes so cool Patrick totally bootstrapped profitwell almost like Sam Walton totally bootstrapped Walmart yes without further Ado David take us in and listeners as always the show is not investment advice Dave 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 thank the man Sam Walton himself and his co-author John Huey for his autobiography Made In America which is just amazing it's the backbone of the history we're gonna tell here we first got turned on to it going back and rereading the everything store and finding out that it was one of bezos's favorite books and it'll 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 the business America that was John Rockefeller and standard oil and Amazon and Jeff is 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 Mega Corp not Tech business but almost Tech business era Founders oh it 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 yes I'll save the spoilers okay we start back in March 1918 in Kingfisher Oklahoma which is right in the middle of Oklahoma not too far from Oklahoma City at the time in 1918 the population of Kingfisher was 2500 people

today it is much larger bustling Metropolis of 5 000 people but of course those five thousand people have just about every retail need of theirs serviced in a first class way by the local Walmart Supercenter that is located just south of town Walmart grew at a much faster rate than the 2x that Kingfisher grew in a century this is crazy Kingfisher 2500 person Kingfisher around this time is also the birthplace of the Coleman company you know like the outdoor like camping oh nowhere yeah started in Kingfisher Oklahoma didn't Jim Weber from our Brooks episodes 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 well anyway back in March of 1918 in Kingfisher won Samuel Moore Walton 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 but it was 1918 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 up in the world and so his dad goes from working on the farm himself to getting into Farm 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 1921 Sam gets one for himself one James Lawrence Walton Bud better known as Bud 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 of Columbia Missouri home of capital Camp yes home of the University of Missouri Capital camp and permanent equity and our friend Brent bishar there yep so the 20s were good times for the Walton family

unfortunately though for Sam and Bud maybe fortunately for Walmart they don't really get shaped by the 20s you know they're still like little kids growing up in the 20s what really shapes them is the 30s and the 30s were very very 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 so if you've ever read The Grapes of Wrath or any of the great novels steinbecker otherwise from that period it was 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 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 foreclose 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 going to say is 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 not 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 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 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 shared completely was their approach to money after all this quote 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 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 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 their mom goes in Colombia 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 Colombia 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 retelling at a young age though indeed and then of course like every good acquired protagonist he gets a newspaper route for the Columbia Missourian just like 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 because he delivered the Washington Post before later going on to become a major shareholder so besides all of these sort of Proto entrepreneurial Ventures that Sam is undertaking as a teenager he also becomes at age 13 the youngest Eagle Scout ever certified in Missouri History Ben you're an eagle scout how old are you when you became a I got one just in the nick of time when I was 17 and a half you must get one before you

turn 18 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 12 or 11 and a half or something like that is when you sort of graduate Cub Scouts so Sam got his Eagle at age 13. 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 raising the rabbits and pigeons yeah that's right maybe some air badges in there so the other thing this is pretty crazy that young Sam is a teenager exhibits 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 going to be a great football athlete of

course we're talking about American football here this is incredible though I think they win the state championship every year because he never loses a game this is crazy he writes about this in the book he says I think that record 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 1935. it never occurred to me that I might lose 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 there's like two sort of contrasting ideas that I've heard different VCS and different Founders a spouse 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 being 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 say I'm right like the depression the Dust Bowl for closing on farms you know his dad struggles and 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 I was in Harrison we'll get there but yes legendary story so after high school he goes on to college locally at the University of Missouri the only way he can go because his family has no money it's the depression is he attends on uh ROTC scholarship so he still has to like pay his living expenses and Mom and Dad in the family aren't going to help out you know there's 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 ROTC he's busy so he hires 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 going to get into what his first job pays him in a minute but four

to five thousand dollars a year in the 30s 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 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 to 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 Warrens 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 they're different

superpowers that manifested both in building early successful periodical distribution sub companies Warren basically stayed an entrepreneur Sam is clearly this natural entrepreneur when it comes time for graduation though he decides 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 JC Penney's and Sears and he goes with the offer from JCPenney which is interesting because Sears was the dominant retailer everyone bought everything for their homes including some homes from Sears yes 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 Casey would have gone to work for Sears but no he writes 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 I still wouldn't have the money to go to Wharton because 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 wow who would not bring him any rest though no no no no maybe this first job at Penney'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 JCPenney pennies right well he ultimately ends up

getting to meet James cash Penny himself wait the guy's name is James cash Penny 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 going to talk a lot about Soul price 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 store of JCPenney as like a floor salesman and he does great I mean literally James cash penny comes and meets with him himself at the story that Sam tells is JC shows him how to 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 18 months because in December 1941 Pearl Harbor happens and the US of course enters World War II and Sam had been in ROTC he's commissioned he's going to join the Army he was looking forward to this so

Bud his brother joins the Navy becomes a decorated bomber pilot in the Pacific you know Sam thinks he's going to go probably off to Europe but he fails the physical exam for combat Duty turns out he had a heart irregularity and so he's kind of depressed he's unhappy about this bud's going off to join the Navy and Sam is going to stay home in America at a desk job so before he gets his commission 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 which is a small town outside of Tulsa which it's interesting to point out we've mentioned six seven towns so far and I don't think most people would have heard of a single one of them 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 at a bowling alley in Claremore he meets and falls in love with a girl named Helen Robson and Helen was from Claremore but her father LS Robson was unlike Sam's family a very wealthy and successful businessman financier Trader in the broader Tulsa area and he ends up taking a big shine to Sam and would become hugely influential along with Helen because he marries Helen of course and Sam would say the robsons 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 1953 and that partner ship that Helen and Sam set up is today Walton Enterprises which

owns 36 percent of Walmart and then individual family members and trusts I think mostly Bud's family owned the other 11 12 yet 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 chairs 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 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 and this is why because the family were all Partners in well Enterprises they couldn't just sell their stock 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 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 I love that warning so Sam and Helen get married and Sam gets posted in a bunch of places all around the country doing kind of internal intelligence work for the Army 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 going to go back into retailing but now he has the support of Helen and her family and her father LS and their financers 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 LS initially wants them to move back to Claremore but Helen and Sam kind of decide together they're like well we want your support but we don't want to be totally under your wing and in your Shadow so Sam he's got big ambitions he and a buddy decide that they want to buy a Federated store Department Store franchise in St Louis they're going to be big you know he'd come from JCPenney in Des Moines he wants to be a big city department store owner or magnet entrepreneur Helen vetoes this outright we would not be talking about Walmart if Sam had moved the family to St Louis so Helen

says look one I don't want you doing any Partnerships with non-family members Sam says her family had seen some Partnerships go sour and she was dead set on the notion that the only way to go was to work 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 10 000 people I mean her whole thing was I want to 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 based strategy and so like what seems so intentional and so genius actually stems from the fact that she just vetoed his original idea totally I

mean it's crazy she had a an undergraduate degree in finance for one woman at that time I mean she was very involved obviously in the strategy of the business in the 30s and 40s the number of women with undergrad Finance degrees in the US was probably tens of thousands it could not have been a large number yeah and also like kudos to the family and LS and his wife for encouraging her she had Brothers like it would have been easy for him to say like okay the boys are all going to take over the business right which is like what we saw in the New York Times family or yeah or the Rockefellers too so Sam you know he doesn't stay down for long I think he was a little disappointed that his wife had overruled him but you know he finds a way so he goes back to the company that owned Federated which is a company called Butler Brothers they were franchisers of Federated they were based in Chicago and he asks well do you have any uh

department store locations that might be available in a small town of say 10 000 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 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 believed 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 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 II that was how small towns and areas were service to retail and they're mostly franchise operations this

particular one was 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 2 000 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 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 if you've ever heard that term like a five cent Ten Cent Store 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 between how these stores operated in 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 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 what you wanted and then the clerk would go back into the store and pick out what you wanted bring it up to the front and check you out because like there wasn't really a 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 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 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 JC Penney's or Sears where Sam had worked but I think it was also not really what we're familiar with I think when Sam was working as a Salesman in Des Moines at 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 very very different experience yeah so belly Brothers Sam's having this conversation with them and they're like well probably you want a Ben Franklin franchise and it just so happens we've got the

perfect store for you in the Little Town of Newport Arkansas the current owner of the Ben Franklin franchise there wants to sell and Newport it's a little town it's about 7 000 people 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 now you have to ask yourself it is 1945 in America the war has just ended and unlike 1945 in Japan like we talked about with the Sony story retail in the U.S is 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 7 000 person town like 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 St 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 27 years old and full of confidence but I didn't know the first thing 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 so he and Helen buy this store this distressed asset at not a distressed price yes they buy it for twenty five thousand dollars five thousand dollars of their own savings and a twenty thousand dollar loan from LS from Helen's father and uh Sam you know he says this isn't what I dreamed but uh you know I'm still gonna set big goals he decides that he's gonna set a goal that this store is going to become the most

profitable Variety Store in Arkansas within five years 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 all of his need for experimentation because he finds himself 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 and 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 72 000 a year 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 it had a strong competitor a sterling store which was

another franchise across the street whose excellent manager John Dunham was doing more than a hundred and fifty thousand dollars a year in sales double mine yikes so not only is it unlikely that he's going to be the most profitable store in Arkansas it's unlikely he's going to be the most profitable store in Newport yeah so what does Sam do he goes right across the street into Dunham's store 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 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 Kmarts than any non-like individual Store employee of Kmart including 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 they were kind of Walmart's Big Brother incumbent oh they were the gorilla I don't know what year this was but I remember some quote from Walton where he's talking about when 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 notepad it's actually a yellow legal pad that Sam uses sorry I'm 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 stories are operating and he quickly realizes from both Dunham 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 price and running promotions cutting prices on big Marquee kind of attractive items like Health and Beauty AIDS toothpaste mouthwash makeup that kind of stuff like that really drives customers in so it's like okay you know he starts doing that he has some success but 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 at whatever cost they prescribe and Butler Brothers they're doing great they get about a 25 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 25 skim off the top yep so what does Sam do he starts figuring out who the manufacturers are of some of these goods and for manufacturers that are also located there are kind of in the South and 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 a deal directly on that and you know what like he's operating 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 run in the place so he's out 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 out outside can you just load the inventory right into the back and I'll drive it back to Newport yeah so he says I'd bring them

the inventory I bring it back price it low and just blow that stuff out of the store which this is an invention like this is a Brand New Concept that we kind of take for granted now but it's 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 SAS products now where you look at it and it's like oh I'm on the free plan right 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 operationalize you know Dunham's across the street was running promotions right but Dunham wasn't

thinking about oh well maybe I could sell even lower if I go home 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 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 go crazy and have a really product Market fit in people's homes price selection convenience right that's the Holy Trinity of of retail but no he really

knew this yet and frankly all of those things are important 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 so like you're gonna 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 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 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 80 cents I found that by pricing it at one dollar I could sell three times more of it than

by pricing it at 120. 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 at the cheaper retail price than you would have by selling the item at a higher price and always low prices always Walmart there it is so we're not quite at Walmart 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 yes 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 and then at some point they changed it I think in the 70s 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 had not professionalized we're not that far removed from Rockefeller like the General Store like post World War II this is all new so this is incredible he actually hits his goal so by year five of the Newport store he's doing a quarter million dollars 250 000 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 24 percent 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

28 but at those numbers 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 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 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 kind of 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 he's by far the best performing Ben Franklin store in the country at this point unfortunately though like I said there's a reason that Walmart has not had recorded in Newport Arkansas 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 figured out of course how great Sam is doing despite you know 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 and there wasn't an option in the contract to renew the lease so the landlord goes to Sam is like you know what son you've done a great job I thank you for turning this property of mine around I'm going to take it from here and like just to contextualize this it's a 7 000 person Town there's not really many other available storefronts he's got tons of shelves in there with tons of goods 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 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 was that the landlord did buy out the value of the Ben Franklin franchise license and the hard assets the inventory the fixtures Etc in the store so he pays Sam and Helen fifty thousand dollars to take over the store I mean I guess that's sort of uh what 2x return and what was what was the operating income from the previous year Thirty to forty thousand dollars yeah wow brutal but at least they get the fifty thousand dollars out so this is now 19.50 and Sam and Helen hit the road again looking for a new town to bring their uh traveling circus

too 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 it's where they start looking around for the next place to set up shop for two reasons one closer to Helen's family in Oklahoma in Claremore and two like I said Sam keeps it real he was like you know there's some really good quail hunting up there 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 so the opportunity that they find and settle on is in a little town of 3 000 people so less than half the size of Newport that already in this town of 3000 people had three variety stores operating Newport had two for seven thousand people this town has three for three thousand people as Sam says he loves competition and that town is Bentonville Arkansas yes Sam probably almost assuredly is rolling over in his grave right now 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 hard to argue who's sort of more frugal and less showy I mean Sam eventually got into airplanes four 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 1985 when Forbes ranked him the richest 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 because he goes you know hunting in the four states nearby 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 going to drive my uh my dogs around in a Rolls-Royce all right so they arrive in Bentonville Bentonville in 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 32 000 in Revenue the year before quite a distance from the 250 000 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 but I have big Ambitions these guys 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 Ben Franklin stores up in Minnesota that were trying a radical New Concept they were redoing the whole way 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 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 the overnight bus up from Arkansas up to Minnesota and uh checks them out he's taking notes the whole time on his you know yellow legal pad and uh he says about that trip I liked it so I did it too I love how he's so obsessed with first-hand experience he couldn't just hear about

this and then implement it he's like I must see it for myself because he's 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 sort of more than any other entrepreneur we've ever talked about on this show this obsession with first-hand 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 listened 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 there's a great quote about this when Walmart actually gets started later that I'm going to tease it for now so on July 29th 1950 just about what is that 72 years ago they reopen the Ben Franklin store that they bought still a franchise still

franchise still Ben Franklin franchise still working with Butler Brothers for most of the inventory quote unquote but they want to send a message that this is you know a new era doing the self-service new store in Bentonville so they rename it Waltons Five and Dime and it became comes the third self-service Variety Store in the entire country and it's fascinating that they picked this name because 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 going to use it 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 yes that is completely freaking crazy that uh store servicing 3 000 people in a little town would handle all of that themselves but they launch with the new name you know it's the New Concept it's still service it causes quite a stir now I believe I couldn't find this exactly but I believe in that first year when 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 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 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 so what was happening here yeah is there a massively expanding Tam did they expand the 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 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 cashier list checkout people sort of came for

novelty value here and that taught him the lesson of 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 yep 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 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 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 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 a Newport where he was satisfied you know the store kept growing he did 250 000 a year in sales he starts looking to open up more locations more five and times he also doesn't want to have all of his eggs in one basket and one lease like he did in Newport right 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 you know it's funny like there's so many Jeff Bezos those systems that when you read this book and you learn about Walmart and Sam Walton you realize that they were originally walton-isms samisms 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 taking the best stuff from our competitors and implementing it here all right yeah well 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 focus 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 counter a position against someone like a competitor so when the big realization is oh customers always want lower prices

and satisfaction guaranteed and all the other walmartisms that will have impacts on your competitors and you have to pay attention to those competitors But ultimately the customers decide Sam is willing to blame the customer for putting the competitor out of business so in 1952 just a short while later Sam opens up 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 store Sam needs to hire somebody to go manage Fayetteville because he's working in in Bentonville so he brings on a guy named Willard Walker who is managing a variety store in Tulsa before that and the way they convince him to move to Fayetteville and take over this sort of New Concept is they make him an offer he can't refuse they 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 in all future stores as their own Partnerships this is something I didn't understand until reading the book becomes a huge part of the playbook for Walmart for decades which was every store manager in a new store opening was given at first equity in individual Partnerships and then later profit sharing incentives 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 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 network and your 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 even though employees of tech companies get 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 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 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 because later you put your dollars in if you feel that it's a valuable thing to own and you 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 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 what seems to happen in 99.9 percent of startup and then reading more in the book about this so during this period And in the early Walmart corporation period it was just the store managers who are 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 a couple interesting things one the people who were the store managers this wasn't quite like white

collar workers it's 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 kind of 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 find a dime on the employee front after Walmart went public Sam instituted both profit sharing at the store level with the associates with the hourly employees but then also an employee stock purchase program and this is cool so Home Depot

modeled their Employee Stock Program purchase program after Walmart 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 in addition to your stock based compensation they call it an espp at Employee Stock purchase program Microsoft only let us have a 10 discount so very kind of Walmart to give a 15 discount for market price so their store Series in the book of hourly Associates that made millions of dollars in the 70s and 80s 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 yeah we should do that at some point I'm totally inspired by Sam and Walmart and everything okay so back to the 50s in Arkansas 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 and one day Sam is visiting Kansas City and he hears about a new suburb development going in just southeast of the city called Ruskin Heights and it's going to have a shopping center this newfangled concept right in the middle of this suburb subdivision and there's going to be a grocery store and a drugstore and real estate for a Big Ben Franklin store so Sam calls up bud and he's like we got to go in 50 50 on this this is a huge opportunity and they do and it is a banger 250 000 in annual sales the first year in Ruskin Heights and then 350 000 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 many things to come the only problem was Ruskin was actually kind of a red

herring this was the future this was the Forerunner of many things to come but it was still a little bit ahead of its time Hmm this is really a 1960s thing not only 50s thing Sam is convinced though that it's the future so he starts going around in Arkansas and in Missouri evangelizing to towns and city planners about putting in the shopping centers for which they would be the anchor tenant 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 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 other people but if I'm willing to invest some capital I could just put bigger stores in in these same locations myself and that's what he starts to do 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 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 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 Ben Franklin from Butler Brothers yes so they don't yet have their own distribution inventory Logistics network setup that was the big step of Walmart these were still just like much larger versions of Ben Franklin's and they were working with 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 quote unquote family centers that Sam and Bud were building they're still Ben Franklin franchises they're just you know The Waltons are now taking over more and more of control of the concept their self-service their larger format but it's still part of a Butler Brothers cartel shall we say yes 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 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 it's worth knowing that we don't think about the notion of discount stores today being counter positioned against something like all big stores have things at kind of the lowest price you can find them because they're all Discounters now I think it's 87 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 that 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 45 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 that you totally could just do this for reference just so people have a sense today Walmart probably has a gross margin between 20 and 24 at any given time and every store had like a 33 gross margin even the like Target is sort of like a high-end Discounter it's sort of like a nicer stuff more offensive they're in the 29 category but everyone was 33 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 yes so you said there were no Discounters yet at this point in time just like with self-service that's not totally true and actually even more so you know self-service there were the two Ben Franklin's 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 discounting model idea to Market was it Ann and Hope was that the most successful it was Ann and Hope stores in New England and contemporaneously at the same time it was fed Mart and Saul price down in San Diego in Southern California which I didn't know Saul price had a 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 90 of our listeners didn't know you probably did know Soul praise 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 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 45 and nobody has done other than Ann and 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 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 going to Mark things up 25 instead of 45 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 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 the dollar than you do at 120 because you sell three times as many yep but there's also the piece in the middle the franchisor the Butler Brothers piece remember they're taking 25 from the manufacturer to Butler Brothers and then out to the stores and that's how most everything operated these Discounters they're like 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 going to completely not be a franchise operation we're going to own and operate everything and we're going to 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 he's telling them don't leave in

any room for a kickback because we don't do that here and we don't want your advertising program or your delivery program our truck will pick it up at your warehouse 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 90 cents he's going to 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 25 you've just bought someone else's inefficiency 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 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 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 going to 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 buy it to increase their production okay that's all the future so in this moment okay so in this moment Sam of course goes out he goes and shops he travels to the Northeast tea shops in Ann and hope he goes out he meets all price who he already knew and we're in

like 1960s late 50s okay late 50s early 60s at this point before 1962 and he sees what they're doing you know they're doing this Proto discounting in big cities 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 what manufacturers are going to ship stuff to Arkansas especially big volume stuff yeah so he goes he meets with Saul and Ann and Hope and he's like you know what I think I can make this work I think I can 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 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 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 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 thing to do 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 on Goods that they would provide to Sam's

stores what are all the rest of their franchise he's gonna say it is literally the innovator's Dilemma because 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 by 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 knew the minute he saw a 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 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 so 1962 Sam and Bud secure a site in Rogers Arkansas which is pretty close to Bentonville I've got to 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 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 Bob Bogle about 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 Walmart seven letters that'll be

pretty cheap I love it 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 but the other reason he really liked it was he really admired Saul price and Saul price head fedmark yep and so that's why he really took a shine to it so July 2nd 1962 which we should say at this point Sam is in his mid-40s I think he's 44 I want to say yeah it's worth pointing out people often say like Sam Walton didn't start Walmart until he was 44 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 ways started 20 years before yeah totally did it start in Newport you know Sam's education well started well before then but yeah yeah

retail entrepreneur education started then but I think Bentonville is Walton's five and dime I think is when you can say it really started yep but anyway July 2nd 1962 the very first Walmart opens in 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 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 so not only they're 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 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 I think you think about running to a Walmart today is kind of a chore like oh it's this big parking lot and then it's a big standard store the goal is to make it anything but the goal was to make it like a UFO is landing in your small town come see it totally 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 always and boy did customers just love it so there's a quote from Charlie Kate who was the store manager of that for 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 everything we carry when other chains around us were discounting he said we advertised 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 25 cents we'd sell it for 21 cents literally everything in the store is the lowest price in the whole area that was the value proposition which should ring eerily true to Amazon 40 years later so that stored as a million dollars in the first year which was great but now remember some of the family center stores were doing 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 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 and um as 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 and then two in Springdale 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 so at this point they do know they have a tiger by the tail and so they sort of have a line of sight to okay I bet we can get to like 10 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 10 or 15 stores that he doesn't have like a global ambition and in part 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 on the ground he wants to be able to take the best ideas from

one and bring him 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 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 hourly employees in the stores store manager salmon Bud that was it and this is how the 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-2000s and then now it's optional Again Sam would be roll falling over in his grave but this was a mandatory Saturday morning meeting for all of the

store managers in person either in Bentonville or like they do it in some motel around the region where they were operating where like they'd all get together every week and they would share p l information what's working what's not working certainly Kmart wasn't doing that and Sam despite objections from a lot of people including his wife didn't feel bad about it because 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 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 yeah so yeah okay we keep talking about Kmart this is crazy also in 1962 the same year as the first Walmart Woolworth launches Wilco which obviously doesn't exist anymore but as a discounting concept store their attempt at discounting yep the Dayton Hudson company in Minneapolis launches Target in 1962 which doesn't Target feel like a newer company than Walmart I know right literally started the same year yep and s s Kresge which was a huge Nationwide Variety Store chain based in Detroit they start their own New discounting Concept Kmart but it's worth knowing all three of these are existing variety store chains that we're used to making 33 on every single item they sold in

their store and if you look at four horses this woolco target Kmart which would come out of ss Kresge and Walmart you probably wouldn't have bet on Walmart to be the dominant 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 Kmart they were the gorilla and they were really well run and I think the parent companies especially Kresge were willing to take losses and have lower margins in Kmart the way Walmart one and that is just this amazing story we're gonna tell now is because all of those others like the problem wasn't the mindset of margins it was that they came out of these existing operations and they used the existing Logistics backend and distribution back

end for their stores and at first that was by far the best So within five years you know by like 1967-ish Kmart has 250 stores all across the country doing 800 million dollars in sales and the new Walmart concept Walmart Revenue was still only around 10 million dollars at that point in time so they are like a a Nat five years later and Kmart is like darling of Wall Street because 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 yeah and they're like in Arkansas and Missouri in like 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 that all of their existing distribution back end was tailored to

the old model it wasn't tailored to 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 cost 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 distribution Network they're always 100 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 going to 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 because 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 because we started out under financed and under capitalized 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 wanted to be because remember he wanted to do the deal with Butler Brothers we might not ever have tried the Harrison or the Rogers or the springdale's 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 it's very clear that what they did was to quote Chatham 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 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 going to 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 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 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 20 planes over the course of Walmart's life but only one was a jet or a 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 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 are not gonna like hire any middleman to like go around all the towns for us and identify spots now we'll just fly over them 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 ah this is amazing CEO of company decides he needs a plane to be able to travel around faster he's 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 second hand 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 hole 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 I think we now have to have a caveat to the Bezos law which is that yes that is true in most cases but if what you're doing is like in a whole new area 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 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 of them at scale then yeah you have to do in-house which I think makes this the perfect place for the 99 of other companies out there and especially most tech companies and startups to talk about our second sponsor of the episode our friends over at Pilot because they do something that you almost certainly do not need to be doing in-house as your core competency pilot sets up and operates the entire Financial stack for startups and growing companies including Finance accounting

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they filed to go public in 1970 with 32 stores and around a thousand employees and the 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 1st of 1970 it went public only 800 shareholders participated in the IPO they sold 300 000 shares at fifteen dollars so that's sort of the actual IPO the night 4 and some quick math shows they raised four and a half million dollars in that IPO it started trading for around 1560 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 at any given moment the next year in 1971 they did grow top line revenue 77 percent so despite the Walmart that we know of today where they're 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 2010s 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 1972 annual report which is a gem ah such a good find and compared to the stuff that you need to write now for your annual reports which is like mostly compliance

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 1977 the market cap was still only 135 million dollars as a public company growing quickly seven years after IPO in 1977 they did half a billion dollars in sales growing at that rate I did some math on the Kiger by decade so Walmart's compound annual revenue growth rate for the Whole Decade of the 1970s was 40.1 percent four zero point one percent for the whole decade and then in the 1980s it was 32.4 percent and that was starting from like a 25 billion dollar Revenue base those two decades propelled them to be and somehow still hold the crown for the highest revenue company in the world you look at Amazon and some people that you think might be approaching them approaching but still not better still

Walmart is King yeah so there's really two last really important pieces of the story that I think we need to fill in here one kind of during this period actually starting like right after those first early years of the first Walmarts and that is computers so yes this is wild in 1966. so just four years after the first Walmart goes in Sam Walton who at this point is what 1966 he's just about 50 he's like 48 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 though 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 the classic retailers today who don't use computers so he goes up to Poughkeepsie New York and enrolls

himself as chairman CEO of Walmart in a seminar at IBM on how to use Computing technology in business there's a great quote from a guy named Abe Marx 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 detailing Empire the size of what he's built the way he built it 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 muntas 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 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 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 head count 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 24 million dollar satellite Network private satellite Network specifically for Walmart this was like

pre-dialup this was in the 70s right was it that early 70s or 80s yeah I think this was in the 70s and 80s oh yeah you're right 1987. so let's see market cap at this point is probably around 10 20 billion dollars somewhere in there so they invested 24 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 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 24 million dollar proprietary satellite Network and then because Sam had this philosophy remember he thought it couldn't scale past 15 20 stores of needing to sort of visit all of the

stores themselves 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 1987 so the satellite Network becomes part of this but 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 in to the company to do this including the first person who Sam brings in who he meets at this conference a guy named Ron Mayer Who ill-fatedly Sam would briefly make CEO of Walmart then Discovery was not ready

to retire yeah exactly which is a very tsmc story totally similar to Morris Chang and 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 in the technology they build the first concept of a distribution center you know think video Kmart is like great they have warehouses right like you would order goods from your vendors from your suppliers that come into a warehouse you know and then you chip them out elsewhere but like they just sit in the warehouse and then you pick stuff up from the warehouse and go elsewhere Walmart as they're investing in technology they start taking daily individual orders for custom you know whatever skus in whatever amounts each store in the Walmart Network needs they buy in like big big bulk in big packaging from their vendors 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 re-box 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 store and then originally they were doing this with common Logistics carriers like UPS FedEx or other carriers then they start 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 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 Dropship directly to the stores 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 the 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 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 it was 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 to all those stores that are connected to it 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 by 1990 Walmart passes Sears to become the largest retailer in America and again all through the 70s all through the 80s Kmart was the gorilla and then by the early 90s Kmart which have been so dominant they start really feeling the squeeze from

Walmart because Walmart is now pretty much nationwide at this point pretty much but still not yet in 1990 they finally opened a store in California it took until 1992 for Oregon a 93 for Washington so all these Coastal Elites who are like underrating Walmart it's kind of for a 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 the big cities you kind of don't feel 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 80s Kmart is at the height of its power the height of its Pride right before you know Walmart is finally gonna tip them over during that time they go on a sort of drunken acquisition spree did you know about this no so Kmart between the mid 80s and the early 90s acquired Sports Authority OfficeMax Builder Square Walden books and borders and this

just had all sorts of light bulbs going off in my head kind of reminds me of the New York Times during that era too right knowing my uh Tech History knowing our Tech History here on acquired Louis borders the CEO and founder of Borders Books started webvan during the tech bubble and I always wondered I was like why on Earth did Louis leave 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 and so by the time like kind of early mid 90s when the writings 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 2004 Kmart and Sears merge wait Kmart and Sears merged yes in 2004.

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 God forbid Sears at that point could compete against Walmart so that combined entity itself went bankrupt in 2018 but Walmart by this point in time this is like the Sony PlayStation version of Walmart like the last big hurray they had launched the super centers this is nuts in fact a super center is so dominant now that they've actually deprecated the name Walmart Supercenters are just called Walmarts now Walmarts were the legacy of the variety stores they didn't have groceries they had hard goods 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 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 Bezos always talked about 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 and Walmart nailed it but it wasn't Sam so Sam passed away in 1992.

before he did in the late 80s he was on a trip in Brazil 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 karafor the French company their operations in Brazil they had these 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 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 at Walmart and again he was right and again like some of the others he was wrong on timing so he launches a spin out of Walmart in the late 80s and early 90s 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 it is the most 90s America thing you have 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 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 as blown out as what terrafour was doing in Brazil but combined grocery like a traditional grocery store and a traditional Walmart dude I lived right next to one in North Carolina in 2008 and it was awesome it was the only thing in my like little suburb off the highway

where I lived for one summer there was a you know some other stuff in the shopping center but you kind of 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 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 approach of low prices to grocery too so most items by and large on average across the board the grocery items in a Walmart Supercenter are 15 cheaper than a comparable grocery store which if you're like a middle or lower income family that's hundreds of dollars a month that you're saving which is incredibly meaningful to you as a family so Walmart goes from zero percent market share in U.S grocery at the beginning of the 90s to I think by the end of the

decade in the 90s they had become the largest Grocer in America which they still are they are the largest 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 2x the number two player whoa which is Kroger who's two Kroger yep so Walmart has over 20 market share of U.S groceries Kroger has under 10 and then Albertsons and Costco are tied at five percent each wow and as Albertson's Safeway now do they merge 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 and e-commerce 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 added together are still 50 shy of Amazon's e-commerce

Revenue in a year in the last most recent fiscal year grocery accounted for 55 of Walmart's total revenue which is over 300 billion dollars alone just from grocery for a part of the business that didn't exist for the first 30 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 had brought on head and Todd crazy one last little bit about super centers I think the war was already won with Kmart but this was really the death knell with super centers because Kmart tried their own Hypermarket concept called super Kmarts oh I remember that and this is where the Walmart distribution strategy just completely trans to Kmart it trounced 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 so like here's Walmart with better Logistics getting better fresher items in their stores at lower prices it's totally game over for Kmart and frankly it's kind of crazy that a lot of the other traditional grocery chains 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 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 were undoubtedly the best at putting in back end systems to build a real impressive Data Network and use that data in the 80s and 90s but of course so the internet happens and Walmart is pretty slow to adapt to that I spent some time on the way back machine kind of looking at their website over the years and they

did not take the internet very seriously at first all the way through the 90s all the way through the early 2000s 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 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 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 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 2011 for 300 million do you know what the founders did beforehand no I remember it was like a meta search company yeah it was called jungley 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 jungley and then those two guys vanky and Anand inside of Amazon started Mechanical Turk oh cool so interesting Amazon history there so they leave they start cosmics Walmart buys it for 300 million that becomes Walmart Labs which was run as a totally separate company and has now sort of merged into Walmart's Global Internet division but that was where this sort of like okay we need to start taking this really seriously this e-commerce thing is going to be really disruptive and you

know they've acquired a variety of other companies over the years including bonobos or bonobos I've never exactly known how to say it other than I like their pants and of course then in 2016 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 we're dinosaurs they bought jet.com for 3.3 billion dollars I would love to talk to Mark Laurie about all this yeah so obviously Mark started Quincy diapers.com sold that to Amazon got into a nice tiff with Jeff Bezos left started chat did you raise is 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 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 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 were going to work we learned from our failures and the party line from Mark and from the Walmart team were that jet served its purpose to 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 core at this point of Walmart's e-commerce business and they really have made a good comeback right yeah so Mark Laurie left in 2021 and Walmart's current CEO Doug McMillan does credit him for jump starting their e-commerce business which I think is growing and this is before covid because kovid statistics messed up everything for Ecom but in 2019 I think grew 37 which when Walmart itself as a whole was growing like two percent yes and at this point it's hard to say if this is a

small number or a big number but only about 13 of Walmart's Revenue comes from e-commerce now that's 75 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 in their stores they want to make e-commerce not a separate thing 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 right which is a prime competitor but 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 I'm very curious if you would shop there that's a good question I mean I love Trader Joe's yeah so I shop at 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 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 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 even Whole Foods too like physically anywhere is the checkout lines it's just like yeah like I hate it yeah yeah but I'm not used to waiting for anything anymore because 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 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 I started in preparing for this episode trying to understand like how is the digital experience of Walmart these days versus Amazon's experience because I obviously am well versed and Amazon

packages arriving at my house every day so I started buying some stuff on Walmart I bought some like Garden lamps because I needed to install some lights and I will say the consumer perspective so far for me has been pretty identical to Amazon 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 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 Amazon is more advanced on and actually this was a great use of tigas 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 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 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 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 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

because of that Marketplace Dynamic there's just exponentially more skus on Amazon than on Walmart.com right so Amazon had to do this Walmart does have third-party sellers online and they do actually 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 in Walmart's like sort of the store within a store concept and like target has those too and 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 areas in Walmarts 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 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 go through and talk about what the things were that made Walmart successful and of course we have to do powers analysis and Powers we got a good amount of episode left here I know but for our next sponsor we have something extremely unusual this segment is brought to you by our great friends at nzs Capital we reached out to Britton and Brad and Joe and John to propose the idea of doing a paid sponsorship and they did jump on it but had one caveat

they told us that the only thing we could ask listeners to do is read one of their white papers think about it and offer feed back to help further refine the thesis indeed many of you already know nzs from the special episode we did with him last fall on complexity investing and semiconductors but for those of you who don't know they're a long only Global Equity Fund that manages money for institutional and accredited investors they have over a billion dollars under management and the team worked together for many years before starting NCS in 2019 they're among our very favorite thinkers on acquired they've been such great contributors to our thinking here on the show yeah so today we want to talk about an idea that really started the nzs investment philosophy 10 years ago which is complexity investing this grew out of research work by the famous Santa Fe Institute the idea kind of applied to investing is that it is

literally impossible to predict the future because every market and every company is a complex adaptive system this means that an investor simply cannot take in the vastness of inputs to a company like competitors or Geo political changes or new technology inventions hence the complex part to consider how all of these inputs then interplay with each other and cause the system itself to change hence adaptive to predict the future with any level of precision yeah and like Walmart is such a perfect example of this who could have predicted that these little small town guys from Arkansas would beat Kmart so if you're willing to accept that you can't predict the future then the question is what do you actually do as an investor and nzs's thesis that they lay out in the paper is that you should invest based on two Dimensions resilience and optionality resilience meaning how resilient is a given company

to varying degrees of change is it a company like Walmart which given all the change happening in the world the internet all that they're still the largest company by Revenue in the world and they can withstand large shocks to the operating environment or is it more like a say a Tesla in the early days which was highly path dependent and like a million little things could have completely derailed the company yeah of course resilience alone is not sufficient to tell if something is a good investment obviously early Tesla shares paid off hugely and resilience was not the core value prop of making that investment so this is where the second dimension optionality comes in so optionality is very similar to how we think about Venture Capital all about asymmetric upside a million little things could have derailed Tesla but would the payoff have been worth the risk if the narrow set of outcomes were

things worked perfectly actually happened like if the variant of the Multiverse where all those things actually did work was the one that happened what would the payoff have been and the answer is a very large payoff because that is the version of the Multiverse that we live in that did indeed happen yes so the key Insight that nzs believes is that you can basically plot every business on the intersection of these two Dimensions how resilient is it and what degree of optionality does it have and the best opportunities to invest come from businesses that have high degrees of both which are totally rare but absolutely exist a good illustration of this today might be Apple for example if you're interested in these ideas if you think they're cool like we do you should go check out the white paper that nzs wrote on complexity investing it also has some really fun diagrams and illustrations in it yes it's not white

paper in the like boring scientific sense it's interesting to read there's great illustrations you can do that by clicking the link in the show notes even though we're not clients of nzs it is well worth reading yep and finally since they really do want feedback you can of course email Brinton or Brad or any of them from the email addresses on the paper when you download it or even better we're going to do a zoom call with them to talk about all these ideas together other so there is a second link in the show notes for you to add it to your calendar for Tuesday August 16th 2022 at 4 pm Pacific time and we would love to see you there our huge thanks to the team at nzs Capital thank you NCS all right so Walmart today we have talked some about this but I think it's worth recapping what the shape of the company is actually at this point so they're in 24 countries which we haven't discussed they're a global Empire at

this point there's 10 500 stores each week 230 million customers visit one of these stores 203 million customers it's wild the Super Center concept is basically Walmart now it wasn't like some of the stores are super centers most stores are now super centers if you just think about the like standard Walmart discount store in 1996 there were about 2 000 of them now there are 368 because the Super Center is the new thing so the business is super centers they did close to 600 billion dollars of Revenue last year they did 25 billion dollars of operating income that's only about a four percent operating margin for those counting at home they do have a 24 gross margin which is interestingly higher than in Sam's Heyday what he sort of believed the discounting business model should bear 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 than sort of originally believed the other piece of the business that we haven't talked about at all but is a interesting both piece of Walmart's business and competitive Vector to Walmart is Sam's Clubs which were started in 1983 I believe and has been a very successful part of the company I believe what is like 10 15 of Revenue of Walmart today it's been a pretty successful part of the company but it's losing to Costco yes Costco has been this amazing story that is like the Walmart of Walmarts you know and Walmart has it too with Sam's Club but it's interesting you bring up margins Costco does 217 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 I think it's like 11 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 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 and there are some crazy stats about Sam's Club like somehow in the 90s one in three U.S households had a Sam's Club membership I 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 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 29 30 of

anything that they sell on the Shelf well Costco's gross profit margin is only around 13 and that's come up like when they first went public in I think 92 it used to be like 10 but the whole business of Costco is totally 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 no not really someone to help you get something off the shelf what if it's all just in a freaking Warehouse it's all about what can we take away and will customers still deal with to get the lowest price so sell price of course as we talked about and Jim Senegal who worked for him were big pioneers of the shopping club you know Costco price Club Sam's Club model the original target

market for it was not consumers it was small businesses 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 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 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 18 of Revenue it's 18 of Revenue it's about half of the stores are 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 the

big retailer chain Asda for about 10 billion dollars when I think that was in the late 90s 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 they actually ended up trying to sell it a couple years ago to Sainsbury's for 10 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 years ago so you know neutral at best we'll see how Flipkart plays out for them they own what 75 of that right so then there's India and Flipkart Walmart bought 77 I think stake in Flipkart back in I think it was 2018 for over 16 billion dollars which is a huge huge price I think part of it was I'm not as studied on the history of this I 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 it I think part of the idea I believe a buying Flipkart was this will be our Vector to bring Walmart into India I don't think it's gone super well I read I believe there are about 20 or so 20 or 30 you know Walmart owned physical locations in India now but you know that's not worth a 16 17 billion dollar purchase price no definitely not well I mean the last thing that I think is important to understand about Walmart is their growth has really just come down if we look back all the way back to let's see 1982. they were growing about 40 to 50 percent a year and that has basically been on a slow steady decline all the way until about 2013 where it's been about flat at three percent since then 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 the top line is just not moving very far year over year these days now 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 in grocery 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 more Tire yep all right let's do power and then we'll get into bearcat's bull case great power so for new listeners in the show and as a reminder for all of us Old-Timers Hamilton helmer's seven Powers there are seven of them and what he's identified as persistent differential returns so basically what enables Walmart to be more profitable than their closest competitor on a

durable basis yep in the seminar counter positioning scale economies switching costs Network economies process power branding and cornered resource we got to separate the takeoff phase from where they are today because I think it's a totally different set of powers hmm okay okay 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 it wouldn't do they were not set up to do it with their distribution chains 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 Walmart realized that same thing they were like well the cities are going to build out and those people are going to 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 yep 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 this is the perfect example of scale economy 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 going to have 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 to the extent that they're utilizing all that at 100 utilization or as close to 100 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 margins squeezed out of it which is also 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 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 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 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 yeah it's the customer centricity they're both deeply customer Centric Bezos sort of adopted the Centric part of customers 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 do we think Walmart has process power and there are two areas I'm thinking about with this one is the 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 there's this DNA at Walmart or at least there used to be understand M 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 their 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 and we will take the absolute bare minimum margin possible pass it all along the 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 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 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 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 but now that we're mostly on to the third generation of Walden's 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 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 it's not necessarily there as much agree okay Baron ball we've hit a lot of these points already but in my bowl case there's they kind of 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 they'll continue to execute really well there 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 downturn which I believe they did in 2009 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 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 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 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 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 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 100 have the full history on the dollar store 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 of the old variety stores like the Ben Franklin's 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 because remember they were fixed prices they were the five and dimes right so like I think that eventually became the dollar store industry fascinating well they 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 we'd love to chat about this yes for sure I think there's bear case around e-commerce even though they're growing quickly 37 pre-pandemic Ecom is still not a profitable segment for them it's crazy to think that you could be doing 75 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 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 because they were reinvesting in more distribution centers and you know stuff like that so maybe it's that but 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 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 sense but I think it's like one of 100 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 other episode we could do on um is Walmart good or bad for the world all right Playbook we'll do Playbook and then I want to get to that point I'll go first because I have one I realize that I 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 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 where he says he's talking about Sam saying I remember Sam saying over and over again 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 then you went into the store with and we must try to incorporate it into our company 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 make themselves feel better about how great they're doing we're guilty of

it too but that is so the wrong way to look at it right a much better way to look at it is 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 have a different posture but it's 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 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 now a core part of being a Founder I think especially these days is identifying something that 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 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 so I just love that one agree there's one that we've talked about a bunch so I'm just gonna like summarize it identify a wave and ride it I never would have known that discounting was a wave that happened before starting this research and if you were operating a variety store in 1955 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 and it's fascinating to me how just in the course of 50 years or 70 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 it was different he both rode

that wave but also created that wave yep reminds me so much of uh Jeff Bezos sitting in the offices of D Shaw in the early 90s being like holy crap the internet is going to be a wave yep for sure a 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 PNG and Walmart were enemies for years even though PNG had to sell in Walmarts and Walmart had to be buying PNG products before they kind of figured out how can we both do this because we do both need to serve the same customer and that took a long time and so 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 you kind of have to if you want

to win yep I don't know that this is a Playbook per se but in a industry like retailing and Walmart's business and Amazon's business and the like price really really really matters selection and convenience you know matters too and that's why Amazon's a thing and Whole Foods exists and Specialty retailers and all that the price 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 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 in those Industries you need to think about what

industry you're you're in before you start applying this stuff yeah that's a great point the last one is an ill-formed thought but I kind of want to just get it out there and it might be word vomit but Walmart in so many ways is a microcosm of America 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 that 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 2.2 million of them so if you come up with some statement of like Walmart employees are so wonderful that is true 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 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 feel they are just everything 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 when you talk about 2.2 million people that work there and when you say 240-ish million people shop there every week yeah Walmart is where you witness Humanity yes in all of its glory and the opposite of Glory all right I got one more which is again I said earlier in the episode but I think we now have to Institute a 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 fair point but that wasn't obvious I don't think that's true in fact it was completely non-obvious in that Kmart just borrowed kresge's 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 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 his name is 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 the company would have made different choices fascinating they had a whole bunch of CEO turnover and all sorts of controversial stuff all right so we're on to the segment where we're going to make a case to each other for Walmart being good for the world and bad for the world it's almost like a Bull and Bear on the business but 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 kind of 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 Sam Walton would say that they didn't I think 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 one especially for customers and well everywhere saving money and saving significant amounts of money on your everyday purchases that's huge 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 then you would have the opportunity to at a Walmart 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 a cruise either positive or negative equity to the business that participated or facilitated the transaction even if that Walmart employs a bunch of local people the equity is still being built by other shareholders so there is a lot I think I said we could do a whole another three four hours on discussing this 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 2006 and it goes really deep into all these questions labor impact on communities all sorts of stuff highly recommend reading frankly we're not going to be able to do anywhere near as good a job discussing all that as the book does and as other forums do 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 that Walmart is good on balance a because saves consumers money that's super important provides a lot of jobs You could argue about the quality of those jobs but a lot of jobs that otherwise would have gotten destroyed discounting was gonna happen yep the local shops were not going to survive the local variety stores 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 now here's the way though where Walmart's impact is a little more

unambiguously pernicious both for 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 and then as the relationships you talked a little bit about the PNG 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 ultimately that leads to a couple things it led to offshoring of American manufacturing Walmart was a huge contributor at some point the majority of items sold in Walmarts were made in China I think during the 80s it went from like six percent to like 40 percent and now like I mean if you take out grocery I'm sure most stuff in Walmart is not made in America yep you know when

Walmart recognized that this was a problem and tried to address it but if you're a supplier and they're a bunch of examples in the book of lawnmower companies Vlasic that makes pickles also like you just at a certain point you cannot pay American labor the wages that you need to pay them 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 covet here in 2022 all sorts of reasons why 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 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 92 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 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 were 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 now for current management and the previous generation of management of Walmart to their like big Credit in the mid-2000s they got religion on this and embraced sustainability and positive

environmental impact as a way to generate more efficiency so like Walmart I think is now the largest U.S 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 I want to say they literally doubled the efficiency of the trucking Fleet over a decade by just little things they did here and there to chip away and that makes a huge impact because they are one of the largest Trucking fleets in the world I mean if you look there's those Graphics that fly around there like what's the largest employer ever in any state and like most of the lower Midwest and much of the South is Walmart and then there's other ones that float around it'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 well was and still is one of the biggest sellers of guns in America and they've paired back the AR-15 and the ammo and the you know they stop 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 could 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 they stopped selling handguns in the 90s and now after the shooting in the store they don't sell guns to people under 21 in

2015 they stop selling assault rifles so I'm sure it's one of these issues where like 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's 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 going to be happening at Walmart totally and let's move on to grading how do you think we should grade this one yeah I think we should go for it I think we should give an overall grade to Walmart the company encompassing the whole body of work the Walton early days the first several decades the 40.1 percent annual compounding in the 70s the 32 and a half

in the 80s three right now 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 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 is it a cop-out to say that like it's an A plus plus from founding through the 80s and mid 90s and then it's been a d on exploiting the next big opportunity since then that's how I feel it feels weird to roll those into one letter well I think if we were going to break it out into subgrades for eras I think I would actually do three errors

I would do the Walton era including the 70s and 80s a plus plus plus plus plus yeah plus right you can't say enough pluses there then I think that actually the 90s is also an A plus and like literally grading four 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 90s also an A plus the super centers like amazing what a huge Innovation and that was not really Sam that led that and was also a big part of driving the nail in the coffin of Kmart and is now 55 of the business dude so let me tell you about the 90s in 1992 they came in growing 34 and by 1997 they were growing at 12 percent okay okay fair that was like the quintessential decade of their decline did growth re-accelerate at all as super centers came online it accelerated from 97 it was down at 12 and then it peaked

again in 2000 at 22 percent but then it's been all downhill from there interesting interesting I mean you could say all their job really has been since 2002 is to stay the same size 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 or necessarily in 2003 and pull it out today but what is a win if you were already the world's largest retailer stay the world's largest retailer through a transformational technology wave which they've done I mean 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 going to catch them no doubt about it oh yeah for sure 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 doubt it all counts like Walmart could have done that right scoreboard right you look at the scoreboard right okay so maybe then 90s is not an A plus but I still like the Super Center Innovation is huge but yeah and then I do think that the 2000s and particularly the 2010s pretty uninspiring for Walmart it's a little silly because like what actually should you be going for if Sam Walton cared about the acquired scoreboard they should have been done in like 1995. or even 2002 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 tremendous upheaval in the world

and stayed Nimble enough to do that all right how about perhaps a less controversial or more straightforward way of grading I would grade made in America as an a among the canonical tomes that we've used as main sources on acquired okay like shoe dog made in Japan yeah of that ilk yeah sure so Sam's co-author who we've mentioned of made in America John Huey do you know anything about who John Huey is no no idea he after writing the book became the editor and chief of time oh wow and do you know who he replaced as editor-in-chief of time is it someone else's co-author Walter Isaacson no way yeah 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 Steve Jobs book and like you know reading like Sam knows 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 your Walmart order was delivered thanks for shopping with us reply hell for more so I have to go run and pick up my my Walmart order oh you gotta 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 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 Mart's 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 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 Berkshire oh so fun I mean that's obviously better but I'm kind of 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 are you talking Mediterranean here like I don't think Mediterranean if I had to guess my carve out is a carve out that has been unacquired before it was your carve out but in a different form oh and that is The Godfather the film you did do it as a carve out right parts one and two parts one and two yes 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 the last month or two is it the book is Mario puza's book The Godfather it's so good I think it was better than the movies it's as good as the movies yeah careful there buddy and I watched both after reading the book as with anything when you read the book you understand so much more about what's going on why motivations because I feel like especially 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 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 2001 A Space Odyssey a couple years ago I read the book and I'd never understood like the movie I was like

this is crazy you're like what the hell is the last scene but then you read the book and you're like oh now I totally understand what's going on and I get it it's awesome it's a little bit like that with the Godfather with the book 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 Vito's history like the Italian backstory is actually part of the first main volume and when Michael goal is off in Sicily hiding after he murders The Turk and the police captain all right on my list adding it it's good it's good with that listeners our thank you to fundrise Pilot and nzs capital thank you so much for being on this journey with us after you finish come discuss with the other 12 000 smart clever kind appreciative members of the acquired community at acquired.fm slack

if you want more acquired I know this episode's going to clock in like three and a half hours or something insane but if you're like 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 200 million 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 LP for paid subscribers and we've got a job board go check it out at acquire.fm jobs 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 stick consider that all right David anything else I don't know what else we could say at this point all right listeners with that we'll see you next time we'll see you

next time