Walmart

Ben Gilbert 0:00 I love how this book is called Made in America, and the Sony story is Made in Japan. Like, I don't know-

David Rosenthal 0:05 Yes

Ben Gilbert 0:06 ... 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.

David Rosenthal 0:12 Ah, so, so great.

Speaker 0:14 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

Ben Gilbert 0:31 Welcome to Season eleven, episode one, the season premiere of Acquired.

David Rosenthal 0:36 Woo!

Ben Gilbert 0:37 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.

David Rosenthal 0:48 And I'm David Rosenthal, and I am an angel investor based in San Francisco.

Ben Gilbert 0:54 And we are your hosts. When we did our Sony episode, we discovered that many Steve Jobsisms really started as Akio Moritisms. 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 six hundred billion dollars a year in sales.

David Rosenthal 1:48 Although Amazon is close behind now.

Ben Gilbert 1:50 It's true. It is the world's largest employer, other than public entities like governments, employing nearly two point three million people around the world. It is still controlled by the Walton family, who owns just over fifty percent of the business, a full sixty years after it was founded.

David Rosenthal 2:08 Oh, we're gonna get into how and why that is the case. One other fun stat for you: today, ninety percent of America lives within ten 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?

Ben Gilbert 2:29 No.

David Rosenthal 2:30 San Francisco, Seattle-

Ben Gilbert 2:33 No way!

David Rosenthal 2:34 ... Boston, and the fourth place is Manhattan in New York City. It is not technically true because there is a Walmart across the river in New Jersey that is less than ten miles away, but in spirit, that is true.

Ben Gilbert 2:45 What, two and a half hours to get there or something? [chuckles]

David Rosenthal 2:48 Yes. [chuckles]

Ben Gilbert 2:49 Wow, so you're saying it's not a company that, uh, is built on the urban core. Is that where you're going, David?

David Rosenthal 2:55 It's the biggest company in the world. It services all of America, except where we live. [chuckles]

Ben Gilbert 3:00 Yeah, it's fascinating. This really is one of the most classic business stories in America or in the world, period, and I kind of can't believe that we're not covering it until now. So let's start Season eleven with a 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.

Ben Gilbert 3:30 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.

Speaker 3:44 Thanks for having me, guys.

Ben Gilbert 3:45 You've built the largest private investment platform in the world for retail investors, and just so listeners have some numbers around that, that's over three hundred and fifty thousand 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?

Speaker 4:07 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.

Ben Gilbert 4:33 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 one hundred and fifty-five million dollars into Fundrise, the operating company itself, from your customers?

Speaker 5:01 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?

Ben Gilbert 5:24 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?

Speaker 5:41 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, aligned from the customers, all the benefits of being public without actually having to go public. We'll handle all the regulatory burden and invest in private tech companies.

Ben Gilbert 6:03 ... That'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?

Speaker 6:14 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 went public? The only reason is because the venture investors had to pay their LPs and take their twenty percent carried interest. We don't take a twenty percent carried interest, and we don't have normal LPs. It's just one point eight five percent asset management fee a year, which is much less than the two and twenty of a typical venture fund. So we're just structurally better incentives. I think it's the future of venture capital.

Ben Gilbert 6:57 Well, 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, notvc@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. Our huge thanks to Fundrise. Well, after you finish this episode, you should come discuss it with the twelve thousand other smart, curious members of the Acquired community at acquired.fm/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 two hundred 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.

David Rosenthal 8:06 So cool. Patrick totally bootstrapped ProfitWell, almost like Sam Walton totally bootstrapped Walmart.

Ben Gilbert 8:14 Yes. Well, without further ado, David, take us in. And listeners, as always, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

David Rosenthal 8:27 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' favorite books and, you know, formed 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 Bezos. Like, this is the connective bridge between those two realities.

Ben Gilbert 9:09 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.

David Rosenthal 9:22 Oh, very much tech business. This is what shocked me reading the story, is how much Walmart embraced technology and Sam embraced technology, and I think they were arguably the first corporation in America to embrace computing as a business paradigm.

Ben Gilbert 9:37 Certainly to embrace their own private satellite network.

David Rosenthal 9:40 Yes.

Ben Gilbert 9:40 But I'll save the spoilers.

David Rosenthal 9:42 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 twenty five hundred people. Today, it is much larger, bustling metropolis of five thousand 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. [chuckles]

Ben Gilbert 10:20 Walmart grew at a much faster rate than the, uh, two X that Kingfisher grew in a century. [chuckles]

David Rosenthal 10:25 This is crazy. Kingfisher, twenty five hundred person Kingfisher around this time, is also the birthplace of the Coleman company. You know, like the outdoor, like camping-

Ben Gilbert 10:34 Oh, no way!

David Rosenthal 10:35 ... gear. Yeah.

Ben Gilbert 10:35 Yeah.

David Rosenthal 10:35 Started in Kingfisher, Oklahoma.

Ben Gilbert 10:38 Didn't Jim Weber from our Brooks episode start his career at Coleman?

David Rosenthal 10:42 Oh, I think that might be right! Oh, yeah.

Ben Gilbert 10:46 We're on, like, an accidental CPG retailing kick here.

David Rosenthal 10:48 I know. So great. Well, anyway, back in March of 1918, in Kingfisher, one 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 I. 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-

Ben Gilbert 11:47 Bud

David Rosenthal 11:48 ... 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.

Ben Gilbert 12:06 Home of Capital Camp.

David Rosenthal 12:07 ... Yes, home of the University of Missouri, Capital Camp, and Permanent Equity, and our friend Brent Beshore there.

Ben Gilbert 12:14 Yep.

David Rosenthal 12:15 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. [chuckles] 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.

Ben Gilbert 12:44 Hmm.

David Rosenthal 12:45 So if you've ever read The Grapes of Wrath or any of the great novels, Steinbeck or 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 [chuckles] 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.

Ben Gilbert 13:22 I remember reading in Made in America, I sort of thought that what Sam was gonna 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 while this is definitely happening."

David Rosenthal 13:51 I mean, that's probably why he brought the kids along, [chuckles] right? Probably hard for somebody to, uh, attack him or get too mad if he had his two little kids there with him.

Ben Gilbert 13:58 I wonder. Yeah.

David Rosenthal 14:00 Crazy times. But yeah, so all of this makes an impression on Sam, and Sam says in the book in his very Sam 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."

Ben Gilbert 14:23 I think we've already kind of made the point, but the Walton family goes on to be the wealthiest family in the world.

David Rosenthal 14:29 Still.

Ben Gilbert 14:30 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.

David Rosenthal 14:42 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 Columbia and gets some cows and sort of restarts part of the farming business. She starts a milk business that they help out, you know, milking the cows, delivering to neighbors in Columbia. Sam starts selling magazine subscriptions. He also starts selling rabbits and pigeons [chuckles] that he raises in the backyard. I don't know who was buying the rabbits and pigeons, but that's what he does.

Ben Gilbert 15:20 He learns retailing at a young age, though.

David Rosenthal 15:22 Indeed. And then, of course, like every good Acquired protagonist, he gets a newspaper route for The Columbia Missourian, just like Warren Buffett.

Ben Gilbert 15:33 That's right. That was on Berkshire Part One, that episode we did?

David Rosenthal 15:37 Yeah, I think that was Part One. Yep.

Ben Gilbert 15:38 Oh, that's right, 'cause he delivered The Washington Post before later going on to become a major shareholder.

David Rosenthal 15:45 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 [chuckles] Missouri history. Ben, you were an Eagle Scout.

Ben Gilbert 16:01 I am.

David Rosenthal 16:01 How old were you when you became a...

Ben Gilbert 16:03 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 was 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.

David Rosenthal 16:39 Maybe he counted, uh, raising the rabbits and pigeons. [chuckles]

Ben Gilbert 16:43 Yeah, that's right. Maybe some merit badges in there.

David Rosenthal 16:45 So the other thing, this is pretty crazy, that young Sam as 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 [chuckles] and very slight, so you wouldn't think that he's gonna 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. [chuckles]

Ben Gilbert 17:21 [chuckles]

David Rosenthal 17:21 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-

Ben Gilbert 17:40 [laughing]

David Rosenthal 17:40 ... 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!

Ben Gilbert 17:57 There's, like, two sort of contrasting ideas that I've heard different VCs and different founders espouse on both sides. One is, you know, you learn from your mistakes, and you learn from failure. The other is, if all you've ever done in your entire career is be in really high-performing, very successful environments, then that is kind of all you know how to do, and that's the bar that you hold yourself to, and I think there's totally merit to both.

David Rosenthal 18:20 ... I think both of these forces shape Sam, right? Like the Depression, the Dust Bowl, foreclosing on farms, you know, his dad's struggles, and he never loses a game. All of that goes right into Walmart.

Ben Gilbert 18:33 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, and they started exploding in the parking lot and getting watermelon juice all over all the customers and their cars.

David Rosenthal 18:57 That was actually Walmart number two.

Ben Gilbert 18:58 Oh, sorry.

David Rosenthal 18:59 That 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, 'cause his family has no money, it's the Depression, is he attends on a ROTC scholarship. So he still has to, like, pay his living expenses, [chuckles] and Mom and Dad and the family aren't gonna help out. You know, there's no money in the family. So he keeps his newspaper route, 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 kinda scale the business. By the end of college, he's making $4,000 to $5,000 a year [chuckles] from his newspaper activities, which that's, like, huge. We're gonna get into what his first job pays him in a minute, but $4,000 to $5,000 a year in the '30s during the Depression, that's a lot of money. [chuckles]

Ben Gilbert 20:03 Yeah, it's crazy.

David Rosenthal 20:04 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 do that because he could sell more than anybody else. He was good. He was really good." [chuckles]

Ben Gilbert 20:26 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. Warren's is about understanding the value of compounding, and it's not that Sam didn't, but it's that Sam was a salesman. He's a merchant. He's a retailer. Like, he understands how to learn what people want and then go procure the thing in the way that they want it and deliver that to them. They're different superpowers that manifested both in building early successful periodical distribution sub-companies.

David Rosenthal 20:59 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, J.C. Penney's and Sears, and he goes with the offer from J.C. Penney.

Ben Gilbert 21:25 Which is interesting because Sears was the dominant retailer. Everyone bought everything for their homes, including some homes, from Sears.

David Rosenthal 21:33 Yes. I think the first house we lived in in Seattle was a Sears catalog home.

Ben Gilbert 21:40 Wow!

David Rosenthal 21:41 Yeah, so, like, this is what's funny, and, you know, and Sam is like... He really keeps it real in the book. You know, you could tell this, like, backward-looking narrative of he connected all the dots. He wanted to go learn retail, learn the craft from the best, in which case he would've 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," 'cause he would've 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."

Ben Gilbert 22:29 Wow! It would not bring him any rest, though. [chuckles]

David Rosenthal 22:33 [chuckles] No. No, no, no.

Ben Gilbert 22:34 Maybe this first job at Penney's, or as he calls it, Penney... I don't think he colloquializes the way that people did in our era. Like, I always called J.C. Penney "Penney's."

David Rosenthal 22:43 Right. Well, he ultimately ends up getting to meet James Cash Penney himself.

Ben Gilbert 22:50 Wait, the guy's name is James Cash Penney?

David Rosenthal 22:52 I know. Isn't that awesome? James Cash Penney. [chuckles]

Ben Gilbert 22:54 That's almost as amazing as Price Club being founded by a guy named Sol Price.

David Rosenthal 22:59 Oh, we are gonna talk a lot about Sol Price.

Ben Gilbert 23:02 Yes.

David Rosenthal 23:02 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 J.C. Penney as, like, a floor salesman, and he does great. I mean, literally, James Cash Penney comes and meets with him himself, and the story that Sam tells is J.C. shows him how to tie, you know, packages, merchandise that is sold, with the least amount of twine and paper possible [chuckles] 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 gonna 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 gonna 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 kinda depressed. He's unhappy about this. Bud's going off to join the Navy, and Sam is gonna stay home in America at a desk job. So before he gets his commission, he leaves Des Moines, and he goes back to Oklahoma. Not exactly sure why. He just sorta 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.

Ben Gilbert 24:28 ... 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.

David Rosenthal 24:44 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, L.S. 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, 'cause 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 partnership that Helen and Sam set up is today Walton Enterprises, which owns thirty-six percent of Walmart, and then individual family members and, and trusts, uh, I think mostly Bud's family, own the other eleven, twelve percent.

Ben Gilbert 26:02 Yeah, this is the interesting seed plant of Walmart being a family business from the very get-go. They organized it interestingly. Each store was actually its own company so that different people could sort of hold shares in each store, the management, different people who, you know, wanted to invest in the store, that sort of thing. But at a really high level, Walmart always was a family partnership. It was always something where the 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.

David Rosenthal 26:41 And this is why, because the family were all partners in Walton 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-

Ben Gilbert 27:27 Buying NBA and NFL teams. [chuckles]

David Rosenthal 27:29 Yeah, buying NBA and NFL teams, which they do now, "I will come back and haunt you, so don't even think about it."

Ben Gilbert 27:35 I love that warning.

David Rosenthal 27:36 So Sam and Helen get married, and Sam gets posted in a bunch of places all around the country doing kinda internal intelligence work for the Army. He goes to Utah, plenty of other places, and he decides that when the war ends and he gets out of the Army, he's gonna go back into retailing, but now he has the support of Helen and her family and her father, L.S., and they're 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, L.S. initially wants them to move back to Claremore, but Helen and Sam kinda decide together, they're like: "Well, we want your support, but we don't wanna be totally under your wing and in your shadow." So Sam, he's got big ambitions. He and a buddy decide that they wanna buy a Federated Store department store franchise in St. Louis. They're gonna be big. You know, he'd come from J.C. Penney in Des Moines. He wants to be a, you know, big city department store owner, magnate, entrepreneur. [chuckles] 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." Uh, Sam says, "Her family had seen some partnerships go sour, and she was dead set on the notion that the only way to go was to work for yourself and for your family. And two," she says, "I don't wanna live in a big city. [chuckles] I wanna go live in a small town like where I grew up in, just like Claremore. I don't wanna live in Claremore itself, but we are not allowed to move to any town that has a population of more than ten thousand people."

Ben Gilbert 29:31 I mean, her whole thing was, "I wanna raise my kids the way that I was raised," and she looked at Sam and said, "You were raised the same way, small town, and, like, that's what we're gonna do." And so whatever business he did had to be family-owned and controlled and have a small town-based strategy. And so, like, what seems so intentional and so genius actually stems from the fact that she just vetoed his [chuckles] original idea.

David Rosenthal 29:54 Totally. I mean, it's crazy. She had a, an undergraduate degree in finance. For a woman at that time, I mean, she was very involved, obviously, in the strategy of the business.

Ben Gilbert 30:04 In the '30s and '40s, the number of women with undergrad finance degrees in the US was probably tens of thousands.

David Rosenthal 30:11 It could not have been a large number.

Ben Gilbert 30:13 Yeah.

David Rosenthal 30:14 And also, like, kudos to the family and L.S. and his wife for encouraging her to ... She had brothers. Like, it would've been easy for him to say, like: "Oh, okay, the boys are all gonna take over the business."

Ben Gilbert 30:24 Right, which is like what we saw in the New York Times family or... Yeah.

David Rosenthal 30:29 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 o- overruled him, but, you know, he finds a way. So he goes back to the company that owned Federated, which was 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, ten thousand people or less?" [chuckles] 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."

Ben Gilbert 31:15 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.

David Rosenthal 31:34 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 serviced at retail, and they were mostly franchise operations. This particular one was Ben Franklin, was the brand name, like Benjamin Franklin general store-type place.

Ben Gilbert 31:51 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, r- maintain all those different vendor relationships. If you're in one of those towns, you're serving two thousand people, you're kind of the one store there. What you really want is to sign a contract and just get the shipment of the stuff that goes into the Ben Franklin stores in all the small towns.

David Rosenthal 32:15 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.

Ben Gilbert 32:34 Like a five-cent, ten-cent store?

David Rosenthal 32:36 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 and modern retail today, which Sam really invented, [chuckles] was they weren't self-service.

Ben Gilbert 32:57 Oh, he didn't invent that. He stole that.

David Rosenthal 32:59 We're gonna get to it. We're gonna get to it.

Ben Gilbert 33:01 Okay.

David Rosenthal 33:02 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, [chuckles] pick out what you wanted, bring it up to the front, and check you out.

Ben Gilbert 33:18 'Cause, like, there wasn't really choice. You're like: I need a hose, and they would go get the hose. It's not like: Well, let me see all the different brands and sizes and colors. It was like: I know you have hoses here. Can you get me one?

David Rosenthal 33:31 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.

Ben Gilbert 33:38 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.

David Rosenthal 33:51 I don't know exactly how the department store model worked, like, you know, J.C. 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 Penney's, 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. [chuckles]

Ben Gilbert 34:20 Yeah.

David Rosenthal 34:21 So Butler 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 seven thousand 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 [chuckles] 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, [chuckles] retail in the US is booming.

Ben Gilbert 35:15 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.

David Rosenthal 35:23 There's a lot of stuff to buy. It doesn't matter if you're a department store in a big city or a variety store in a seven-thousand-person town, like, everybody in retail should be making money hand over fist right now. So the question that Sam [chuckles] didn't ask himself and should have was: Why does this guy wanna sell? [laughing] 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 twenty-seven 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 naivete about contracts and such would later come back to haunt me in a big way."

Ben Gilbert 36:14 Wow!

David Rosenthal 36:15 So he and Helen buy this store.

Ben Gilbert 36:19 This distressed asset at not a distressed price.

David Rosenthal 36:23 [chuckles] Yes. They buy it for twenty-five thousand dollars, five thousand dollars of their own savings and a twenty-thousand-dollar loan from L.S., from Helen's father. And, uh, Sam, you know, he says, "This isn't what I dreamt, but, uh, you know, I'm still gonna set big goals."... He decides that he's gonna set a goal that this store is gonna become the most profitable variety store in Arkansas within five years.

Ben Gilbert 36:50 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.

David Rosenthal 37:12 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. [chuckles] He says, "Only after we closed the deal, of course, did I learn that the store was a real dog. It had sales of about seventy-two thousand dollars a year, 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."

Ben Gilbert 37:56 Yikes!

David Rosenthal 37:57 So not only is it unlikely that he's gonna be the most profitable store in Arkansas, it's unlikely he's gonna be the most profitable store in Newport. [chuckles]

Ben Gilbert 38:07 Yeah.

David Rosenthal 38:08 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.

Ben Gilbert 38:19 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.

David Rosenthal 38:51 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.

Ben Gilbert 39:05 Yeah, and also, we keep referencing Kmart. When I was growing up, I was like, Walmart, Kmart. I think Kmart's kinda 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.

David Rosenthal 39:27 Oh, they were the gorilla.

Ben Gilbert 39:29 I don't remember 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.

David Rosenthal 39:42 So you mentioned notepad. It's actually a yellow legal pad that Sam uses.

Ben Gilbert 39:46 Sorry. Sorry, David.

David Rosenthal 39:47 Famously, he has his yellow legal pad, and he's going into competitor stores. He starts, like, diving in dumpsters, trying to get sales receipts and, like, inventory orders and stuff, figure out how these stores are operating. And he quickly 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, uh, health and beauty aids, toothpaste, mouthwash, makeup, that kind of stuff, like, that really drives customers in. So he's like, "Okay," you know, he starts doing that, and 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, as 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 twenty-five percent markup on all the inventory, and they don't even do anything. It's almost like they set up the whole system just to keep these prices high out in the countryside, and they just get a, you know, twenty-five percent skim off the top.

Ben Gilbert 41:01 Yep.

David Rosenthal 41:02 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, kinda [chuckles] 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, sorta, you know, clandestinely [chuckles] 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.

Ben Gilbert 41:33 And you know what? Like, he's operating at a small enough scale that Butler Brothers doesn't really notice, and to be frank, like, there wasn't good tracking or accountability at this point. I mean, there wasn't computers yet, so-

David Rosenthal 41:45 There's no computerized inventory here.

Ben Gilbert 41:47 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."

David Rosenthal 41:54 He's driving around himself. There's no management. He has some clerks working in the store, but it's just Sam and, you know, Helen running the place. So he's out, he drives to visit them. He's gotta get a deal done on the spot. So he goes, he knocks on the door, meets these people, and is like: "I wanna buy it right now. I've got a trailer hooked up to my pickup truck outside. [chuckles] Can you just load the inventory right into the back, and I'll drive it back to Newport?"

Ben Gilbert 42:18 Yeah.

David Rosenthal 42:19 So he says, "I bring them," the inventory, "I bring it back, price it low, and just blow that stuff out of the store." [chuckles]

Ben Gilbert 42:26 Which this is an invention. Like, this is a brand-new concept-... that we kinda take for granted now, but is totally a Sam Walton invention to meet his own needs, which is create something that is astonishingly low price to get people in the store. Take no margin on it. Make it a loss leader! Who cares? But get people in the door, spending time in your store, and they look at other stuff. And this would become a cornerstone of Walmart forever after this, and for every other retailer. Even a pricing of SaaS products now, where you look at it, and it's like, "Oh, I'm on the free plan."

David Rosenthal 43:02 Right.

Ben Gilbert 43:03 It's not that he invented loss leadership as a category, but he figured out how to make it work in the retail model.

David Rosenthal 43:09 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 haul my pickup truck out to these manufacturers and get goods at a lower price."

Ben Gilbert 43:27 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 really product market fit in people's homes.

David Rosenthal 44:08 Price, selection, convenience, right? That's the holy trinity of, of retail. But nobody really knew this yet, and frankly, all of those things are important, 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-

Ben Gilbert 44:31 Life was inconvenient, period. So, like, y- you were 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.

David Rosenthal 44:43 Customers will go to great, great lengths to get lower prices.

Ben Gilbert 44:49 People would make day trips. People would drive five hours to other cities to get a deal on goods.

David Rosenthal 44:56 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 eighty cents. I found that by pricing it at one dollar, I could sell three times more of it than by pricing it at $1.20. 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've by selling the item at a higher price. And always low prices, always. [chuckles] Walmart, there it is. D- we're not quite at Walmart yet, though.

Ben Gilbert 45:45 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-

David Rosenthal 45:56 Yes

Ben Gilbert 45:56 ... they didn't always have the lowest price.

David Rosenthal 45:59 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 [chuckles] and, uh, the government had a little something to say about that.

Ben Gilbert 46:19 Yeah.

David Rosenthal 46:20 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, two hundred and fifty thousand, in sales at a thirty to forty thousand dollar annual profit. Remember, he bought the thing for twenty-five thousand dollars, and that's including the crazy five percent rent charge in his expenses.

Ben Gilbert 46:57 So his operating margin on this is twenty-four percent. He's making very, very real profits on this little store that he's got.

David Rosenthal 47:05 If he had a better rent deal, it could be, like, twenty-eight percent. [chuckles] 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.

Ben Gilbert 47:27 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 [chuckles] Corporation's radar, and they kinda know what he's doing at this point. But it's good for them. Even though it's good for Sam, it's also good for them, because volume and customers.

David Rosenthal 47:51 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 is not headquartered in Newport, Arkansas. Butler Brothers wasn't the only related party to Sam who figured out what was going on here. His landlord, [chuckles] that had pulled one over on the previous owner and had the super onerous rent terms, also figures out, of course, how great Sam is doing, despite, you know, having the deck stacked against him, and he decides he wants to take over the store. So he goes to Sam, and 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 and is like, "You know what, son? You've done a great job,... I thank you for turning this property of mine around. I'm gonna take it from here.

Ben Gilbert 48:42 And, like, just to contextualize this, it's a seven thousand person town. There's not really many other available storefronts. He's got tons of shelves in there with tons of goods, um, 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."

David Rosenthal 49:06 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, et cetera, in the store. So he pays Sam and Helen fifty thousand dollars [chuckles] to take over the store. I'm gonna guess that's sort of a, what, two X return?

Ben Gilbert 49:44 And what was, what was the operating income from the previous year?

David Rosenthal 49:47 Thirty to forty thousand dollars. [chuckles]

Ben Gilbert 49:49 Yeah. Wow! Brutal.

David Rosenthal 49:51 But at least they get the fifty thousand dollars out. So this is now nineteen fifty, and Sam and Helen hit the road again, looking for a new town to bring their, uh, traveling circus to.

Ben Gilbert 50:01 And have a little bit more knowledge on lease negotiation.

David Rosenthal 50:05 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. [chuckles] And two, like I said, Sam keeps it real. He was like: "You know, there's some really good quail hunting up there, [laughing] and I really wanted to be closer, so I could drive my bird dogs out and go hunting."

Ben Gilbert 50:35 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.

David Rosenthal 50:51 Yes. So great.

Ben Gilbert 50:52 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.

David Rosenthal 51:05 So the opportunity that they find and settle on is in a little town of three thousand people, so less than half the size of Newport, that already in this town of three thousand people, had three variety stores operating. Newport had two for seven thousand people. This town has three for three thousand people. As, uh, Sam says, he loves competition. [chuckles] And that town is Bentonville, Arkansas.

Ben Gilbert 51:37 Yes.

David Rosenthal 51:38 Sam, probably, almost assuredly, is rolling over in his grave right now.

Ben Gilbert 51:42 The new Walmart campus?

David Rosenthal 51:43 The new Walmart campus that they're building. It looks absolutely gorgeous, which I'm sure he would be furious about.

Ben Gilbert 51:50 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 for very, you know, practical use, but Sam is not a showy guy.

David Rosenthal 52:11 Actually, the anecdote that he and John Huey opened Made in America with is, I think it's nineteen eighty-five when Forbes ranked him the richest man in America, and all these reporters, you know, start descending on Bentonville. They wanna 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 gonna drive my, uh, my dogs around in, a Rolls-Royce?" [chuckles]

Ben Gilbert 52:49 All right, so they arrive in Bentonville. Bentonville and the world are forever changed, but it doesn't happen all at once.

David Rosenthal 52:55 No. So the store that they buy is another Ben Franklin franchise that had done thirty-two thousand dollars in revenue the year before. Quite a distance from the two hundred and fifty thousand that they left Newport with. And, uh, Sam decides, he's like: "All right. Well, this is a small market, this is a small store. There's a lot of competition, but I have big ambitions." He's got his ear to the ground in retail, and particularly in the Ben Franklin franchisee, you know, sort of network. He hears through the grapevine that there are two 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." [laughing]

Ben Gilbert 54:13 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: "Well, I must see it for myself," because he so fervently believes that he picks up insights from, like, actually spending time in stores and actually talking to customers. It seems like he does that sort of more than any other entrepreneur we've ever talked about on this show, this obsession with first-hand experience.

David Rosenthal 54:36 I think everybody can apply this to their business. I was thinking about it, reading the book. You know, I starred so many passages like this. I'm like, I already listen a lot to other podcasts, unlike when we started Acquired, and I didn't listen to any other podcasts.

Ben Gilbert 54:47 We should find the best ideas and incorporate them. Yeah.

David Rosenthal 54:50 There's a great quote about this when Walmart actually gets started later that... I'm gonna tease it for now.... So on July 29th, 1950, just about, what is that? Seventy-two years ago, they reopen the Ben Franklin store that they bought.

Ben Gilbert 55:08 Still a franchise.

David Rosenthal 55:09 Still a franchise, still a Ben Franklin franchise, still working with Butler Brothers for most of the inventory, quote, unquote. But they wanna send a message that this is, you know, a new era. They're doing a self-service new store in Bentonville, so they rename it Walton's Five and Dime, and it becomes the third self-service variety store in the entire country.

Ben Gilbert 55:33 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 gonna use it."

David Rosenthal 56:02 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-

Ben Gilbert 56:18 Yes

David Rosenthal 56:19 ... that is completely freaking crazy [chuckles] that a store servicing three thousand 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 self-service. It causes quite a stir. Now, I believe... I couldn't find this exactly, but I believe in that first year when, uh, Walton's Five and Dime is open, remember, the previous Ben Franklin iteration of the store had done, I think, what? Thirty-two thousand dollars I said, a year in revenue, something like that. Walton's Five and Dime 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. [chuckles] So what was happening here?

Ben Gilbert 57:23 Yeah. Is there a massively expanding TAM? Did they expand the market because people are just buying more stuff than they otherwise would've?

David Rosenthal 57:30 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.

Ben Gilbert 57:45 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-less 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."

David Rosenthal 58:12 Yep. And if you think about it, right, like, put yourself in the shoes of customers back then, a- and Sam talks about this a lot in the book, you know. For so long, and 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, 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 in Newport, where he was satisfied, you know, the store kept growing, he did two hundred and fifty thousand dollars a year in sales, he starts looking to open up more locations.

Ben Gilbert 59:07 More five and dimes.

David Rosenthal 59:08 He also doesn't wanna have all of his eggs in one basket and one lease like he did in Newport.

Ben Gilbert 59:13 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?

David Rosenthal 59:21 Yes.

Ben Gilbert 59:21 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."

David Rosenthal 59:27 Yes. Clearly, he's a very competitor-focused... You know, it's funny, like, there's so many Jeff Bezos-isms that when you read this book and you learn about Walmart and Sam Walton, you realize that they were originally Walton-isms, Sam-isms. But the whole Amazon, like, "We're customer-focused, we're not competitor-focused," Sam would've said, "Absolutely not. We are absolutely competitor-focused. We are focused on taking the best stuff from our competitors and implementing it here."

Ben Gilbert 59:54 All right. Yeah, while we're here, we have to say it. So eventually, a Walmart does go in back in Newport, and there is a little store that is run by a family member of the landlord that screwed over Sam that does get put out of business by that Walmart going in, and Sam makes the point: "You can't say we ran that guy, the landlord's son, out of business. His customers were the ones who shut him down. They voted with their feet." To me, this is that perfect overlap of are you competitor-focused or customer-focused? Well, both. You have to win in a market by counterpositioning in some way, and Walton did it by discounting, but that obviously has an impact on your competitors, and you need to be able to counterposition against someone, like a competitor. So when the big realization is, "Oh, customers always want lower prices and satisfaction guaranteed," and all the other Walmart-isms, that will have impacts on your competitors, and you have to pay attention to those competitors, but ultimately-

David Rosenthal 1:00:48 The customers decide

Ben Gilbert 1:00:50 ... Sam is willing to blame the customer for putting the competitor out of business.

David Rosenthal 1:00:55 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 'cause he's working in, in Bentonville. So he brings on a guy named Willard Walker, who was managing a variety store in Tulsa before that, and the way they convince him to move to Fayetteville and take over this sorta 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 and all future stores as their own partnerships. This is something I didn't understand till reading the book, becomes a huge part of the playbook for Walmarts 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 you're incentivized to information share, and you want everybody to do better.

Ben Gilbert 1:02:38 They get carry, and they should make a GP commit.

David Rosenthal 1:02:41 Exactly. [laughing] 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-

Ben Gilbert 1:03:10 Which is like an RSU-type equivalent.

David Rosenthal 1:03:12 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.

Ben Gilbert 1:03:30 Which is what a stock option is supposed to simulate, 'cause la- later, you put your dollars in if you feel that it's a valuable thing to own, and you-

David Rosenthal 1:03:37 But I don't think people think about it like that.

Ben Gilbert 1:03:38 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 ninety-nine point nine percent of startups.

David Rosenthal 1:03:54 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 were doing this, not the hourly employees.

Ben Gilbert 1:04:06 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.

David Rosenthal 1:04:21 And so there are 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 [chuckles] and doing this.

Ben Gilbert 1:04:42 Intentionally not. Those folks were kinda discriminated against in the Walmart culture, especially in the early days of, like, "You think you're better than us, college boy?"

David Rosenthal 1:04:49 Totally. One of the first managers was nicknamed The Bear, and he had one eye. [laughing] There's some crazy stories out there. They were, you know, bringing donkeys into the store, like-

Ben Gilbert 1:04:58 All right, all right, we're talking Walmart, so, like, take us to Walmart. How did we get from the Waltons' Fymodine?

David Rosenthal 1:05:04 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's, 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 at a fifteen percent discount to the stock price.

Ben Gilbert 1:05:39 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, an employee stock purchase program. Microsoft only let us have a ten percent discount, so very kind of Walmart to give a fifteen percent discount from market price.

David Rosenthal 1:05:53 So there are stories 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.

Ben Gilbert 1:06:02 Wow! Speaking of Home Depot, did you know that's a venture capital-backed company?

David Rosenthal 1:06:07 Yes. It's an amazing story.

Ben Gilbert 1:06:09 Yeah, we should do that at some point.

David Rosenthal 1:06:11 And totally inspired by Sam and Walmart and everything.

Ben Gilbert 1:06:15 Yep.

David Rosenthal 1:06:15 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? [chuckles] Well, Bud had gotten into the Ben Franklin business himself after the war in Missouri. 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 gonna have a shopping center, this new-fangled concept, right in the middle of this suburb subdivision, and there's gonna be a grocery store and a drugstore and real estate for a big Ben Franklin store. So Sam calls up Bud, and he's like, "We gotta go in fifty-fifty on this. This is a huge opportunity" And they do, and it is a-... 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.

Ben Gilbert 1:07:37 Hmm.

David Rosenthal 1:07:38 This is really a 1960s thing, not a late '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 these shopping centers.

Ben Gilbert 1:07:54 For which they would be the anchor tenant.

David Rosenthal 1:07:56 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, and he's like: Well, these multi-tenant shopping centers, I see the power in Ruskin, 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.

Ben Gilbert 1:08:31 Hmm.

David Rosenthal 1:08:32 And that's what he starts to do.

Ben Gilbert 1:08:36 Does he become his own landlord then and just buy the land, or what requires more capital?

David Rosenthal 1:08:40 That's a good question. I don't know at this point if they were doing real estate themselves, but certainly they, 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.

Ben Gilbert 1:09:14 And are they still sourcing the inventory from Ben Franklin, from Butler Brothers?

David Rosenthal 1:09:18 Yes. So they don't yet have their own distribution, inventory, logistics network set up. That was the big step of Walmart. These were still just, like, much larger versions of Ben Franklin's, and they were working with them to get all the inventory to them.

Ben Gilbert 1:09:35 And they've already, at this point, they've bent 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.

David Rosenthal 1:09:58 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. They're self-service, they're larger format, but it's still a part of a Butler Brothers cartel, shall we say?

Ben Gilbert 1:10:22 Yes.

David Rosenthal 1:10:23 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. [chuckles]

Ben Gilbert 1:10:46 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.

David Rosenthal 1:11:01 Because they're all discounters now. I think it's 87% of market share in America is discounters.

Ben Gilbert 1:11:08 Yeah. So there's either, like, specialty high-end retail, which is often directly from the manufacturer, sort of like vertically integrated or specialty sourced or something. Or if you're buying things at what we consider a big, regular store, they're all discounters, and at the time, there were no discounters. Everyone was marking up their goods by about 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.

David Rosenthal 1:11:39 And that was on top of the markups in the middle from the franchise operators.

Ben Gilbert 1:11:44 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 though, like, Target is sort of like a high-end discounter, it's sort of like a nicer stuff, more expensive, they're in the 29% category, but everyone was 33% or above gross margin at this point in history.

David Rosenthal 1:12:18 Before this episode, I didn't think of Target as a discounter.

Ben Gilbert 1:12:22 Right.

David Rosenthal 1:12:22 But that's what it is, it's a discounter. [chuckles] It is this model that Sam is about to perfect here. [chuckles]

Ben Gilbert 1:12:29 Yes.

David Rosenthal 1:12:30 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 Franklins in Minnesota that was doing it. You could argue they were first, but Sam was really the first to bring it to market in a real way. There were folks bringing this new discounting model idea to market.

Ben Gilbert 1:12:55 Was it Ann and Hope? Was that the most-

David Rosenthal 1:12:57 Yes

Ben Gilbert 1:12:57 ... successful?

David Rosenthal 1:12:58 It was Ann and Hope Stores in New England, and contemporaneously, at the same time, it was Fed Mart and Sol Price-... down in San Diego, in Southern California.

Ben Gilbert 1:13:11 Which I didn't know Sol Price had a-- I mean, I should have known this, but I just haven't been a student of Sol Price. I didn't realize he had a big venture before Price Club, that Fedmart was his first very large, successful thing.

David Rosenthal 1:13:23 I didn't know. I bet ninety percent of our listeners didn't know. You probably did know. Sol Price, you know, Fedmart and then Price Club, which he starts later, that's Costco! Costco was a merger of Costco in Seattle, in the Northwest, with Price Club. Costco is the legacy of Sol Price.

Ben Gilbert 1:13:42 Isn't there something like Jim Sinegal worked at Price Club or was, like, a disciple of Sol Price?

David Rosenthal 1:13:48 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. [chuckles]

Ben Gilbert 1:13:57 So basically, everyone's marking up their goods forty-five percent, and nobody has done, other than Ann & 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 gonna mark things up twenty-five percent instead of forty-five percent, and then, you know, when you do that, of course, you don't make as much money per item, but everybody buys more stuff in your store. This hadn't really been proven yet.

David Rosenthal 1:14:42 Yeah. Well, and there's another component. What you're saying, which is Sam's original lesson of you actually make more profit dollars selling items at a dollar than you do at $1.20, 'cause you sell three times as many.

Ben Gilbert 1:14:53 Yep.

David Rosenthal 1:14:54 But there's also the piece in the middle, the franchisor, the Butler Brothers piece. Remember, they're taking twenty-five percent from the manufacturer to Butler Brothers and then out to the stores, and that's how most everything operated. These discounters, they're like, "No, no, no, we're gonna go direct to the manufacturers for everything," just like Sam was starting to do in this, but on the margins. We're just gonna completely not be a franchise operation. We're gonna own and operate everything, and we're gonna operate our own backend, our own supplier relationships, our own distribution.

Ben Gilbert 1:15:29 There's a great quote, this is again later in Walmart's development, and it's when Sam Walton is sort of informing the Walmart vendor relations team and merchandisers on how to deal with vendors. And he's telling them, "Don't leave in any room for a kickback, 'cause 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 ninety cents, he's gonna get the business.' So make sure a dollar is your best price. If that's being hard-nosed, then we ought to be as hard-nosed as we can be. You have to be fair and upfront and honest, but you have to drive your bargain because you're dealing with millions and millions of customers who expect the best price they can get. If you buy the thing for a buck twenty-five, you've just bought someone else's inefficiency."

David Rosenthal 1:16:20 Totally.

Ben Gilbert 1:16:21 I love that. I mean, it is brutal, but that encapsulates the philosophy so well.

David Rosenthal 1:16:27 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 backend 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.

Ben Gilbert 1:16:58 You need to forecast. You need to be able to understand, we're gonna sell enough of these units to go buy a crap ton at this super low price. We need to be able to be so confident in that, that we can tell the supplier to spin up new inventory and so that we will buy it, to increase their production. Okay, that's all the future. So in this moment-

David Rosenthal 1:17:17 Okay, so in this moment, Sam, of course, goes out. He goes and shops. He travels to the Northeast. He shops in Ann & Hope. He goes out, he meets Sol Price, who he already knew.

Ben Gilbert 1:17:26 And we're in, like, 1960?

David Rosenthal 1:17:28 Late '50s.

Ben Gilbert 1:17:29 Okay.

David Rosenthal 1:17:29 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 gonna ship stuff to Arkansas, especially big volume stuff?

Ben Gilbert 1:18:01 Yeah.

David Rosenthal 1:18:02 So he goes, he meets with Sol and Ann & 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 backend. 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." [chuckles] And Butler Brothers says, "No."

Ben Gilbert 1:18:53 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."

David Rosenthal 1:19:04 Yes.

Ben Gilbert 1:19:05 That is this moment for Walmart.

David Rosenthal 1:19:07 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 counterpositioning 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 franchisees gonna say?

Ben Gilbert 1:19:33 It is literally the innovator's dilemma, 'cause they have too much baggage to actually pull this new thing off. And to be more specific about that, there is too much ongoing revenue that they would cannibalize in the short term 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.

David Rosenthal 1:19:57 Yeah. And the thing that Sam knew the minute he saw discounting was all of those stores are dead anyway.

Ben Gilbert 1:20:04 Yeah, just a matter of time.

David Rosenthal 1:20:06 Somebody is gonna come bring discounting to Arkansas and Missouri and Texas and Florida and everywhere else, and those stores are dead.

Ben Gilbert 1:20:15 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.

David Rosenthal 1:20:32 Totally. So 1962, Sam and Bud secure a site in Rogers, Arkansas, which is pretty close to Bentonville. They've got the site, 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." [chuckles]

Ben Gilbert 1:21:27 I love it.

David Rosenthal 1:21:28 Uh, and the legend is born.

Ben Gilbert 1:21:30 And, uh, you know, Sam's basically not mad about this.

David Rosenthal 1:21:34 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 had-

Ben Gilbert 1:21:44 Fed Mart. Yep.

David Rosenthal 1:21:46 And so that's why he really took a shine to it. So July 2nd, 1962-

Ben Gilbert 1:21:52 Which we should say, at this point, Sam is in his mid-forties.

David Rosenthal 1:21:58 I think he's forty-four, I wanna say.

Ben Gilbert 1:21:59 Yeah, it's worth pointing out, people often say, like, "Sam Walton didn't start Walmart until he was forty-four." But as you can tell, because we are very deep in this 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 twenty years before.

David Rosenthal 1:22:24 Yeah, totally. Did it start in Newport? You know, Sam's education well, started well before then, but-

Ben Gilbert 1:22:31 Yeah

David Rosenthal 1:22:31 ... 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.

Ben Gilbert 1:22:38 Yep.

David Rosenthal 1:22:39 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.

Ben Gilbert 1:22:57 Is this the one with the donkey rides?

David Rosenthal 1:22:59 Yeah, they had donkey rides and trying to pull together a back end for the first time on their own. Total, total freaking chaos. [chuckles]

Ben Gilbert 1:23:08 Right. So not only are they sourcing all this stuff on their own for the first time, but they're also opening a store that is a pretty unfamiliar store concept to people, but an appealing one. Come here, and you can get everything that you're used to, but for less money.

David Rosenthal 1:23:22 Like, a lot less money.

Ben Gilbert 1:23:24 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 as kind of a chore, like, "Oh, it's this big parking lot, and then it's a big standard store." The goal was to make it anything but. The goal was to make it like a UFO is landing in your small town. Come see it.

David Rosenthal 1:23:42 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.

Ben Gilbert 1:23:52 Everyday low prices, David.

David Rosenthal 1:23:54 Always the low price. Always. [chuckles] And boy, did customers just love it. So there's a quote from Charlie Cate, who was the store manager of that first Walmart in Rogers, and he says: "From day one at Walmart, Mr. Walton made it clear that this wasn't just Ben Franklin with low prices on some items. He wanted real discounting. He said, 'We want to discount everything we carry.' When other chains around us were discounting, he said, 'We advertise that we sell it for less, and we mean it.' So whatever anyone else did, we always had to sell it for less. If an item came in and everybody else in town was selling it for twenty-five cents, we'd sell it for twenty-one cents." Literally, everything in the store is the lowest price in the whole area. That was the value proposition.

Ben Gilbert 1:24:44 Which should ring eerily true to Amazon forty years later.

David Rosenthal 1:24:50 So that store does a million dollars in the first year, which was great, but now, remember, some of the Family Center stores were doing 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 opened 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, [chuckles] 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.

Ben Gilbert 1:25:49 So at this point, they do know they have a tiger by the tail, and so they sort of have line of sight to, "Okay, I bet we can get to, like, ten stores." And I think Sam even gives an interview where he talks about that that's all he would ever want to expand to, something like ten or fifteen stores, that he doesn't have, like, a global ambition. And in part, 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 them to the other. He's not really a control freak as much as he's uncomfortable with being disconnected from what's going on in the stores. And so his belief was, 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 ten, fifteen, twenty, somewhere in there, 'cause I can't run it the only way that I know how to run it if it gets bigger.

David Rosenthal 1:26:53 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, Sam, and 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-

Ben Gilbert 1:27:19 Rolling over in his grave, ugh!

David Rosenthal 1:27:20 But this was a mandatory Saturday morning meeting for all of the store managers in person, either in Bentonville or, like, they'd 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.

Ben Gilbert 1:27:42 And Sam, despite objections from a lot of people, including his wife, didn't feel bad about it 'cause he was like: "Look, you work in 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 pore 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?

David Rosenthal 1:28:22 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.

Ben Gilbert 1:28:31 Yeah.

David Rosenthal 1:28:32 So yeah, okay, we keep talking about Kmart. This is crazy. Also, in 1962, the same year as the first Walmart, Woolworth launches Woolco, which obviously doesn't exist anymore, but as a discounting concept store.

Ben Gilbert 1:28:48 Their attempt at discounting, yep.

David Rosenthal 1:28:50 The Dayton Hudson company in Minneapolis launches Target in 1962.

Ben Gilbert 1:28:56 Which, doesn't Target feel like a newer company than Walmart?

David Rosenthal 1:28:59 I know, right? Literally started the same year.

Ben Gilbert 1:29:02 Yep.

David Rosenthal 1:29:03 And S.S. Kresge, which was a huge nationwide variety store chain based in Detroit, they start their own new discounting concept, Kmart.

Ben Gilbert 1:29:17 But it's worth knowing all three of these are existing variety store chains that were used to making thirty-three percent on every single item they sold in their store. And if you look at four horses, this Woolco, Target, Kmart, which would come out of S.S. 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.

David Rosenthal 1:29:46 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 won, 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 back end 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 two hundred and fifty stores all across the country doing eight hundred million dollars in sales. And the new Walmart concept, Walmart revenue was still only around ten million dollars at that point in time. So they are like a, a gnat five years later, and Kmart is, like, darling of Wall Street.

Ben Gilbert 1:30:55 'Cause they're having to build everything from scratch, like go negotiate with every single manufacturer of every item that they sell, try and figure out how to warehouse it, figure out the logistics network for the very first time.

David Rosenthal 1:31:06 Yeah, and they're, like, in Arkansas and Missouri, in, like, a, a regional area. Kmart's now everywhere. Like, they could just leverage this network that they had, all their distribution back end, and, like, go everywhere all at once. But the problem was 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, the most efficient operations possible, because they weren't that worried about margin on the back end. So as Walmart starts to build out on their own, going from chaos to building out their own distribution network, they're always-... a hundred percent laser-focused on lowest cost possible, most efficient possible, as much cash flow, as much inventory turns as possible, like they had to be. The only way they were gonna grow was if they could get excess cash flow to grow, to invest in new stores. The only way they could do that while keeping prices low was to make their operations as efficient as humanly possible.

Ben Gilbert 1:32:22 'Cause they were not taking outside capital, so they had to only reinvest cash flows coming out of the business.

David Rosenthal 1:32:27 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," 'cause remember, he wanted to do the deal with Butler Brothers, "we might not ever have tried the Harrison or the Rogers or the Springdales or all these other little towns we went into in the early days. It turned out that the first big lesson we learned was that there was much, much, much more business out there in small-town America than anybody, including me, had ever dreamed of." And, of course, that they built their own logistics network to service it.

Ben Gilbert 1:33:13 It's very clear that what they did was, to quote Jason 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 gonna be so thin. There was a second component, though, which is be a great merchandiser. You both have to be super operationally efficient, but you have to be a good merchant, too. And part of this was 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.

David Rosenthal 1:34:10 Oh, yes, let's talk about the planes.

Ben Gilbert 1:34:12 So Bud was a pilot in the war, and pretty early [chuckles] in the book, Sam talks about that he and Bud owned, like, twenty planes over the course of Walmart's life, but only one was a jet, or sort of later they became jets, because early on-

David Rosenthal 1:34:27 Well, and they didn't have any pilots.

Ben Gilbert 1:34:29 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 wanna put a store. They would identify from the air what seemed like an interesting location.

David Rosenthal 1:34:42 By flying sideways.

Ben Gilbert 1:34:44 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 to all the towns for us and identify spots. No, we'll just fly over them and figure out where we wanna 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."

David Rosenthal 1:35:12 Totally. When I read that story, I was like, "Ugh, 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..." And then Sam was 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.

Ben Gilbert 1:35:36 Amazing.

David Rosenthal 1:35:37 I was thinking also about this whole incredibly important piece of the Walmart story, where they literally build their own infrastructure for everything from scratch. You know, and it reminded me of what we talk about all the time on the show, right, of the Jeff Bezos, "Don't build your own infrastructure. Focus only on what makes your beer taste better." And, uh, I think we now have to have a caveat to the Bezos law-

Ben Gilbert 1:36:03 Ooh

David Rosenthal 1:36:04 ... 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. [chuckles]

Ben Gilbert 1:36:23 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 than them at scale, then yeah, you have to do it in-house.

David Rosenthal 1:36:46 Which I think makes this the perfect place for the ninety-nine percent 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.

Ben Gilbert 1:37:01 Because they do something that you almost certainly do not need to be doing in-house as your core competency.

David Rosenthal 1:37:07 Pilot sets up and operates the entire financial stack for startups and growing companies, including finance, accounting, tax, even higher-level CFO services, like investor reporting, all of which otherwise you would be hiring a bunch of employees to do for yourself or, like, an old-school accounting firm. With Pilot, they take care of all of that. Obviously, we talk all the time on the show about Jeff Bezos and AWS and what we were just saying, focus only on what makes your beer taste better. Pilot is one of the very, very best examples of that, not just in and of itself, it is also backed by Jeff Bezos himself and-

Ben Gilbert 1:37:49 [chuckles]

David Rosenthal 1:37:50 ... Sequoia and Index and lots of other great investors. So for the vast majority of companies, hiring your own finance team will net you absolutely zero incremental new customer or product value, not to mention adding to all the overhead and people management complexity that you have to deal with.... The other traditional option before Pilot, and I used to work with lots of companies that did this, was go find, like, a old-school accountant in your local area to handle your finances for you. Except old-school accountants aren't typically well-versed in the nuances of, say, a SaaS business, so that was not a great solution.

Ben Gilbert 1:38:28 Not to mention, these things aren't products, so Pilot is both human-powered and product-powered because it has sort of built all these connectors with the modern financial stack that your business probably uses, so you can bring in all that real-time information from Stripe and everything else that it needs to connect to.

David Rosenthal 1:38:48 Stripe, Brex, Gusto, Shopify, Square, Pilot plugs into all of those providers. They take literally all the headache of finance and accounting off of your plate as a founder, provide you with a team of financial experts and accountants to both do your books and all the technology and infrastructure, like we're saying, that you need to get it right. So if you're using an old-school accounting firm still, or even worse, as a startup, hiring your own internal finance team, unless it is core to what makes your beer taste better, I know a lot of founders that were doing this, too. Still using QuickBooks yourself, like going and learning how to be an accountant yourself, that is not a good use of your time. Go on over to pilot.com/acquired, make your life way easier, and have them eliminate the pain of tax prep and bookkeeping from your company for good. And thanks to our friends, Pilot co-founders Waseem, Jessica, and Jeff, all Acquired listeners, if you use that link, you will get twenty percent off your first six months of service.

Ben Gilbert 1:39:51 Twenty percent, big discount.

David Rosenthal 1:39:53 Indeed. Thank you, Pilot.

Ben Gilbert 1:39:56 All right, so discounting. Well, they grew the number of discounting stores pretty dramatically up through their 1970 IPO, and people still weren't really paying attention 'cause they were this company in the Southern Midwest. They seemed regional. But let's just take you through some figures. By 1968, they had twenty-four stores. They filed to go public in 1970 with thirty-two 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 treated, 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 [chuckles] fell apart on them, much like many startups are going through right now. But in October 1st of 1970, it went public. Only eight hundred shareholders participated in the IPO. They sold three hundred thousand shares at fifteen dollars, so that's sort of the actual IPO the night before. And some quick math shows they raised four and a half million dollars in that IPO. It started trading for around fifteen sixty, so they had a modest little pop the next day, but they really were not having meaningful research coverage. A lot of the research coverage they were getting was kind of skeptical. It sounds a lot like Amazon's research coverage early days, as if this whole house of cards could fall apart at any given moment. The next year, in 1971, they did grow top-line revenue seventy-seven 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 [chuckles] top-line revenue by any standards now. But shortly after IPO, despite not attracting a lot of attention, that was not the case.

David Rosenthal 1:42:05 No.

Ben Gilbert 1:42:06 We'll link to it in the show notes, but I pulled open the 1972 Annual Report, which is a gem.

David Rosenthal 1:42:11 Ah, such a good find.

Ben Gilbert 1:42:13 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 wanna 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 seventy-seven percent their first year after IPO. In fact, by 1977, the market cap was still only one hundred and thirty-five million dollars. As a public company, growing quickly, seven years after IPO-

David Rosenthal 1:42:41 In, in 1977, they did half a billion dollars in sales, [chuckles] growing at that rate. I did some math on the CAGR by decade. So Walmart's compound annual revenue growth rate for the whole decade of the 1970s was forty point one percent, four zero point one percent, for the whole decade. And then in the 1980s, it was thirty-two point four percent, and that was starting from, like, a twenty-five billion dollar revenue base.

Ben Gilbert 1:43:12 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.

David Rosenthal 1:43:28 Still, Walmart is king.

Ben Gilbert 1:43:30 Yeah.

David Rosenthal 1:43:31 So there's really two last really important pieces of the story that I think we need to fill in here. One, kinda during this period, actually starting, like, right after those first early years of the first Walmarts, and that is computers. So-

Ben Gilbert 1:43:50 Yes

David Rosenthal 1:43:50 ... 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 fifty. He's, like, forty-eight years old, I think.

Ben Gilbert 1:44:08 Yep.

David Rosenthal 1:44:08 He starts hearing about computers, 'cause he's always got his ear to the ground. He's talking to everybody. He's always looking for new ideas.

Ben Gilbert 1:44:15 He's cheap, so he doesn't wanna spend money on computers, but he's starting to get the sense that in the same way that discounting disrupted everyone that came before in the variety store era, computer backend retailers were probably going to disrupt the classic retailers today who don't use computers.

David Rosenthal 1:44:32 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 retailing 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've been impossible." And then Sam, right after that, says, "Much as I hate to admit to something like that, I expect Abe is probably right." [chuckles]

Ben Gilbert 1:45:16 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 headcount, meant that he was open to it. He just wouldn't be the one to make the decision because he probably wouldn't have picked the right technology choice or might have done it too early or too late. And so I think this was, like, an interesting compromise for him to do this. Later on, there was a proposal made for a twenty-four million dollar satellite network, private satellite network, specifically for Walmart.

David Rosenthal 1:46:28 This was, like, pre-dial-up. This was in the '70s, right?

Ben Gilbert 1:46:31 Was it that early?

David Rosenthal 1:46:31 '70s or '80s. Yeah, I think this was in the '70s and '80s.

Ben Gilbert 1:46:34 Oh, yeah, you're right, 1987. So let's see, market cap at this point is probably around ten, twenty billion dollars, somewhere in there. So they invested twenty-four million dollars to link all stores with a two-way voice and data transmission and a one-way video communication from Bentonville. And basically, there was not enough bandwidth available on any other communication lines-

David Rosenthal 1:47:03 Yeah, whatever was being used at the time

Ben Gilbert 1:47:06 ... to sync back in a very fast manner, all of the sales data from stores. And, you know, we talked about how Sam was obsessed with getting the data as quickly as possible and learning from it and disseminating those learnings. They ended up okaying a twenty-four million dollar proprietary satellite network, and then, because Sam had this philosophy... Remember, he'd thought it couldn't scale past fifteen, twenty stores, of needing to sort of visit all of the stores himself and have that personal communication. The satellite network enabled Sam to sort of virtually visit these stores from the home office and broadcast satellite transmissions of himself. And they eventually instituted this for the Saturday morning meeting, too, where he would broadcast over their proprietary satellite network in 1987.

David Rosenthal 1:47:51 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 into 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.

Ben Gilbert 1:48:23 Then discover he was not ready to retire.

David Rosenthal 1:48:25 Yeah, exactly.

Ben Gilbert 1:48:25 Which is a very TSMC story.

David Rosenthal 1:48:28 Totally.

Ben Gilbert 1:48:28 Similar to Morris Chang.

David Rosenthal 1:48:30 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 team that he builds in, in the technology, they build the first concept of a distribution center. You know, think of Kmart is, like, they have warehouses, right? Like, you would order goods from your vendors, from your suppliers. They come into a warehouse, you know, and then you'd ship them out elsewhere. But, like, they just sit in the warehouse, and then you'd 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.

Ben Gilbert 1:50:19 ... 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.

David Rosenthal 1:50:30 Drop ship directly to the stores.

Ben Gilbert 1:50:32 You can only sell what you have in the store, and so when they opened the first distribution center, what they basically did was, because they saw the growth of cities moving outward, so, like, the suburbs are starting to happen, they would build a distribution center, sort of like hub-and-spoke. They would pick the city that they wanted to go into that was furthest from that distribution center, and they would build a store there, 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 what would become an area where a lot of people lived as suburbia sort of blossomed.

David Rosenthal 1:51:09 It was a one-day drive of a truck from the distribution center, right?

Ben Gilbert 1:51:12 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, 'cause they could negotiate these huge discounts with vendors, 'cause they have the distribution center, which will send all the 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.

David Rosenthal 1:51:52 So by 1990, Walmart passes Sears to become the largest retailer in America. Again, all through the '70s, all through the '80s, Kmart was the gorilla, and then by the early '90s, Kmart, which had been so dominant, they start really feeling the squeeze from Walmart, 'cause Walmart is now pretty much nationwide at this point.

Ben Gilbert 1:52:19 Pretty much, but still not yet. In 1990, they finally opened a store in California. It took until 1992 for Oregon and '93 for Washington. So all these-

David Rosenthal 1:52:29 Ah!

Ben Gilbert 1:52:29 ... quote, unquote, "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.

David Rosenthal 1:52:40 Wow.

Ben Gilbert 1:52:41 Of course, on the coasts and then in the big cities, you kind of don't feel the dominance of Walmart in the same way.

David Rosenthal 1:52:49 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?

Ben Gilbert 1:53:09 No.

David Rosenthal 1:53:10 So Kmart, between the mid '80s and the early '90s, acquired Sports Authority, OfficeMax, Builders Square, Waldenbooks, and Borders, and this just had all sorts of light bulbs going off in my head.

Ben Gilbert 1:53:25 Kinda reminds me of The New York Times during that era, too.

David Rosenthal 1:53:27 [chuckles] 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 Webvan thing?" It was 'cause Kmart bought his company!

Ben Gilbert 1:53:53 Wow. I never knew what happened to Borders.

David Rosenthal 1:53:56 And so by the time, like, kind of early mid '90s, when the writing's on the wall, Kmart starts selling off all [chuckles] of these acquisitions that they had made to just try and raise cash. They ultimately filed for bankruptcy in January of 2002, and then in 2004, Kmart and Sears merge.

Ben Gilbert 1:54:15 Wait, Kmart and Sears merged?

David Rosenthal 1:54:17 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, f- well, duh, 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

David Rosenthal 1:54:47 Sony PlayStation version of Walmart, like, the last big hurrah. They had launched the Supercenters.

Ben Gilbert 1:54:55 This is nuts. In fact, Supercenters is so dominant now that they've actually deprecated the name. Walmart Supercenters are just called Walmarts now.

David Rosenthal 1:55:04 Walmarts were the legacy of the variety stores. [chuckles] 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.

Ben Gilbert 1:55:19 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.

David Rosenthal 1:55:30 Yes. This also explains why I've always wondered, why is Amazon so obsessed with [chuckles] grocery over the years?

Ben Gilbert 1:55:37 Which they haven't cracked, by the way. Famously, they've sort of struggled to nail it.

David Rosenthal 1:55:42 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." [chuckles] This is why. It's enormous.

Ben Gilbert 1:55:52 But difficult. There's a cold supply chain that you need to nail that's totally different than shipping plastic around.

David Rosenthal 1:56:00 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, Carrefour, 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.

Ben Gilbert 1:56:36 Dude, we should open a merch store and call it the Acquired Hypermarket.

David Rosenthal 1:56:39 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, [chuckles] and there are photos you can find online. This is what I tweeted on July Fourth. I think they only built three of them. It is the most '90s America thing you have ever, ever, ever seen. [chuckles]

Ben Gilbert 1:57:17 It's a great logo.

David Rosenthal 1:57:18 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 Supercenters, that was, like, not as blown out as what Carrefour was doing in Brazil, but combined grocery, like a traditional grocery store, [chuckles] and a traditional Walmart.

Ben Gilbert 1:57:57 Dude, I lived right next to one in North Carolina in two thousand and eight, and it was awesome. It was the only thing in my, like, little suburb off the highway where I lived for one summer. There was a, you know, some other stuff in the shopping center, but you kinda had, like, the Walmart Supercenter, 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.

David Rosenthal 1:58:22 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 fifteen percent cheaper than-

Ben Gilbert 1:58:43 Wow!

David Rosenthal 1:58:43 ... 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 US 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.

Ben Gilbert 1:59:12 Which they still are. They are the largest grocery store in the United States today.

David Rosenthal 1:59:17 Well, now, they are not just the largest grocery store, they are the largest grocery store by a factor of over two X the number two player.

Ben Gilbert 1:59:26 Whoa! Which is Kroger? Who's two?

David Rosenthal 1:59:29 Kroger. Yep. So Walmart has over twenty percent market share of US groceries. Kroger has under ten percent, and then Albertson's and Costco are tied at five percent each.

Ben Gilbert 1:59:42 Wow, and is Albertson's Safeway now? Did they merge?

David Rosenthal 1:59:46 I think that might be right. So if you add up all of those together, they're still less than Walmart.

Ben Gilbert 1:59:52 Oh, my God.

David Rosenthal 1:59:53 Crazy.

Ben Gilbert 1:59:54 That's like Amazon's dominance in 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 fifty percent shy of Amazon's e-commerce revenue in a year.

David Rosenthal 2:00:20 In the last most recent fiscal year, grocery accounted for fifty-five percent of Walmart's total revenue, which is over three hundred billion dollars [chuckles] alone, just from grocery.

Ben Gilbert 2:00:33 For a part of the business that didn't exist for the first thirty years, I mean, that is an iPhone-scale company reinvention.

David Rosenthal 2:00:39 And barely existed when Sam died. It reminded me of Ted and Todd within Berkshire Hathaway buying Apple, [chuckles] the best Berkshire Hathaway investment probably ever-

Ben Gilbert 2:00:49 Yes

David Rosenthal 2:00:49 ... that happened in the public markets after Warren had brought on Ted and Todd. Crazy. One last little bit about Supercenters. I think the war was already won with Kmart, but this was really the death knell with Supercenters, 'cause Kmart tried their own hypermarket concept called Super Kmarts.

Ben Gilbert 2:01:09 Oh, I remember that.

David Rosenthal 2:01:10 And this is where the Walmart distribution strategy just completely trounced Kmart. It trounced Kmart in hard goods, but now you're talking about groceries.

Ben Gilbert 2:01:21 The items need to be fresh. They expire after a few days. You need to figure out how to preserve.

David Rosenthal 2:01:25 It's also an even lower margin business.

Ben Gilbert 2:01:27 Yep.

David Rosenthal 2:01:28 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 kinda 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.

Ben Gilbert 2:01:56 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 Wayback Machine, kinda 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.

David Rosenthal 2:02:43 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-

Ben Gilbert 2:02:56 Right.

David Rosenthal 2:02:56 -and they pursued opportunities like super centers. Why they didn't pursue the online opportunity is really puzzling.

Ben Gilbert 2:03:05 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 kinda too late. That really was the style of make the pitch to leadership of why this needs a massive investment.

David Rosenthal 2:03:20 And Amazon was poaching executives from Walmart [chuckles] left and right.

Ben Gilbert 2:03:24 Totally. So the first step that they take here is... Do you remember the company Kosmix, David? K-O-S-M-I-X.

David Rosenthal 2:03:33 Yes. Yes, I do. I remember using it.

Ben Gilbert 2:03:36 Walmart bought them in twenty eleven for three hundred million. Do you know what the founders did beforehand?

David Rosenthal 2:03:41 No. I remember it was, like, a meta search company.

Ben Gilbert 2:03:45 Yeah, it was called Junglee. 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 Junglee, and then those two guys, Venky and Anand, inside of Amazon, started Mechanical Turk.

David Rosenthal 2:04:02 Oh, cool.

Ben Gilbert 2:04:04 So interesting Amazon history there. So they leave, they start Kosmix, Walmart buys it for three hundred million. That becomes Walmart Labs, which was run as a totally separate company and is now sort of merged into Walmart's global internet division. But that was where this sort of like, "Okay, we need to start taking this really seriously. This e-commerce thing is gonna be really disruptive." And, you know, they've acquired a variety of other companies over the years, including Bonobos or Bonobos, I've never exactly known how to say it other than I like their pants. And, of course, then in twenty sixteen, we did an episode on this, now we're entering the timeline where Acquired was already a thing by the time this happened, which is crazy, 'cause now it means we're dinosaurs. They bought Jet.com for three point three billion dollars.

David Rosenthal 2:04:49 I would love to talk to Marc Lore about all this.

Ben Gilbert 2:04:53 Yeah, so obviously, Marc started Quidsi, Diapers.com, sold that to Amazon, got into a nice tiff with Jeff Bezos, left, started Jet. Did he raise a billion dollars, or was it a billion-dollar valuation? There was some ludicrous, for the time, pre-launch financing that happened, and it basically didn't work. The actual Jet.com thing, Walmart shut down.

David Rosenthal 2:05:15 It was a club, right? It was more like Costco.

Ben Gilbert 2:05:18 Well, it changed. It originally was, and then... I can't remember if it was and then it wasn't, or it wasn't and then it was, but there were multiple strategies, and the quote is: "We tried a lot of things. We innovated. Not all of them are going to work. We learn from our failures." And the party line from Marc 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.

David Rosenthal 2:05:50 And they really have made a good comeback, right?

Ben Gilbert 2:05:53 Yeah, so Marc Lore left in twenty twenty-one, and Walmart's current CEO, Doug McMillon, does credit him for jump-starting their e-commerce business, which I think is growing, and this is before COVID, 'cause COVID statistics messed up everything for e-com, but in twenty nineteen, I think, grew thirty-seven percent.

David Rosenthal 2:06:12 Which when Walmart itself as a whole was growing, like, two percent?

Ben Gilbert 2:06:16 Yes, and at this point, it's hard to say if this is a small number or a big number, but only about thirteen percent of Walmart's revenue comes from e-commerce. Now, that's seventy-five billion dollars.

David Rosenthal 2:06:29 Right.

Ben Gilbert 2:06:29 And it is growing much faster than Amazon's e-commerce business, but it's because Amazon's e-commerce business is at ludicrous scale. You know, it's five or six times larger than Walmart's e-commerce at this point. But the Walmart strategy here is quite interesting because it leverages their distribution centers and their stores. They want to make e-commerce not a separate thing. They really wanna 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 wanna 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.

David Rosenthal 2:07:22 They're doing some cool stuff. They launched Walmart Plus.

Ben Gilbert 2:07:26 Which is a Prime competitor.

David Rosenthal 2:07:27 Right, which is a Prime competitor. But like you were 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 [chuckles] save money on stuff I buy, but, B, so I could try stuff like this.

Ben Gilbert 2:07:45 I'm very curious if you would shop there.

David Rosenthal 2:07:47 That's a good question. I mean, I love Trader Joe's.

Ben Gilbert 2:07:50 Yeah.

David Rosenthal 2:07:51 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-

Ben Gilbert 2:08:31 Yeah.

David Rosenthal 2:08:32 Like, I hate it.

Ben Gilbert 2:08:33 Yeah. Yeah, but I'm not used to waiting for anything anymore, 'cause the internet makes it so I don't have to.

David Rosenthal 2:08:37 I think about stuff like this, and I'm like: Why am I doing this? It's not just, like, the waste of my time. It's that, like, this is unnecessary in this day and age.

Ben Gilbert 2:08:44 Right.

David Rosenthal 2:08:45 And I'd be happy to check out on my phone as I go through a store.

Ben Gilbert 2:08:49 ... I started in preparing for this episode, trying to understand, like, how is the digital experience of Walmart these days versus Amazon's experience? 'Cause I obviously am well-versed, and Amazon packages arriving at my house every day. So I started buying some stuff on Walmart. I bought some, like, garden lamps 'cause I needed to install some lights, and I will say the consumer perspective so far for me has been pretty identical to Amazon. 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 Wirecutter 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 Tegas, good friends of the show over there. I read a, uh, transcript from a call with a former Amazon director. It's an interesting quote. It's just a, a little microcosm. It says: "I can tell you at Walmart, it is almost exclusively just the title and the product description used for search, and as far as I can tell, there's no metadata that's put into their search algorithm today. Amazon absolutely has the additional metadata that they've built into their algorithms, and it's a constantly changing and ongoing process. They're very sophisticated in what they do for search. There's tons of stuff, hitting keywords, user-generated content, all that seller input is totally baked into the search algorithm." And that sort of makes sense, that on Walmart, it would be sort of like a focus on a crude implementation first, make sure it works well enough, but they also just have less historical data than Amazon does on all the shopper behavior and all that stuff to incorporate into functionality of the website.

David Rosenthal 2:10:34 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.

Ben Gilbert 2:10:50 Right.

David Rosenthal 2:10:51 So Amazon had to do this. [chuckles]

Ben Gilbert 2:10:53 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.

David Rosenthal 2:11:18 This was so fascinating. I knew that there were McDonald's and Subways in Walmart, it's like sort of the store-within-a-store concept, and, like, Target has those, too, and also a brilliant way to increase your margins as a retailer [chuckles] 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 Walmart that are integrated into the store-

Ben Gilbert 2:11:48 Especially, like, greeting cards, that sort of thing, things that require, like, heavy customization in the way that it's presented.

David Rosenthal 2:11:54 Those are owned, operated, and run by third-party vendors. [chuckles]

Ben Gilbert 2:11:59 Well, we wanna get to the final figures on the business from today, and then I wanna 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.

David Rosenthal 2:12:13 And, of course, we have to do [chuckles] Powers' analysis.

Ben Gilbert 2:12:16 And Powers. We've got a good amount of episode left here.

David Rosenthal 2:12:18 I know.

Ben Gilbert 2:12:19 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 Brinton, and Brad, and Joe, and John to propose the idea of doing a paid sponsorship, and they did jump on it, but had one [chuckles] 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 feedback to help further refine the thesis.

David Rosenthal 2:12:49 Indeed. Many of you already know NZS from the special episode we did with them 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 NZS in 2019. They're among our very favorite thinkers on Acquired. They've been such great contributors to our thinking here on the show.

Ben Gilbert 2:13:20 Yeah, so today we wanna talk about an idea that really started the NZS investment philosophy ten 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 geopolitical 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.

David Rosenthal 2:14:06 Yep, 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, uh, 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.

Ben Gilbert 2:15:01 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 where 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 [chuckles] large payoff.

David Rosenthal 2:15:43 Because that is the version of the multiverse that we live in. [chuckles]

Ben Gilbert 2:15:46 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.

David Rosenthal 2:16:10 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.

Ben Gilbert 2:16:22 Yes. It's not white paper in the, like, boring, scientific sense. It's interesting to read. There's great illustrations.

David Rosenthal 2:16:28 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.

Ben Gilbert 2:16:35 Yep. And finally, since they really do want feedback, you can, of course, email Brendan or Brad or any of them from the email addresses on the paper when you download it, or even better, we're gonna do a Zoom call with them to talk about all these ideas together. So there is a second link in the show notes for you to add it to your calendar for Tuesday, August 16th, 2022, at 4:00 PM Pacific Time, and we would love to see you there. Our huge thanks to the team at NZS Capital.

David Rosenthal 2:17:05 Thank you, NZS.

Ben Gilbert 2:17:07 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 twenty-four countries, which we haven't discussed. They're a global empire at this point. There's ten thousand five hundred stores. Each week, two hundred and thirty million customers visit one of these stores. Two hundred and thirty million customers, that's wild! The supercenter concept is basically Walmart now.

David Rosenthal 2:17:43 Mm-hmm.

Ben Gilbert 2:17:43 It wasn't like some of the stores are supercenters. Most stores are now supercenters. If you just think about the, like, standard Walmart discount store in 1996, there were about two thousand of them. Now there are three hundred and sixty-eight, because the supercenter is the new thing. So the business's supercenters, they did close to six hundred billion dollars of revenue last year. They did twenty-five billion dollars of operating income. That's only about a four percent operating margin for those counting at home. They do have a twenty-four percent 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.

David Rosenthal 2:18:41 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, it's like ten, fifteen percent of revenue of Walmart today?

Ben Gilbert 2:19:06 It's been a pretty successful part of the company, but it's losing to Costco.

David Rosenthal 2:19:10 Yes. Costco has been this amazing story that is like the Walmart of Walmarts, [chuckles] you know? And Walmart has it, too, with Sam's Club, but it's interesting you bring up margins.

Ben Gilbert 2:19:25 Costco does two hundred and seventeen billion dollars a year in revenue. Sam's Club does about seventy-five billion. How is it that they have all of Walmart's advantages, and yet, I think it's, like, eleven percent of Walmart's revenues, which is obviously very material, but somehow they did not become dominant in this category.

David Rosenthal 2:19:44 Especially, you know, we were talking about Walmart+ 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. [chuckles]

Ben Gilbert 2:20:06 And there are some crazy stats about Sam's Club, like somehow in the '90s, one in three US households had a Sam's Club membership.

David Rosenthal 2:20:14 I don't know if you have the numbers, but I bet it's way less now.

Ben Gilbert 2:20:17 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 w- we were citing some numbers earlier. If you look at Walmart's twenty-four-ish percent gross margin, so that's basically what they get from the goods that they sell on the shelf, you see, okay, it's less than Target, which makes twenty-nine, thirty percent off anything that they sell on the shelf. Well, Costco's gross profit margin is only around thirteen percent, and that's come up, like, when they first went public in, I think, '92, it used to be, like, ten percent. 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 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?

David Rosenthal 2:21:29 So Sol 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.

Ben Gilbert 2:21:48 Oh, I didn't know that.

David Rosenthal 2:21:49 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."

Ben Gilbert 2:21:57 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.

David Rosenthal 2:22:09 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.

Ben Gilbert 2:22:22 It's eighteen percent of revenue.

David Rosenthal 2:22:24 It's eighteen percent 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.

Ben Gilbert 2:22:38 They pulled out of Germany, right?

David Rosenthal 2:22:40 They pulled out of Germany. In the UK, they bought the big retailer chain, Asda, for about ten billion dollars. When... I think that was in the late nineties, I believe, and they operated that, and they were a decent-sized player, but never as big as Tesco and some of the other retailers in the UK. They actually ended up trying to sell it a couple of years ago to Sainsbury's for ten billion dollars. The UK government blocked that deal, and then they ended up selling it off to private equity, I think, for about six billion dollars-

Ben Gilbert 2:23:13 Hmm

David Rosenthal 2:23:13 ... just a couple of years ago. So, you know, neutral at best.

Ben Gilbert 2:23:18 We'll see how Flipkart plays out for them. They own, what, seventy-five percent of that?

David Rosenthal 2:23:22 Right. So then there's India and Flipkart. Walmart bought seventy-seven percent, I think, stake in Flipkart back in, I think it was twenty eighteen, for over sixteen billion dollars, which is a huge, huge price. And 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, and I think part of the idea, I believe, of buying Flipkart was, "This will be our vector to bring Walmart into India."

Ben Gilbert 2:23:58 Hmm.

David Rosenthal 2:23:59 I don't think it's gone super well. [chuckles] I read, I believe there are about twenty or so, twenty or thirty, you know, Walmart-owned physical locations in India now, but, you know, that's not worth a [chuckles] sixteen, seventeen billion dollar purchase price.

Ben Gilbert 2:24:14 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, nineteen eighty-two, they were growing about forty to fifty percent a year, and that has basically been on a slow, steady decline all the way until about twenty thirteen, where it's been about flat at three percent since then. 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 in... No, like, the top line is just not moving very far year over year these days.

David Rosenthal 2:24:57 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-

Ben Gilbert 2:25:11 And grocery.

David Rosenthal 2:25:12 Well, and... Well, they did on grocery, but on, um, discount clubs and the Costco and Sam's Club, if they'd executed well on all of those, their growth could have been much, much higher.

Ben Gilbert 2:25:22 Yep. All right, let's do power, and then we'll get into bear case, bull case.

David Rosenthal 2:25:27 Great. Power. So for new listeners of 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-

Ben Gilbert 2:25:39 Persistent differential returns. So basically, what enables Walmart to be more profitable than their closest competitor on a durable basis?

David Rosenthal 2:25:50 Yep, and the seven are counterpositioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

Ben Gilbert 2:26:00 We gotta separate the takeoff phase from where they are today because I think it's a totally different set of powers.

David Rosenthal 2:26:06 Hmm. Okay, okay.

Ben Gilbert 2:26:07 In the takeoff phase, no doubt that it was counterpositioning. I mean, this small town strategy, they were just doing something that all of the big, established companies couldn't and wouldn't do. They were not set up to do it with their distribution chains. They were not, frankly, set up to serve those customers well. They didn't understand those customers well. They kind of ignored them.

David Rosenthal 2:26:27 And it didn't seem like a big opportunity.

Ben Gilbert 2:26:29 No, and then 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 gonna build out, and those people are gonna want something like this in their towns, and so we can serve the people who are there now, and we will be positioned to serve way more people as those suburbs build out.

David Rosenthal 2:26:59 Yep, totally.

Ben Gilbert 2:27:01 ... So massive counter-positioning, I think.

David Rosenthal 2:27:04 Such a good point in the beginning here. Absolutely right. I think as they built it up, though, I mean, scale economies?

Ben Gilbert 2:27:10 Yes. This is the perfect example of scale economies. [chuckles]

David Rosenthal 2:27:13 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've built behind it.

Ben Gilbert 2:27:30 There is no reason why anyone should be able to have a lower price than Walmart. Walmart is going to buy in larger quantities than any other retailer for basically any item that they sell. They're gonna have 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 margin squeezed out of it.

David Rosenthal 2:28:19 Which is also interesting when you think about Amazon and everything Amazon has been doing for the last, especially five, 10 years. They're doing all the same things. Amazon Air, [chuckles] building their own logistics, all the Amazon vans that you see around.

Ben Gilbert 2:28:34 Yep, absolutely.

David Rosenthal 2:28:35 Okay, do we have any others on here? Switching costs, I mean, with Walmart Plus, you know, maybe, but, like, not.

Ben Gilbert 2:28:42 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 m- 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.

David Rosenthal 2:29:24 I don't think Amazon was ever just about being the lowest price. I think it was more about, "We're the best combination of price, selection, and convenience."

Ben Gilbert 2:29:35 Yeah, it's the customer centricity. They're both deeply customer-centric. Bezos sort of adopted the centric part of customer centricity, or at least that is the way that he refers to it. But Sam Walton, in about eight different ways in his book, tells you that the only thing that makes Walmart tick is listening to the customer, and it just so happens that the vector that they optimized for more than anything else was price, and Amazon was convenience.

David Rosenthal 2:29:59 I think it might be worth a minute to discuss process power.

Ben Gilbert 2:30:03 Hmm.

David Rosenthal 2:30:04 Do we think Walmart has process power? And there are two areas I'm thinking about with this. O- One is the operations themselves and everything we've talked about. I don't think you could airlift that out of Walmart [chuckles] 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 under Sam, of what you just said: the lowest price is the thing that matters the most. And they could've, and I think most other companies would have, taken their distribution and operation advantages and increased 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 to consumers, rather than taking it for the company."

Ben Gilbert 2:31:09 And the question is, is that still true, or are they looking for opportunities to keep margin now, given growth has stalled?

David Rosenthal 2:31:17 Right.

Ben Gilbert 2:31:18 And at the end of the day, public late-stage CEOs are paid to get more earnings per share.

David Rosenthal 2:31:23 Right.

Ben Gilbert 2:31:24 Did you see what they were doing with gas stations in the last few years?

David Rosenthal 2:31:28 No.

Ben Gilbert 2:31:29 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.

David Rosenthal 2:31:52 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 Waltons, as you said, I think Walton family members own more professional sports franchises than any other family out there. [chuckles]

Ben Gilbert 2:32:16 Them and their spouses, yes.

David Rosenthal 2:32:18 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, uh, it's not necessarily there as much.

Ben Gilbert 2:32:33 Agree. Okay, bear and bull. We've hit a lot of these points already, but in my bull case, there's... They kinda should win same-day grocery delivery since they have these supercenters everywhere. You could 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 countercyclical.

David Rosenthal 2:33:05 Mm-hmm.

Ben Gilbert 2:33:05 Because of their obsession with the lowest price, they actually should do great in a economic downturn.

David Rosenthal 2:33:12 Which I believe they did in 2009.

Ben Gilbert 2:33:15 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.

David Rosenthal 2:33:53 Mm-hmm.

Ben Gilbert 2:33:54 Those are my few bull cases.

David Rosenthal 2:33:57 That makes sense to me.

Ben Gilbert 2:33:58 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 Walmart's 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.

David Rosenthal 2:34:56 So I think, I don't know that I hundred percent 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.

Ben Gilbert 2:35:16 Really?

David Rosenthal 2:35:17 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.

Ben Gilbert 2:35:32 Right.

David Rosenthal 2:35:32 So, like, I think that eventually became the dollar store industry.

Ben Gilbert 2:35:37 Fascinating. Well, I have a whole new internet rabbit hole I need to go down after this.

David Rosenthal 2:35:42 Listeners, if you know anything about this, definitely hit us up in Slack, and, uh, we would love to chat about this.

Ben Gilbert 2:35:48 Yes, for sure. I think there's a bear case around e-commerce, even though they're growing quickly, thirty-seven percent pre-pandemic, e-com is still not a profitable segment for them. It's crazy to think that you could be doing seventy-five billion in e-commerce revenue, and that hasn't reached scale that makes it profitable. I guess it's just a massive, massive fixed cost on the employee base to make that happen.

David Rosenthal 2:36:10 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- [chuckles]

Ben Gilbert 2:36:19 [chuckles]

David Rosenthal 2:36:19 ... also, like, [chuckles] running really low margin or even discounting below cost on some stuff.

Ben Gilbert 2:36:25 And because they don't break it out, I don't know if that means it's not profitable. I don't know where, what profit we're talking about there. Amazon, for a long time, was not profitable 'cause they were reinvesting in more distribution centers and, you know, stuff like that. So maybe it's that, but there is a work in progress going on with Walmart e-commerce.

David Rosenthal 2:36:42 Yep. 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.

Ben Gilbert 2:36:54 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-

David Rosenthal 2:37:07 Mm

Ben Gilbert 2:37:07 ... converted into an e-commerce distribution center, and we can figure out if you're a fit." It makes sense, but I think it's, like, one of one hundred death-by-a-thousand-cuts things going on between Walmart and labor right now.

David Rosenthal 2:37:20 Oh, boy. Well, we'll do value creation, value capture in a minute, and, uh, [chuckles] there's a whole another episode we could do on, um, is Walmart good or bad for the world?

Ben Gilbert 2:37:29 All right, playbook. We'll do playbook, and then I wanna get to that point.

David Rosenthal 2:37:32 I'll go first, 'cause I have one... I realize that I teased this quote hours ago, in the beginning of the episode, and then-

Ben Gilbert 2:37:39 Yeah

David Rosenthal 2:37:39 ... 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 Cate, the manager of that first Walmart store, number one.

Ben Gilbert 2:37:56 Mm-hmm.

David Rosenthal 2:37:57 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 than 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." [chuckles] And the reason that this grabbed me so much, organizational dynamics and behavior, and just human behavior, is such that your competitors, you always wanna, 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."

Ben Gilbert 2:38:40 Oh, that's such a good point.

David Rosenthal 2:38:41 Especially, I don't know if you see this, but being VCs, and, you know, we invest in so many wonderful founders and work with folks, but this is really like a disease that I've noticed over the years, that startup founders and management teams, they look for the worst in their competition, and they, they make themselves feel better about how great they're doing. We're guilty of it, too, but that is so the wrong way to look at it.

Ben Gilbert 2:39:02 Right.

David Rosenthal 2:39:02 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 [chuckles] and steal it.

Ben Gilbert 2:39:09 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 b- 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?"

David Rosenthal 2:39:40 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.

Ben Gilbert 2:39:57 Yes.

David Rosenthal 2:39:58 But once you've done that, you've done that, you're doing it. Now, go make it better. [chuckles] Like, it doesn't matter what everybody else is doing wrong. So I just love that one.

Ben Gilbert 2:40:08 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 fifty years or seventy years, it can go from, "Wait, will this even be a thing?" To, "There was ever a point in time where it wasn't a thing?" It was different. He both rode that wave, but also created that wave.

David Rosenthal 2:40:55 Yep. Ah, reminds me so much of, uh, Jeff Bezos sitting in the offices of D. E. Shaw in the early '90s being like: "Holy crap! The Internet is going to be a wave." [chuckles]

Ben Gilbert 2:41:08 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. P&G and Walmart were enemies for years, even though P&G had to sell in Walmart and Walmart had to be buying P&G products before they kinda figured out, how can we both do this? 'Cause we do both need to serve the same customer, and that took a long time. And so that ruthlessness of being willing to not buy anyone else's inefficiency, even though it can create tension in the relationship, if you're a business that's winning on price, somebody will be doing that in your space, so, uh, you kinda have to if you wanna win.

David Rosenthal 2:41:54 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. But price really, really, really matters. And so what you're saying is absolutely applicable in cases like that. When price really matters, your margins really matter, and your margin is my opportunity, and exploiting inefficiencies, and being as efficient as possible is, 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 in before you start applying this stuff. [chuckles]

Ben Gilbert 2:42:51 Yeah, that's a great point. The last one is an ill-formed thought, but I kinda wanna 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.

David Rosenthal 2:43:30 Environmental impact.

Ben Gilbert 2:43:32 Employees doing everything you can think of because there are two point two million of them. So if you come up with some statement of, like, "Walmart employees are so wonderful," that is true, 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, and at their scale, they are just everything.

David Rosenthal 2:44:09 Yep.

Ben Gilbert 2:44:09 You walk into a store, and you get a microcosm of America.

David Rosenthal 2:44:13 At this point, it's not even a microcosm, it's a macrocosm. [chuckles] When you talk about two point two million people that work there, and what'd you say? Two hundred and forty-ish million people shop there every week?

Ben Gilbert 2:44:22 Yeah. Walmart is where you witness humanity.

David Rosenthal 2:44:24 Yes. [chuckles] 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-

Ben Gilbert 2:44:47 Mm-hmm

David Rosenthal 2:44:48 ... 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.

Ben Gilbert 2:44:55 Dude, Walmart building a logistics network made their beer taste better.

David Rosenthal 2:44:59 Fair point. But that wasn't obvious, I don't think.

Ben Gilbert 2:45:02 That's true.

David Rosenthal 2:45:03 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.

Ben Gilbert 2:45:13 Yeah, and it certainly was for the first decade.

David Rosenthal 2:45:16 First, probably two decades.

Ben Gilbert 2:45:18 Yeah, that helped 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.

David Rosenthal 2:45:36 Yep. And Sam says in the book, his name was Henry Cunningham, I wanna 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.

Ben Gilbert 2:46:00 Fascinating.

David Rosenthal 2:46:01 They had a whole bunch of CEO turnover and all sorts of controversial stuff.

Ben Gilbert 2:46:07 All right. So we're onto the segment where we're gonna make a case to each other for Walmart being good for the world and bad for the world. It's almost like a 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, it's bad for communities 'cause it puts the local store out of business. And certainly, I don't think Sam Walton would say that they didn't. I think that he would say that, "We put a Walmart in a community, and it was better for consumers, and so then people needed to adapt. Of course, existing merchants hated us, but did consumers hate us? No, I don't think so at all. I think it was better for them."

David Rosenthal 2:46:48 Well, and especially for customers in, 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.

Ben Gilbert 2:47:04 Yeah. That said, there's probably more interesting things you could buy that have more soul in the local stores' merchandising that may not show up in a Walmart supply chain. There might be more meaningful personal relationships you could build with people who run the stores than you would have the opportunity to at a Walmart. 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 fifty percent to the Walton family and fifty percent to a bunch of public shareholders. Every transaction any business makes accrues either positive or negative equity to the business that participated or facilitated the transaction. Even if that Walmart employs a bunch of local people, the equity's still being built by other shareholders.

David Rosenthal 2:47:55 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 gonna 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.

Ben Gilbert 2:48:57 Yep.

David Rosenthal 2:48:58 The local shops were not gonna survive, the local variety stores.

Ben Gilbert 2:49:02 And it could be someone that doesn't have the types of incentive programs that Walmart has.

David Rosenthal 2:49:07 Right.

Ben Gilbert 2:49:07 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.

David Rosenthal 2:49:23 Yep. Now, here's the way, though, where [exhales] 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 P&G relationship, but with all their vendors, you know, Walmart is the biggest customer [chuckles] 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. Well, it led to offshoring of American manufacturing. Walmart was a huge contributor.

Ben Gilbert 2:50:18 At some point, the majority of items sold in Walmart were made in China.

David Rosenthal 2:50:22 I think during the '80s, it went from, like, six percent to, like, forty percent, and now, like... I mean, if you take out grocery, I'm sure most stuff in Walmart is not made in America.

Ben Gilbert 2:50:30 Yep.

David Rosenthal 2:50:31 You know, and Walmart recognized that this was a problem and tried to address it, but if you're a supplier, and there are a bunch of examples in the book of lawnmower companies, Vlasic, that makes pickles, all sort-- 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, [chuckles] you know, post-COVID, 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.

Ben Gilbert 2:51:28 ... And quality was an afterthought. I mean, even in ninety-two, when Sam published his book, it was only in