Walmart

We kick off Season 11 with the incredible story of the retail “granddaddy of them all” Walmart, and its founder Sam Walton. Once you study Walmart, you realize just how deep its heritage runs through Amazon and so many iconic modern companies we cover on Acquired. This episode was an absolute blast, and we even uncovered a new addendum to the hallowed “focus on what makes your beer taste better” playbook theme! *Links:* - Walmart’s 1972 Annual Report: https://s2.q4cdn.com/056532643/files/doc_financials/1970s/1972-annual-report-for-walmart-stores-inc.pdf - Episode sources: https://www.acquired.fm/episodes/walmart#sources *Carve Outs:* - Ted Weschler on the Nebraska Furniture Mart podcast!!! https://iamhome.libsyn.com/lunch-with-warren-buffett-working-for-berkshire-hathaway-and-the-future-of-investments-with-ted-weschler - Mario Puzo’s The Godfather (the book): https://www.amazon.com/Godfather-Mario-Puzo-dp-0451205766/dp/0451205766/ *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  I love how this book is called Made in America and the Sony story is made in Japan. Like, I don't know who stole from who there, or if it was just the natural title they both chose and didn't even consider it, but it's amazing.

• 0:12David Rosenthal?

  Ah, so, so great.

• 0:31Ben Gilbert?

  Welcome to season 11, episode one, the season premiere of Acquire.

• 0:36David Rosenthal?

  Woo!

• 0:37Ben Gilbert?

  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.

• 0:48David Rosenthal?

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

• 0:54Ben Gilbert?

  And we are your hosts. When we did our Sony episode, we discovered that many Steve Jobs-isms really started as Akio Morita-isms. 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.

• 1:38Ben Gilbert?

  Some astonishing stats on the company. It is the largest by revenue in the world, doing nearly $600 billion a year in sales.

• 1:48David Rosenthal?

  Although Amazon is close behind now.

• 1:50Ben Gilbert?

  It's true. It is the world's largest employer, other than public entities like governments employing nearly 2.3 million people around the world. It is still controlled by the Walton family, who owns just over 50% of the business, a full 60 years after it was founded.

• 2:08David Rosenthal?

  Oh, we're going to get into how and why that is the case. One other fun stat for you. Today, 90% of America lives within 10 miles of a Walmart, but there are three places where that is not true, and a fourth kind of where it's technically true but not in spirit. Do you know what those places are?

• 2:29Ben Gilbert?

  No.

• 2:30David Rosenthal?

  San Francisco, Seattle.

• 2:33Ben Gilbert?

  No way.

• 2:33David Rosenthal?

  Boston, and the fourth place is Manhattan and New York City. It is not technically true because there is a Walmart across the river in New Jersey that is less than 10 miles away, but in spirit, that is true.

• 2:45Ben Gilbert?

  What, two and a half hours to get there or something?

• 2:48David Rosenthal?

  Yes.

• 2:49Ben Gilbert?

  Wow, so you're saying it's not a company that is built on the urban core? Is that where you're going, David?

• 2:55David Rosenthal?

  It's the biggest company in the world. It services all of America, except where we live.

• 3:00Ben Gilbert?

  Yeah, it's fascinating. This really is one of the most classic business stories in America or in the world, period, and I kind of can't believe that we're not covering it until now. So let's start season 11 with the bang. There are so many lessons that are totally applicable today, and every entrepreneur can learn from Sam Walton. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:38David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 3:59Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap, and the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:21David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:39Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Well, after you finish this episode, you should come discuss it with the 12,000 other smart, curious members of the acquired community at acquired.fm/Slack. And if you are dying for more acquired, go check out the acquired LP show. You can search for

• 5:20Ben Gilbert?

  that in any podcast player. The next episode will be an interview with Patrick Campbell on all the juicy details of how his $200 million 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.

• 5:44David Rosenthal?

  So cool. Patrick totally bootstrapped ProfitWell, almost like Sam Walton, totally bootstrapped Walmart.

• 5:52Ben Gilbert?

  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.

• 6:04David Rosenthal?

  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 going to 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 he 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.

• 6:47Ben Gilbert?

  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.

• 6:59David Rosenthal?

  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.

• 7:14Ben Gilbert?

  Certainly to embrace their own private satellite network, but I'll save the spoilers.

• 7:20David Rosenthal?

  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 2,500 people. Today, it is much larger, bustling metropolis of 5,000 people. But of course, those 5,000 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.

• 7:58Ben Gilbert?

  Walmart grew at a much faster rate than the 2X that Kingfisher grew in a century.

• 8:02David Rosenthal?

  This is crazy. Kingfisher, 2,500-person Kingfisher around this time, is also the birthplace of the Coleman Company. You know, like the outdoor, like camping gear?

• 8:13Ben Gilbert?

  Oh, no way.

• 8:13David Rosenthal?

  Yeah, started in Kingfisher, Oklahoma.

• 8:16Ben Gilbert?

  Didn't Jim Weber from our Brooks episode start his career at Coleman?

• 8:20David Rosenthal?

  Oh, I think that might be right. Oh, yeah.

• 8:23Ben Gilbert?

  We're on like an accidental CPG retailing kick here.

• 8:26David Rosenthal?

  I know. So great. Well, anyway, back in March of 1918 in Kingfisher, when 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.

• 9:07David Rosenthal?

  He becomes a mortgage broker for farms, working with his brother in the business. This is a theme that's gonna recur in the Walton family. And speaking of brothers, in December 1921, Sam gets one for himself. One James Lawrence Walton. Bud. Better known as Bud. Shortly after Bud is born, the family moves from Oklahoma to Missouri, where they move around a bunch before ultimately settling down in the lovely, we can personally say, truly genuinely lovely town of Columbia, Missouri. Home of Capital Camp. Yes, home of the University of Missouri, Capital Camp, and Permanent Equity. And our friend Brent Bishore there. Yep.

• 9:53David Rosenthal?

  So the twenties 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 twenties. You know, they're still like little kids growing up in the twenties. What really shapes them is the thirties. And the thirties were very, very 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. Hmm. 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

• 10:38David Rosenthal?

  just that they were farmers, they were financiers 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.

• 11:00Ben Gilbert?

  I remember reading in Made in America, I sort of thought that what Sam was going to say is that his father worked with these farmers the best he could to help them save the business where they could, or cut a deal. But no, what he actually just said was, and he just did it in the most humane and decent way possible. And you're like, whoa, there were not deals or negotiations to be struck. It is, we are foreclosing and we just have to be a good human to you. Well, this is definitely happening.

• 11:28David Rosenthal?

  I mean, that's probably why he brought the kids along, right? Probably hard for somebody to attack him or get too mad if he had his two little kids there with him.

• 11:36Ben Gilbert?

  I wonder, yeah.

• 11:38David Rosenthal?

  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."

• 12:01Ben Gilbert?

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

• 12:07David Rosenthal?

  Still.

• 12:08Ben Gilbert?

  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.

• 12:20David Rosenthal?

  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, milk and the cows delivering to neighbors in Columbia. Sam starts selling magazine subscriptions. He also starts selling rabbits and pigeons that he raises in the backyard. I don't know who was buying the rabbits and pigeons, but that's what he does.

• 12:58Ben Gilbert?

  He learns retailing at a young age, though.

• 13:00David Rosenthal?

  Indeed. And then, of course, like every good acquired protagonist, he gets a newspaper route for the Columbia Missourian, just like Warren Buffett.

• 13:11Ben Gilbert?

  That's right. That was on Berkshire Part One, that episode we did?

• 13:14David Rosenthal?

  Yeah, I think that was Part One. Yep.

• 13:16Ben Gilbert?

  Oh, that's right, because he delivered the Washington Post before later going on to become a major shareholder.

• 13:23David Rosenthal?

  So besides all of these sort of proto-entrepreneurial ventures that Sam is undertaking as a teenager, he also becomes, at age 13, the youngest Eagle Scout ever certified in Missouri history. Ben, you were an Eagle Scout. How old were you when you became a?

• 13:41Ben Gilbert?

  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 shorter period of time.

• 14:17David Rosenthal?

  Maybe he counted raising the rabbits and pigeons.

• 14:20Ben Gilbert?

  Yeah, that's right. Maybe some merit badges in there.

• 14:23David Rosenthal?

  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 and very slight. So you wouldn't think that he's going to be a great football athlete. Of course, we're talking about American football here. This is incredible, though. I think they win the state championship every year because he never loses a game. This is crazy. He writes about this in the book. He says, "I think that record had an important effect on me.

• 15:04David Rosenthal?

  It taught me to expect to win, to go into tough challenges, always planning to come out victorious. Later on in life, I think Kmart, or whatever competition we were facing, just became Jeff City High School, the team we played for the state championship in 1935. It never occurred to me that I might lose. To me, it was almost as if I had a right to win." Thinking like that often seems to turn into sort of a self fulfilling prophecy. And man, was that Sam Walton.

• 15:35Ben Gilbert?

  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.

• 15:58David Rosenthal?

  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.

• 16:11Ben Gilbert?

  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 in their cars.

• 16:35David Rosenthal?

  That was actually Walmart number two.

• 16:36Ben Gilbert?

  Oh, sorry.

• 16:37David Rosenthal?

  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, because his family has no money, it's the depression, is he attends on a ROTC scholarship. So he's still. Has to like pay his living expenses and mom and dad in the family aren't gonna help out. You know, there's no money in the family. So he keeps his newspaper around, but like he's busy, you know, and he actually, he has like political aspirations on campus. He becomes the president of the class, you know, he's greeting everybody, he's in ROTC, he's busy. So he hires a few people under him to actually like do the delivery of the

• 17:19David Rosenthal?

  newspapers and help kind of scale the business. By the end of college, he's making $4,000 to $5,000 a year from his newspaper activities, which that's like huge. We're going to get into what his first job pays him in a minute, but $4,000 to $5,000 a year in the 30s during the depression, that's a lot of money.

• 17:41Ben Gilbert?

  Yeah, it's crazy.

• 17:42David Rosenthal?

  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 to 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."

• 18:04Ben Gilbert?

  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. There are different superpowers that manifested both in building early, successful, periodical distribution sub-companies.

• 18:37David Rosenthal?

  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, JCPenney's and Sears, and he goes with the offer from JCPenney.

• 19:03Ben Gilbert?

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

• 19:10David Rosenthal?

  Yes, I think the first house we lived in in Seattle was a Sears catalog home.

• 19:18Ben Gilbert?

  Wow.

• 19:19David Rosenthal?

  Yeah, so like, this is what's funny, and you know, and Sam is like, he really keeps it real in the book. You know, you could tell this like backward looking narrative of he connected all the dots. He wanted to go learn retail, learn the craft from the best, in which case he would have gone to work for Sears. But no, he writes, "I had big plans for after graduation. I figured I would get my degree and go on to the Wharton School of Finance in Pennsylvania." Buffett, just like Warren. "But as college wound down, I realized that even if I kept up the same kind of work routine I'd had all through college, I still wouldn't have the money to go to Wharton because he would have had to pay tuition. So I decided to cash in what chips I already had. I visited with the two company recruiters who came to campus. Now I realize the simple truth.

• 20:03David Rosenthal?

  I got into retailing because I was tired and I wanted a real job."

• 20:07Ben Gilbert?

  Wow, it would not bring him any rest, though.

• 20:10David Rosenthal?

  No, no, no, no.

• 20:12Ben Gilbert?

  Maybe this first job at Penny's, or as he calls it Penny. I don't think he colloquializes the way that people did in our era. Like, I always called JCPenney Pennies.

• 20:21David Rosenthal?

  Right, well, he ultimately ends up getting to meet James Cash Penny himself.

• 20:27Ben Gilbert?

  Wait, the guy's name is James Cash Penny?

• 20:30David Rosenthal?

  I know, isn't that awesome? James Cash Penny.

• 20:32Ben Gilbert?

  That's almost as amazing as Price Club being founded by a guy named Saul Price.

• 20:37David Rosenthal?

  Oh, we are gonna talk a lot about Saul Price.

• 20:40Ben Gilbert?

  Yes.

• 20:40David Rosenthal?

  So he's tired, he just wants a regular job, but he's this natural born salesman. So he goes to work in the Des Moines, Iowa store of JCPenney as like a floor salesman. And he does great. I mean, literally, James Cash Penny comes and meets with him himself. And the story that Sam tells is JCPenney shows him how to Tie, you know, packages merchandise that is sold with the least amount of twine and paper possible, but still make it look nice to save money. But of course, pretty quickly, this only lasts 18 months because in December 1941, Pearl Harbor happens and the US, of course, enters World War II. And Sam had been in ROTC, he's commissioned, he's going to join the army. He was looking forward to this.

• 21:24David Rosenthal?

  So Bud, his brother, joins the Navy, becomes a decorated bomber pilot in the Pacific. You know, Sam thinks he's going to go probably off to Europe, but he fails the physical exam for combat duty. Turns out he had a heart irregularity. And so he's kind of depressed, he's unhappy about this. Bud's going off to join the Navy and Sam is going to stay home in America at a desk job. So before he gets his commission, he leaves Des Moines and he goes back to Oklahoma. Not exactly sure why, he just sort of traveled back to Oklahoma. He says in the book that he was sort of depressed at the time and he ends up in Claremore, Oklahoma, which is a small town outside of Tulsa.

• 22:05Ben Gilbert?

  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.

• 22:21David Rosenthal?

  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, because he marries Helen, of course. And Sam would say, "The Robsons were very smart about the way they handled their finances.

• 23:03David Rosenthal?

  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 36% of Walmart and then individual family members and trusts, I think mostly Bud's family, own the other 11, 12%.

• 23:40Ben Gilbert?

  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.

• 24:19David Rosenthal?

  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."

• 25:04Ben Gilbert?

  Buying NBA and NFL teams.

• 25:07David Rosenthal?

  Buying NBA and NFL teams, which they do now. "I will come back and haunt you. So don't even think about it."

• 25:13Ben Gilbert?

  I love that wording.

• 25:14David Rosenthal?

  So Sam and Helen get married and Sam gets posted in a bunch of places all around the country, doing kind of internal intelligence work for the army. He goes to Utah, plenty of other places. And he decides that when the war ends and he gets out of the army, he's going to go back into retailing. But now he has the support of Helen and her family and her father, LS, and their financiers. So he knows, I now have access to some amount of capital. Like I can be an entrepreneur. I don't necessarily have to work for somebody. So when the war ends, LS initially wants them to move back to Claremore. But Helen and Sam kind of decide together, they're like, well,

• 25:57David Rosenthal?

  we want your support, but we don't want to be totally under your wing and in your shadow. So Sam, he's got big ambitions. He and a buddy decide that they want to buy a federated store, department store franchise in St. Louis. They're going to be big. You know, he come from JCPenney in Des Moines. He wants to be a big city department store owner, magnet entrepreneur. Helen vetoes this outright. We would not be talking about Walmart if Sam had moved the family to St. Louis. So Helen says, look, one, I don't want you doing any partnerships

• 26:40David Rosenthal?

  with non-family members. Sam says, her family had seen some partnerships go sour and she was dead set on the notion that the only way to go was to work for yourself and for your family. And two, she says, I don't want to live in a big city. I want to go live in a small town, like where I grew up in, just like Claremore. I don't want to live in Claremore itself, but we are not allowed to move to any town that has a population of more than 10,000 people.

• 27:09Ben Gilbert?

  I mean, her whole thing was, I want to raise my kids the way that I was raised. And she looked at Sam and said, you were raised the same way, small town. And like, that's what we're going to do. And so whatever business he did had to be family owned and controlled and have a small town based strategy. And so like, what seems so intentional and so genius actually stems from the fact that she just vetoed his original idea.

• 27:32David Rosenthal?

  Totally. I mean, it's crazy. She had a undergraduate degree in finance for a woman at that time. And she was very involved, obviously, in the strategy of the business.

• 27:41Ben Gilbert?

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

• 27:49David Rosenthal?

  It could not have been a large number.

• 27:51Ben Gilbert?

  Yeah.

• 27:52David Rosenthal?

  And also like kudos to the family and LS and his wife for encouraging her to say she had brothers. Like it would have been easy for him to say like, oh, okay, the boys are all going to take over the business.

• 28:02Ben Gilbert?

  Right. Which is like what we saw in the New York Times family or yeah.

• 28:07David Rosenthal?

  Or the Rockefellers too. So Sam, you know, he doesn't stay down for long. I think he was a little disappointed that his wife had overruled him, but you know, he finds a way. So he goes back to the company that owned Federated, which has a company called Butler Brothers. They were franchisers of Federated. They were based in Chicago. And he asks, well, do you have any department store locations that might be available in a small town of say 10,000 people or less? And the Butler Brothers guys are like, um, we don't really do department stores in, uh, in towns like that. But we do have another, you know, sort of spinoff operation that we run, which is our variety store franchising business.

• 28:53Ben Gilbert?

  Like there literally wasn't enough people, they believe to support a department store. Variety stores are, they're like glorified general stores. I mean, when, if you think about a town that's like two, three, 4,000 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.

• 29:12David Rosenthal?

  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're mostly franchise operations. This particular one was Ben Franklin was the brand name, like Benjamin Franklin, general store type place.

• 29:29Ben Gilbert?

  And when you say franchise operation, it's because it's way too much of a burden to like source your own inventory, carry your own inventory, maintain all those different vendor relationships. If you're in one of those towns, you're serving 2,000 people, you're kind of the one store there. What you really want is to sign a contract and just get the shipment of the stuff that goes into the Ben Franklin stores in all the small towns.

• 29:53David Rosenthal?

  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.

• 30:12Ben Gilbert?

  Like a five cent, 10 cent store?

• 30:14David Rosenthal?

  And the reason for that is that most of them, every item in the store was either priced at five cents or 10 cents. That was the level of sophistication here. The other big, big difference between how these stores operated in modern retail today, which Sam really invented, was they weren't self-service.

• 30:35Ben Gilbert?

  Oh, he didn't invent that. He stole that.

• 30:37David Rosenthal?

  We're gonna get to it. We're gonna get to it. Okay. So you would walk into these stores and there'd just be a counter area up front that had clerks and you would tell the clerk what you wanted. And then the clerk would go back into the store, pick out what you wanted, bring it up to the front and check you out.

• 30:56Ben Gilbert?

  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?

• 31:08David Rosenthal?

  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.

• 31:16Ben Gilbert?

  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.

• 31:29David Rosenthal?

  I don't know exactly how the department store model worked, like, you know, JCPenney'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 Penny'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.

• 31:58Ben Gilbert?

  Yeah.

• 31:59David Rosenthal?

  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 7,000 people. It's in eastern Arkansas. Now, if you know where Bentonville, Arkansas and Walmart is today, it's not in eastern Arkansas. And Sam's like, great, I'll take it.

• 32:34David Rosenthal?

  Sight unseen. Now, you have to ask yourself, it is 1945 in America. The war has just ended. And unlike 1945 in Japan, like we talked about with the Sony story, retail in the US is booming.

• 32:53Ben Gilbert?

  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.

• 33:01David Rosenthal?

  There's a lot of stuff to buy. It doesn't matter if you're a department store in a big city or a variety store in a 7,000 person town, like, everybody in retail should be making money hand over fist right now. So, the question that Sam didn't ask himself and should have was, why does this guy want to sell?

• 33:22David Rosenthal?

  He says in the book, "A guy from St. Louis owned it, and things weren't working out at all for him. He was losing money, and he wanted to unload the store as fast as he could. I realize now that I was the sucker Butler Brothers sent to save him. I was 27 years old and full of confidence, but I didn't know the first thing about how to evaluate a proposition like this, so I just jumped in with both feet. My naivety about contracts and such would later come back to haunt me in a big way."

• 33:52Ben Gilbert?

  Wow.

• 33:53David Rosenthal?

  So he and Helen buy this store.

• 33:57Ben Gilbert?

  This distressed asset at not a distressed price.

• 34:00David Rosenthal?

  Yes, they buy it for $25,000, $5,000 of their own savings, and a $20,000 loan from LS, from Helen's father. And Sam, you know, he says, this isn't what I dreamt, but you know, I'm still going to set big goals. He decides that he's going to set a goal that this store is going to become the most profitable variety store in Arkansas within five years.

• 34:28Ben Gilbert?

  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.

• 34:50David Rosenthal?

  Well, it also sets the stage for what was to come. He sets this goal and then he gets there and this is not a realistic goal. He says, only after we closed the deal, of course, did I learn that the store was a real dog. It had sales of about $72,000 a year, but its rent was 5% 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 5% 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 $150,000 a year in sales, double mine.

• 35:34Ben Gilbert?

  Yikes.

• 35:35David Rosenthal?

  So not only is it unlikely that he's going to be the most profitable store in Arkansas, it's unlikely he's going to be the most profitable store in Newport.

• 35:45Ben Gilbert?

  Yeah.

• 35:46David Rosenthal?

  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.

• 35:57Ben Gilbert?

  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.

• 36:28David Rosenthal?

  So great. I was gonna bring this up later, but I think he says in the book that he believes he has spent more time in K-Marts than any non-individual store employee of Kmart, including Kmart senior management.

• 36:43Ben Gilbert?

  Yeah, and also we keep referencing Kmart. When I was growing up, I was like Walmart, Kmart. I think Kmart's kind of like Walmart, about the same scale, same size, kind of a little lower end. Like that was my perception as a kid of Kmart. I didn't realize that Kmart for a very long time was much, much larger than Walmart. They were kind of Walmart's big brother incumbent.

• 37:05David Rosenthal?

  Oh, they were the gorilla.

• 37:07Ben Gilbert?

  I don't remember what year this was, but I remember some quote from Walton where he's talking about when we reached 5% the scale of Kmart. And it's like, whoa, that really puts it into perspective how big a lead they had.

• 37:20David Rosenthal?

  So you mentioned notepad. It's actually a yellow legal pad that Sam uses.

• 37:24Ben Gilbert?

  Sorry, sorry, David.

• 37:25David Rosenthal?

  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 health and beauty aids, toothpaste, mouthwash, makeup, that kind of stuff, like that really drives customers in. So he's like, okay, you know, he starts doing that. He has some success. But there's a problem, right? Like we talked about.

• 38:11David Rosenthal?

  Butler Brothers is the franchise or they're controlling all the inventory. Sam is the merchant is just getting whatever they send to him at whatever cost they prescribe. And Butler Brothers, they're doing great. They get about a 25% markup on all the inventory and they don't even do anything. It's almost like they set up the whole system just to keep these prices high out in the countryside and they just get a 25% skim off the top.

• 38:39Ben Gilbert?

  Yep.

• 38:40David Rosenthal?

  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, kind of in the South and the Midwest, he starts driving around and knocking on their doors and asking if they'll do side deals with him and just like sort of clandestinely sell him some of the merchandise that he otherwise would be ordering from Butler Brothers and that they would be selling to Butler Brothers. They just give him a deal directly on that.

• 39:11Ben Gilbert?

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

• 39:23David Rosenthal?

  There's no computerized inventory here.

• 39:25Ben Gilbert?

  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.

• 39:32David Rosenthal?

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

• 39:56Ben Gilbert?

  Yeah.

• 39:56David Rosenthal?

  So he says, I bring them the inventory. I bring it back, price it low and just blow that stuff out of the store.

• 40:04Ben Gilbert?

  Which this is an invention, like this is a brand new concept that we kind of 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.

• 40:40David Rosenthal?

  Right.

• 40:41Ben Gilbert?

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

• 40:47David Rosenthal?

  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.

• 41:05Ben Gilbert?

  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.

• 41:46David Rosenthal?

  Price, selection, convenience, right? That's the holy trinity 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.

• 42:09Ben Gilbert?

  Life was inconvenient, period. So like 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.

• 42:21David Rosenthal?

  Customers will go to great, great lengths to get lower prices.

• 42:27Ben Gilbert?

  People would make day trips. People would drive five hours to other cities to get a deal on goods.

• 42:34David Rosenthal?

  It's crazy. He says, here's the simple lesson we learned, which others were learning at the same time, and which eventually would change the way retailers sell and customers buy all across America. Say I bought an item for 80 cents. I found that by pricing it at $1, 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 have by selling the item at a higher price. And always low prices, always. Walmart,

• 43:20David Rosenthal?

  there it is. We're not quite at Walmart yet, though.

• 43:23Ben Gilbert?

  Did you know their slogan for a long time was always the lowest price always? But then there was like FTC lawsuit against them where they changed to always low prices because it was like false advertising that they didn't always have the lowest price.

• 43:37David Rosenthal?

  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 seventies, to always the lowest price. Like, we're gonna push it even farther. And they got away with it for like five or six years. And the government had a little something to say about that. Yeah. So all this sounds like Sam says there, it sounds simple, right? But like, people didn't know this stuff yet. Like, retailing had not professionalized. We're not that far removed from Rockefeller, like the general store, like post-World War II. This is all new. So this is incredible. He actually hits his goal. So by year five of the Newport

• 44:20David Rosenthal?

  store, he's doing a quarter million dollars, 250,000 in sales at a $30,000 to $40,000 annual profit. Remember, he bought the thing for $25,000. And that's including the crazy 5% rent charge in his expenses.

• 44:35Ben Gilbert?

  So his operating margin on this is 24%. He's making very, very real profits on this little store that he's got.

• 44:43David Rosenthal?

  If he had a better rent deal, it could be like 28%. But at those numbers, it is the most profitable store in Arkansas and the biggest store by sales, not just in Arkansas, but like the whole Midwest and South region. So like, he has found a winning formula here.

• 45:05Ben Gilbert?

  Which is interesting because I'm pretty sure at this point, he's got a bunch of direct deals cut with the suppliers and he's added a bunch of products of his own. He's really merchandising, so he's really showing up on Ben Franklin's radar, on the Butler Brothers Corporation's radar, and they kind of know what he's doing at this point. But it's good for them. Even though it's good for Sam, it's also good for them because volume and customers.

• 45:29David Rosenthal?

  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 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 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?

• 46:15David Rosenthal?

  You've done a great job. I thank you for turning this property of mine around. I'm going to take it from here.

• 46:20Ben Gilbert?

  And like, just to contextualize this, it's a 7,000 person town. There's not really many other available storefronts. He's got tons of shelves in there with tons of goods. It's 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.

• 46:44David Rosenthal?

  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 $50,000 to take over the store. I mean, I guess that's sort of a, what, 2X return?

• 47:22Ben Gilbert?

  And what was, what was the operating income from the previous year?

• 47:25David Rosenthal?

  $30,000 to $40,000.

• 47:27Ben Gilbert?

  Yeah. Wow. Brutal.

• 47:29David Rosenthal?

  But at least they get the $50,000 out. So this is now 1950 and Sam and Helen hit the road again, looking for a new town to bring their traveling circus to.

• 47:39Ben Gilbert?

  And have a little bit more knowledge on lease negotiation.

• 47:42David Rosenthal?

  Yes. So they go up to the other corner of the state in northwest Arkansas. That's where they start looking around for the next place to set up shop for two reasons. One, closer to Helen's family in Oklahoma, in Claremore. And two, like I said, Sam keeps it real. He was like, you know, there's some really good quail hunting up there. And I really wanted to be closer so I could drive my bird dogs out and go hunting.

• 48:13Ben Gilbert?

  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.

• 48:29David Rosenthal?

  Yes. So great.

• 48:30Ben Gilbert?

  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.

• 48:42David Rosenthal?

  So the opportunity that they find and settle on is in a little town of 3,000 people. So less than half the size of Newport. That already in this town of 3,000 people had three variety stores operating. Newport had two for 7,000 people. This town has three for 3,000 people. As Sam says, he loves competition. And that town is Bentonville, Arkansas.

• 49:15Ben Gilbert?

  Yes.

• 49:16David Rosenthal?

  Sam probably, almost assuredly, is rolling over in his grave right now.

• 49:20Ben Gilbert?

  The new Walmart campus?

• 49:21David Rosenthal?

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

• 49:28Ben Gilbert?

  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.

• 49:49David Rosenthal?

  Actually, the anecdote that he and John Huey open made in America with is, I think it's 1985, when Forbes ranked him the richest man in America. And all these reporters, you know, start descending on Bentonville. They want to go interview the richest man in America. And 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 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, when am I going to drive my, uh, my dogs around in a Rolls Royce?

• 50:27Ben Gilbert?

  All right. So they arrive in Bentonville. Bentonville and the world are forever changed, but it doesn't happen all at once.

• 50:33David Rosenthal?

  No. So the store that they buy is another Ben Franklin franchise that had done $32,000 in revenue the year before, quite a distance from the 250,000 that they left Newport with. And 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.

• 51:17David Rosenthal?

  They were removing the upfront counters or turning them into checkout counters and letting customers go into the store.

• 51:26David Rosenthal?

  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 checks them out. He's taking notes the whole time on his, you know, yellow legal pad. And he says about that trip, I liked it, so I did it too.

• 51:50Ben Gilbert?

  I love how he's so obsessed with firsthand experience. He couldn't just hear about this and then implement it. He's like, I must see it for myself because he so fervently believes that he picks up insights from like actually spending time in stores and actually talking to customers. It seems like he does that sort of more than any other entrepreneur we've ever talked about on this show, this obsession with firsthand experience.

• 52:13David Rosenthal?

  I think everybody can apply this to their business. I was thinking about it, reading the book, you know, I starred so many passages like this. I'm like, I already listened to lots of other podcasts, unlike when we started acquired and I didn't listen to any other podcasts.

• 52:25Ben Gilbert?

  We should find the best ideas and incorporate them. Yeah.

• 52:28David Rosenthal?

  There's a great quote about this when Walmart actually gets started later that I'm going to tease it for now. So on July 29th, 1950, just about, what is that? 72 years ago, they reopen the Ben Franklin store that they bought.

• 52:46Ben Gilbert?

  Still a franchise.

• 52:47David Rosenthal?

  Still a franchise, still a Ben Franklin franchise, still working with Butler Brothers for most of the inventory, quote unquote. But they want to send a message that this is a new era. They're doing the 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.

• 53:11Ben Gilbert?

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

• 53:40David Rosenthal?

  It really was rational because even though Sam on the margins is doing his own direct deals with manufacturers at this point, it's a ludicrous concept that somebody in a little store in Arkansas could source all of their inventory and do all of their logistics by themselves. Like, that is completely freaking crazy that a store servicing 3,000 people in a little town would handle all of that themselves. But they launch with the new name. You know, it's the new concept, it's self-service, it causes quite a stir. Now, I believe, I couldn't find this exactly, but I believe in that first year when Walton's

• 54:20David Rosenthal?

  Five and Dime is open, remember the previous Ben Franklin iteration of the store had done, I think, what $32,000, I said, a year in revenue, something like that? Walton's Five and Dime does $90,000 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 3,000 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 $90,000. And they did $90,000 in revenue. So what was happening here?

• 55:01Ben Gilbert?

  Yeah. Is there massively expanding TAM? Did they expand the market because people are just buying more stuff than they otherwise would have?

• 55:08David Rosenthal?

  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.

• 55:22Ben Gilbert?

  I think it was the first time that Sam realized that shock value would bring customers. Much like I didn't need anything. The first time I went to an Amazon Go to like, try the cashierless checkout. People sort of came for novelty value here, and that taught him the lesson of, 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.

• 55:50David Rosenthal?

  Yep. And if you think about it, right? Like, put yourself in the shoes of customers back then. And Sam talks about this a lot in the book, you know, for so long, 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 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.

• 56:33David Rosenthal?

  And so he starts looking, unlike in Newport, where he was satisfied, you know, the store kept going. He did $250,000 a year in sales. He starts looking to open up more locations.

• 56:45Ben Gilbert?

  More Five and Dimes.

• 56:46David Rosenthal?

  He also doesn't want to have all of his eggs in one basket and one lease like he did in Newport.

• 56:51Ben Gilbert?

  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?

• 56:59David Rosenthal?

  Yes.

• 56:59Ben Gilbert?

  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.

• 57:04David Rosenthal?

  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 Waltonisms, Samisms. But the whole Amazon, like we're customer focused, we're not competitor focused. Sam would have said, absolutely not. We are absolutely competitor focused. We are focused on taking the best stuff from our competitors and implementing it here.

• 57:32Ben Gilbert?

  All right. Yeah. Well, we're here. We have to say it. So eventually a Walmart does go in back in Newport. And there is a little store that is run by a family member of the landlord that screwed over Sam. That does get put out of business by that Walmart going in. And Sam makes the point, you can't say we ran that guy, the landlord's son out of business. His customers were the ones who shut him down. They voted with their feet. To me, this is that perfect overlap of are you competitor focused or customer focused? Well, both. You have to win in a market by counter positioning in some way. And Walton did it by discounting, but that obviously has an impact on your competitors. And you need to be able to counter position against someone like a competitor.

• 58:14Ben Gilbert?

  So when the big realization is, oh, customers always want lower prices and satisfaction guaranteed. And all the other Walmartisms, that will have impacts on your competitors. And you have to pay attention to those competitors, but ultimately.

• 58:26David Rosenthal?

  The customers decide.

• 58:28Ben Gilbert?

  Sam is willing to blame the customer for putting the competitor out of business.

• 58:32David Rosenthal?

  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 Helen, when she can, you know, helping out with the bookkeeping, managing the first store. Sam needs to hire somebody to go manage Fayetteville because he's working in 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 sort of new concept is they make him an offer he can't refuse. They make him a partner in the store.

• 59:14David Rosenthal?

  And 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 until reading the book, becomes a huge part of the playbook for Walmart for decades, which was every store manager in a new store opening was given at first equity in individual partnerships. And then later profit sharing incentives in that individual store. So like that sets up a true alignment of incentives. I don't think anybody else was doing this at that point in time. And then even better, so.

• 59:54David Rosenthal?

  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.

• 1:00:16Ben Gilbert?

  They get carry and they should make a GP commit.

• 1:00:19David Rosenthal?

  Exactly.

• 1:00:21David Rosenthal?

  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.

• 1:00:48Ben Gilbert?

  Which is like an RSU type equivalent.

• 1:00:50David Rosenthal?

  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.

• 1:01:07Ben Gilbert?

  Which is what a stock option is supposed to simulate because later you put your dollars in if you feel that it's a valuable thing to own and you.

• 1:01:15David Rosenthal?

  But I don't think people think about it like that.

• 1:01:16Ben Gilbert?

  No. Well, people think about options like it's direct equity. That's the biggest problem with options. Most people do not understand what they're actually getting. But yes, no employees are ever asked to invest in the business. That is definitely not what seems to happen in 99.9% of startups.

• 1:01:32David Rosenthal?

  And then reading more in the book about this, so during this period and in the early Walmart corporation period, it was just the store managers who are doing this, not the hourly employees.

• 1:01:44Ben Gilbert?

  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.

• 1:01:59David Rosenthal?

  And so a couple of interesting things. One, the people who were the store managers, this wasn't quite like. White collar workers. It's somewhere in between. Most of these people didn't have college degrees. They were salaried and then they got equity in these partnerships. But you know, it wasn't like these were Wharton graduates that were coming in and doing this.

• 1:02:19Ben Gilbert?

  Intentionally not. Those folks were kind of discriminated against in the Walmart culture, especially in the early days of like, you think you're better than us, college boy?

• 1:02:27David Rosenthal?

  Totally. One of the first managers was nicknamed the bear and he had one eye. There's some crazy stories out there. They were bringing donkeys into the store.

• 1:02:36Ben Gilbert?

  All right, all right. We're talking Walmart. So like, take us to Walmart. How did we get from the Walton's find a dime?

• 1:02:42David Rosenthal?

  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, add a 15% discount to the stock price.

• 1:03:17Ben Gilbert?

  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 10% discount. So very kind of Walmart to give a 15% discount from market price.

• 1:03:31David Rosenthal?

  So there's stories in the book of hourly associates that made millions of dollars in the seventies and eighties off of the employee stock purchase program. It's pretty cool.

• 1:03:40Ben Gilbert?

  Wow. Speaking of Home Depot, did you know that's a venture capital backed company?

• 1:03:45David Rosenthal?

  Yes, it's an amazing story.

• 1:03:47Ben Gilbert?

  Yeah, we should do that at some point.

• 1:03:48David Rosenthal?

  And totally inspired by Sam and Walmart and everything. Okay, so back to the 50s in Arkansas. Remember, we talked all the way back in the beginning of the episode about Sam's brother Bud? Well, Bud had gotten into the Ben Franklin business himself after the war in Missouri. One day, Sam is visiting Kansas City and he hears about a new suburb development going in just southeast of the city called Ruskin Heights. And it's going to have a shopping center, this new fangled concept, right in the middle of this suburb subdivision. And there's going to be a grocery store and a drugstore and real estate for a big Ben

• 1:04:33David Rosenthal?

  Franklin store. So Sam calls up Bud and he's like, we gotta go in 50/50 on this. This is a huge opportunity. And they do. And it is a banger. $250,000 in annual sales the first year in Ruskin Heights and then $350,000 the year after and just keeps growing and growing. Sam says, when I saw that shopping center catch on the way it did, I thought, man, this is the forerunner of many, many things to come. The only problem was Ruskin was actually kind of a red herring. This was the future. This was the forerunner of many things to come, but it was still a little bit ahead of its time.

• 1:05:15David Rosenthal?

  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. For which they would be the anchor tenant. But it's super slow going. Dealing with local governments, you know, it's hard. It takes a long time. He wants to move fast. So he starts trying to put his own real estate deals together for multi-tenant shopping centers and fails. And so eventually he goes back to Helen's advice. He's like, well, these multi-tenant shopping centers, I see the power in Ruskin, but it's dependent on too many other people.

• 1:06:00David Rosenthal?

  But if I'm willing to invest some capital. I could just put bigger stores in, in these same locations myself.

• 1:06:09Ben Gilbert?

  Hmm.

• 1:06:10David Rosenthal?

  And that's what he starts to do.

• 1:06:13Ben Gilbert?

  Does he become his own landlord then and just buy the land? Or what requires more capital?

• 1:06:18David Rosenthal?

  That's a good question. I don't know at this point if they were doing real estate themselves, but certainly they're 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, $2 million.

• 1:06:51Ben Gilbert?

  And are they still sourcing the inventory from Ben Franklin, from Butler Brothers?

• 1:06:56David Rosenthal?

  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.

• 1:07:13Ben Gilbert?

  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.

• 1:07:36David Rosenthal?

  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 part of the Butler Brothers cartel, shall we say?

• 1:07:59Ben Gilbert?

  Yes.

• 1:08:00David Rosenthal?

  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.

• 1:08:24Ben Gilbert?

  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.

• 1:08:38David Rosenthal?

  Because they're all discounters now. I think it's 87% of market share in America is discounters.

• 1:08:45Ben Gilbert?

  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.

• 1:09:17David Rosenthal?

  And that was on top of the markups in the middle from the franchise operators.

• 1:09:22Ben Gilbert?

  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.

• 1:09:56David Rosenthal?

  Before this episode, I didn't think of Target as a discounter.

• 1:10:00Ben Gilbert?

  Right.

• 1:10:00David Rosenthal?

  But that's what it is. It's a discounter. It is this model that Sam is about to perfect here.

• 1:10:07Ben Gilbert?

  Yes.

• 1:10:08David Rosenthal?

  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.

• 1:10:33Ben Gilbert?

  Was it Ann and Hope? Was that the most successful?

• 1:10:36David Rosenthal?

  It was Ann and Hope stores in New England and contemporaneously, at the same time, it was FedMart and Sol Price down in San Diego in Southern California.

• 1:10:49Ben Gilbert?

  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.

• 1:11:01David Rosenthal?

  I didn't know. I bet 90% of our listeners didn't know. You probably did know. Sol Price, 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.

• 1:11:20Ben Gilbert?

  Isn't there something like Jim Senegal worked at Price Club? Or was like a disciple of Sol Price?

• 1:11:26David Rosenthal?

  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.

• 1:11:34Ben Gilbert?

  So basically, everyone's marking up their goods 45%. And nobody has done, other than Ann and Hope and a few other select folks that haven't really rolled it out at scale or really popularized the movement. No one has done discounting. But what is discounting? Two major components. One is big loss leadership. So blow it out in order to get people in the store, do it in dramatic fashion, and then people buy other stuff. Two is, we make it up on volume. Just don't mark stuff up that much, period, across the whole store. Decide that you're only going to mark things up 25% instead of 45%. And then, you know, when you do that, of course, you don't make as much money per item, but everybody buys more stuff in your store. This hadn't really been proven yet.

• 1:12:19David Rosenthal?

  Yeah. Well, and there's another component. What you're saying, which is Sam's original lesson of you actually make more profit dollars selling items at the dollar than you do at 120 because you sell three times as many.

• 1:12:31Ben Gilbert?

  Yep.

• 1:12:32David Rosenthal?

  But there's also the piece in the middle. The franchiser, the Butler Brothers piece, remember, they're taking 25% from the manufacturer to Butler Brothers and then out to the stores. And that's how most everything operated. These discounters, they're like, no, no, no, we're going to go direct to the manufacturers for everything, just like Sam was starting to do in this, but on the margins, we're just going to completely not be a franchise operation. We're going to own and operate everything. We're going to operate our own backend, our own supplier relationships, our own distribution.

• 1:13:06Ben Gilbert?

  There's a great quote, this is again later in Walmart's development, and it's when Sam Walton is sort of informing the Walmart vendor relations team and merchandisers on how to deal with vendors. And he's telling them, don't leave in any room for a kickback because we don't do that here. 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 going to go to your competitor. And if he says 90 cents, he's going to get the business. So make sure a dollar is your best price. If that's being hard-nosed, then we ought to be as hard-nosed as we can be. You have to be fair and upfront and honest, but you have to drive your bargain because you're dealing with millions and millions of customers

• 1:13:50Ben Gilbert?

  who expect the best price they can get. If you buy the thing for a buck 25, you've just bought someone else's inefficiency.

• 1:13:58David Rosenthal?

  Totally.

• 1:13:59Ben Gilbert?

  I love that. I mean, it is brutal, but that encapsulates the philosophy so well.

• 1:14:05David Rosenthal?

  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.

• 1:14:35Ben Gilbert?

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

• 1:14:54David Rosenthal?

  Okay, so in this moment, Sam, of course, goes out, he goes and shops, he travels to the Northeast, he shops in Anan Hope, he goes out, he meets Saul Price, who he already knew.

• 1:15:04Ben Gilbert?

  And we're in like 1960?

• 1:15:06David Rosenthal?

  Late 50s, 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?

• 1:15:39Ben Gilbert?

  Yeah.

• 1:15:40David Rosenthal?

  So he goes, he meets with Saul and Anan 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 have 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.

• 1:16:22David Rosenthal?

  You already distribute out to small towns like mine. Let's partner on this and do it together. And Butler Brothers says, no.

• 1:16:31Ben Gilbert?

  By the way, this is like when Vitalik goes to the colored coins guys and says, hey, 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.

• 1:16:42David Rosenthal?

  Yes.

• 1:16:43Ben Gilbert?

  That is this moment for Walmart.

• 1:16:45David Rosenthal?

  And, you know, in Butler Brothers' defense, they signed their own death warrant here, but that was the rational thing to do. This is like a counter positioning thing. If they had done this, they had all these other Ben Franklin franchises out there. So if they had done what Sam is proposing and essentially taken out their markup. On goods that they would provide to Sam's stores. What are all the rest of their franchisees gonna say?

• 1:17:11Ben Gilbert?

  It is literally the innovator's dilemma because they have too much baggage to actually pull this new thing off. And to be more specific about that, there is too much ongoing revenue that they would cannibalize in the short term by messing up all those relationships they had with their other franchisees, where they would probably churn too much of that and risk the whole business. So they could not take advantage of what could be the new wave.

• 1:17:34David Rosenthal?

  Yep. And the thing that Sam knew the minute he saw discounting was all of those stores are dead anyway.

• 1:17:42Ben Gilbert?

  Yeah, just a matter of time.

• 1:17:44David Rosenthal?

  Somebody is gonna come bring discounting to Arkansas and Missouri and Texas and Florida and everywhere else, and those stores are dead.

• 1:17:52Ben Gilbert?

  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.

• 1:18:09David Rosenthal?

  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 backend, 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.

• 1:18:54David Rosenthal?

  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.

• 1:19:04Ben Gilbert?

  I love it.

• 1:19:06David Rosenthal?

  And the legend is born.

• 1:19:08Ben Gilbert?

  And, uh, you know, Sam's basically... Not mad about this.

• 1:19:11David Rosenthal?

  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 FedMart.

• 1:19:23Ben Gilbert?

  Yep.

• 1:19:23David Rosenthal?

  And so that's why he really took a shine to it. So July 2nd, 1962.

• 1:19:30Ben Gilbert?

  Which we should say, at this point, Sam is in his mid 40s.

• 1:19:35David Rosenthal?

  I think he's 44, I want to say.

• 1:19:37Ben Gilbert?

  Yeah, it's worth pointing out, people often say like, Sam Walton didn't start Walmart until he was 44. But as you can tell, because we are very deep in the story and in this episode here, and we are just now at the formal founding of Walmart. Everything that Sam had done in his whole career was leading up to this moment. And it's a gradient. It's a slow start. Walmart in some ways started 20 years before.

• 1:20:02David Rosenthal?

  Yeah, totally. Did it start in Newport? You know, Sam's education, well, started well before then, but

• 1:20:09Ben Gilbert?

  Yeah.

• 1:20:09David Rosenthal?

  Retail entrepreneur education started then, but I think Bentonville is Walton's five in time. I think is when you can say it really started.

• 1:20:16Ben Gilbert?

  Yep.

• 1:20:17David Rosenthal?

  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.

• 1:20:35Ben Gilbert?

  Is this the one with the donkey rides?

• 1:20:37David Rosenthal?

  Yeah, they had donkey rides and trying to pull together a backend for the first time on their own. Total, total freaking chaos.

• 1:20:46Ben Gilbert?

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

• 1:21:00David Rosenthal?

  Like a lot less money?

• 1:21:02Ben Gilbert?

  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 run into a Walmart today as kind of a chore. Like, oh, it's this big parking lot and it's a big standard store. The goal was to make it anything but. The goal was to make it like a UFO is landing in your small town. Come see it.

• 1:21:20David Rosenthal?

  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.

• 1:21:29Ben Gilbert?

  Everyday low prices, David.

• 1:21:32David Rosenthal?

  Always the low price, always. And boy, did customers just love it. So there's a quote from Charlie Kate, who was the store manager of that 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 25 cents, we'd sell it for 21 cents."

• 1:22:14David Rosenthal?

  Literally everything in the store is the lowest price in the whole area. That was the value proposition.

• 1:22:22Ben Gilbert?

  Which should ring eerily true to Amazon 40 years later.

• 1:22:28David Rosenthal?

  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 $2 million. So it was very promising, but Rogers was still a pretty small town. So later that year, 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 as Sam puts it, they were basically trying to answer two questions with each of these. Like, one, would people in a small town defect and start shopping in this new crazy,

• 1:23:13David Rosenthal?

  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.

• 1:23:27Ben Gilbert?

  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 10 stores. And I think Sam even gives an interview where he talks about that that's all he would ever want to expand to, something like 10 or 15 stores that he doesn't have like a global ambition. And in part, the reason for that is he is extremely into overseeing these stores himself. He wants to be able to visit every single one. He wants to be able to really understand what's going on on the ground. He wants to be able to take the best ideas from one and bring them to the other. He's not really a control freak as much as he's uncomfortable with being

• 1:24:11Ben Gilbert?

  disconnected from what's going on in the stores. And so his belief was, well, if we expand outside of this state or this tri-state area, and we start getting more and more stores, I don't know that it expands beyond 10, 15, 20, somewhere in there, because I can't run it the only way that I know how to run it if it gets bigger.

• 1:24:30David Rosenthal?

  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

• 1:24:56Ben Gilbert?

  Rolling over in his grave. Ugh.

• 1:24:58David Rosenthal?

  But this was a mandatory Saturday morning meeting for all of the store managers in person, either in Bentonville, or like they do it in some motel around the region where they were operating, where like They'd all get together every week and they would share P and L information, what's working, what's not working. Certainly Kmart wasn't doing that.

• 1:25:20Ben Gilbert?

  And Sam, despite objections from a lot of people, including his wife, didn't feel bad about it because he was like, look, you're working retail and you've got hourly employees that have to be in your store today. I feel like you can come to a meeting today. And a big part of this was he was obsessed with getting numbers as fast as possible, getting the sales numbers in his hands so he could understand them and pour over them, then immediately getting them into the management's hands as fast as possible so they could look over them and make changes in their stores. But then as they got more and more stores, it was really about how fast can we incorporate things that are working into stores in other places so that we can very, very quickly learn.

• 1:26:00David Rosenthal?

  Yep. And remember, all these managers were equity owners in their own stores and in most cases in the stores of all the other managers too.

• 1:26:09Ben Gilbert?

  Yeah.

• 1:26:10David Rosenthal?

  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.

• 1:26:26Ben Gilbert?

  Their attempt at discounting. Yep.

• 1:26:27David Rosenthal?

  The Dayton Hudson Company in Minneapolis launches Target in 1962.

• 1:26:34Ben Gilbert?

  Which doesn't Target feel like a newer company than Walmart?

• 1:26:37David Rosenthal?

  I know, right? Literally started the same year.

• 1:26:40Ben Gilbert?

  Yep.

• 1:26:41David Rosenthal?

  And SS Kresge, which was a huge nationwide variety store chain based in Detroit, they start their own new discounting concept, Kmart.

• 1:26:55Ben Gilbert?

  But it's worth knowing, all three of these are existing variety store chains that were used to making 33% on every single item they sold in their store. And if you look at four horses, this Woolco, Target, Kmart, which would come out of SS Kresge and Walmart. You probably wouldn't have bet on Walmart to be the dominant one that wins in the discount wave, but they steamrolled the other three.

• 1:27:24David Rosenthal?

  Those other folks, because they came out of existing companies, they weren't as willing to discount as much. There may be some truth to that, but I think the story is actually a little more nuanced. I think especially like Kmart, they were the gorilla and they were really well-run. And 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 going to tell now, is because all of those others, like the problem wasn't the mindset of margins, it was that they came out of these existing operations and they used the existing logistics backend and distribution backend for their stores.

• 1:28:09David Rosenthal?

  And at first, that was by far the best. So within five years, you know, by like 1967-ish, Kmart has 250 stores all across the country doing $800 million in sales. And the new Walmart concept, Walmart revenue was still only around $10 million at that point in time. So they are like a gnat five years later and Kmart is like darling of Wall Street.

• 1:28:33Ben Gilbert?

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

• 1:28:44David Rosenthal?

  Yeah. And they're like in Arkansas and Missouri and like a regional area, Kmart's now everywhere. Like they could just leverage this network that they had, all their distribution backend and like go everywhere all at once. But the problem was that all of their existing distribution backend was tailored to the old model. It wasn't tailored to this new model of store. And that worked fine when there was no competition, but it wasn't lean and mean focused on getting the lowest cost, most efficient operations possible because they weren't that worried about margin on the backend.

• 1:29:25David Rosenthal?

  So as Walmart starts to build out on their own, going from chaos to building out their own distribution network, they're always 100% laser focused on lowest cost possible, most efficient possible, as much cash flow, as much inventory turns as possible, like they had to be. The only way they were going to grow was if they could get excess cash flow to grow, to invest in new stores. The only way they could do that while keeping prices low was to make their operations as efficient as humanly possible.

• 1:29:59Ben Gilbert?

  Because they were not taking outside capital, so they had to only reinvest cash flows coming out of the business.

• 1:30:05David Rosenthal?

  Totally. Sam has this amazing quote. He says, "The things that we were forced to learn to do because we started out under financed and under capitalized in these remote, small communities contributed mightily to the way we've grown as a company. Had we been capitalized, or had we been the offshoot of a large corporation, the way I wanted to be," because remember, he wanted to do the deal with Butler Brothers, "we might not ever have tried the Harrison, or the Rogers, or the Springdales, or all of 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

• 1:30:48David Rosenthal?

  built their own logistics network to service it."

• 1:30:51Ben Gilbert?

  It's very clear that what they did was, to quote Chathen 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 in selling these items are going to be so thin. There was a second component, though, which is be a great merchandiser. You both have to be super operationally efficient, but you have to be a good merchant, too. And part of this was...

• 1:31:37Ben Gilbert?

  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.

• 1:31:48David Rosenthal?

  Oh, yes. Let's talk about the planes.

• 1:31:50Ben Gilbert?

  So Bud was a pilot in the war and pretty early in the book, Sam talks about that he and Bud owned like 20 planes over the course of Walmart's life, but only one was a jet or a sort of later they became jets because early on.

• 1:32:05David Rosenthal?

  When they didn't have any pilots.

• 1:32:06Ben Gilbert?

  They had no pilots. So early on, what they would do is the two of them would take prop planes, fly to places to survey where they want to put a store. They would identify from the air what seemed like an interesting location.

• 1:32:20David Rosenthal?

  By flying sideways.

• 1:32:21Ben Gilbert?

  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 going to like hire any middleman to like go around all the towns for us and identify spots. No, we'll just fly over them and figure out where we want to put a store and we'll figure out how to reach consumers in a way that is like bringing them the best merchandise at the absolute lowest operating cost to us.

• 1:32:50David Rosenthal?

  Totally. When I read that story, I was like, oh, this is amazing. CEO of company decides he needs a plane to be able to travel around faster. He's spending too much time in the cars and you're like, okay, here we go. And then Sam was like, I'm going to buy a secondhand prop plane with a washing machine motor and I'm going to learn how to fly and fly it myself.

• 1:33:14Ben Gilbert?

  Amazing.

• 1:33:15David Rosenthal?

  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 I think we now have to have a caveat to the Bezos law.

• 1:33:40Ben Gilbert?

  Ooh.

• 1:33:41David Rosenthal?

  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.

• 1:33:57David Rosenthal?

  In a case like this, the infrastructure actually can make your beer taste better.

• 1:34:01Ben Gilbert?

  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 with them at scale, then yeah, you have to do in-house. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 1:34:38David Rosenthal?

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• 1:34:52Ben Gilbert?

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• 1:35:02David Rosenthal?

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• 1:35:19Ben Gilbert?

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• 1:35:35David Rosenthal?

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• 1:35:52Ben Gilbert?

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• 1:36:01David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:36:12Ben Gilbert?

  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 because they were this company in the southern Midwest. They seemed regional, but let's just take you through some figures. By 1968, they had 24 stores. They filed to go public in 1970 with 32 stores and around 1,000 employees. And the public markets, the reception, the bankers, like this was not a household name.

• 1:36:51Ben Gilbert?

  So even though it was a consumer brand, you would sort of treat it the way that you treat it like an enterprise IPO today. It's not like the Airbnb IPO that gets a lot of reception. Some stats on the actual IPO. Well, first of all, it was postponed because the market fell apart on them, much like many startups are going through right now. But in October 1st of 1970, it went public. Only 800 shareholders participated in the IPO. They sold 300,000 shares at $15. So that's sort of the actual IPO the night before. And some quick math shows they raised $4.5 million in that IPO. It started trading for around 1560, so they had a modest little pop the next day.

• 1:37:33Ben Gilbert?

  But they really were not having meaningful research coverage. A lot of the research coverage they were getting was kind of skeptical. It sounds a lot like Amazon's research coverage, early days, as if this whole house of cards could fall apart at any given moment. The next year, in 1971, they did grow top line revenue 77%. 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 2% to 3% range. So not a fast growing company by top line revenue by any standards now.

• 1:38:17Ben Gilbert?

  But shortly after IPO, despite not attracting a lot of attention, that was not the case.

• 1:38:21David Rosenthal?

  No.

• 1:38:22Ben Gilbert?

  We'll link to it in the show notes, but I pulled open the 1972 annual report, which is a gem.

• 1:38:27David Rosenthal?

  Ah, such a good find.

• 1:38:29Ben Gilbert?

  And compared to the stuff that you need to write now for your annual reports, which is like mostly compliance stuff that you don't want to even page through. This is like remarkably legible. It's a pretty thin document. Most of it seems to be written from Sam himself. They grew 77% their first year after IPO. In fact, by 1977, the market cap was still only $135 million. As a public company, growing quickly seven years after IPO.

• 1:38:57David Rosenthal?

  And in 1977, they did half a billion dollars in sales, growing at that rate. I did some math on that CAGR by decade. So Walmart's compound annual revenue growth rate for the whole decade of the 1970s was 40.1%, 4-0.1% for the whole decade. And then in the 1980s, it was 32.4%. And that was starting from like a $25 billion revenue base.

• 1:39:28Ben Gilbert?

  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.

• 1:39:44David Rosenthal?

  Still, Walmart is king.

• 1:39:46Ben Gilbert?

  Yeah.

• 1:39:47David Rosenthal?

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

• 1:40:06Ben Gilbert?

  Yes.

• 1:40:07David Rosenthal?

  This is wild. In 1966, so just four years after the first Walmart goes in, Sam Walton, who at this point is, what, 1966? He's just about 50, he's like 48 years old, I think.

• 1:40:24Ben Gilbert?

  Yep.

• 1:40:24David Rosenthal?

  He starts hearing about computers because he's always got his ear to the ground. He's talking to everybody. He's always looking for new ideas.

• 1:40:31Ben Gilbert?

  He's cheap, so he doesn't want to spend money on computers. But he's starting to get the sense that, in the same way that discounting disrupted everyone that came before in the variety Store era, computer backend retailers were probably going to disrupt the classic retailers today who don't use computers.

• 1:40:48David Rosenthal?

  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 have been impossible." And then Sam, right after that says, "Much as I hate to admit to something like that, I expect Abe is probably right."

• 1:41:32Ben Gilbert?

  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.

• 1:42:15Ben Gilbert?

  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 $24 million satellite network, private satellite network specifically for Walmart.

• 1:42:44David Rosenthal?

  This was like pre-dial-up. This was in the 70s, right?

• 1:42:47Ben Gilbert?

  Was it that early?

• 1:42:47David Rosenthal?

  70s or 80s. Yeah, I think this was in the 70s and 80s.

• 1:42:50Ben Gilbert?

  Oh, yeah, you're right. 1987. So let's see, market cap at this point is probably around $10, $20 billion, somewhere in there. So they invested $24 million 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.

• 1:43:19David Rosenthal?

  Yeah, whatever was being used at the time.

• 1:43:22Ben Gilbert?

  To sync back in a very fast manner, all of the sales data from stores. And, you know, we talked about how Sam is obsessed with getting the data as quickly as possible and learning from it and disseminating those learnings. They ended up okaying a $24 million proprietary satellite network. And then because Sam had this philosophy, remember, he thought it couldn't scale past 15, 20 stores, of needing to sort of visit all of the stores themselves and have that personal communication. The satellite network enabled Sam to sort of virtually visit these stores from the home office and broadcast satellite transmissions of himself. And they eventually instituted this for the Saturday morning meeting, too, where he would broadcast over their proprietary satellite network in 1987.

• 1:44:07David Rosenthal?

  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.

• 1:44:39Ben Gilbert?

  Then discover he was not ready to retire.

• 1:44:41David Rosenthal?

  Yeah, exactly.

• 1:44:42Ben Gilbert?

  Which is a very TSMC story.

• 1:44:44David Rosenthal?

  Totally.

• 1:44:44Ben Gilbert?

  Similar to Morris Chang.

• 1:44:46David Rosenthal?

  And he's very gracious to Ron in the book. You know, he said, 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're coming into a warehouse, you know, and then you ship them out elsewhere. But like, they just sit in the warehouse and then you pick stuff up from the warehouse and go elsewhere. Walmart, as they're investing in technology, they start taking daily individual orders for custom, whatever SKUs and whatever amounts each store in the Walmart network needs. They buy in like big, big bulk in big packaging from their vendors.

• 1:45:31David Rosenthal?

  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,

• 1:46:15David Rosenthal?

  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.

• 1:46:36Ben Gilbert?

  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.

• 1:46:46David Rosenthal?

  Drop ship directly to the stores.

• 1:46:48Ben Gilbert?

  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 would become. An area where a lot of people lived as suburbia sort of blossomed.

• 1:47:25David Rosenthal?

  It was one day drive of a truck from the distribution center, right?

• 1:47:28Ben Gilbert?

  Yes. And so then at some point, they've got dozens of stores that are driving distance, filled in this whole sort of radius back to the distribution center. So they could make a lot more margin because they could get the price down as much as possible because they could negotiate these huge discounts with vendors because they have the distribution center, which will send all those stores that are connected to it. It's a pretty brilliant methodology. And I don't really realize they invented this concept of a distribution center. I always forget that before Walmart, there was the franchise variety stores, but there really wasn't large scale discount retail that used this sort of model.

• 1:48:08David Rosenthal?

  So by 1990, Walmart passes Sears to become the largest retailer in America. Again, all through the seventies, all through the eighties, Kmart was the gorilla. And then by the early nineties, Kmart, which had been so dominant, they start really feeling the squeeze from Walmart because Walmart is now pretty much nationwide at this point.

• 1:48:35Ben Gilbert?

  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 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.

• 1:48:56David Rosenthal?

  Wow.

• 1:48:57Ben Gilbert?

  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.

• 1:49:06David Rosenthal?

  So here's some really fun history that I had no idea about. In the mid to late eighties, Kmart is at the height of its power, the height of its pride, right before Walmart is finally gonna tip them over. During that time, they go on a sort of drunken acquisition spree. Did you know about this?

• 1:49:25Ben Gilbert?

  No.

• 1:49:26David Rosenthal?

  So Kmart, between the mid eighties and the early nineties, acquired Sports Authority.

• 1:49:33David Rosenthal?

  Office Max, Builders Square, Walden Books and Borders. And this just had all sorts of light bulbs going off in my head.

• 1:49:41Ben Gilbert?

  Kind of reminds me of the New York Times during that era, too.

• 1:49:44David Rosenthal?

  Right. Knowing my 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 because Kmart bought his company.

• 1:50:09Ben Gilbert?

  Wow. I never knew what happened to Borders.

• 1:50:12David Rosenthal?

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

• 1:50:31Ben Gilbert?

  Wait, Kmart and Sears merged?

• 1:50:33David Rosenthal?

  Yes, in 2004. We're going to take these two legacy, you know, previously biggest retailers out there, storied brands, and we're going to merge them together and it's going to work. And I vaguely was aware of this and I thought like, oh, 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 Sony PlayStation version of Walmart, like the last big hurrah. They had launched the Supercenters.

• 1:51:11Ben Gilbert?

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

• 1:51:20David Rosenthal?

  Walmarts were the legacy of the variety stores. They didn't have groceries. They had hard goods. And groceries was always this very attractive category. It's the biggest category of retail in America.

• 1:51:35Ben Gilbert?

  Dude, it's an enormous amount of consumer spend. After house and cars, I think grocery, or at least food as the next category, is the largest thing that households spend money on.

• 1:51:46David Rosenthal?

  Yes. This also explains why I've always wondered, why is Amazon so obsessed with grocery over the years?

• 1:51:53Ben Gilbert?

  Which they haven't cracked, by the way. Famously, they've sort of struggled to nail it.

• 1:51:58David Rosenthal?

  Yep. And they bought Whole Foods and, you know, Whole Foods is great and all that. But Bezos always talked about, we're always trying to crack grocery. This is why. It's enormous.

• 1:52:08Ben Gilbert?

  But difficult. There's a cold supply chain that you need to nail. That's totally different than shipping plastic around.

• 1:52:16David Rosenthal?

  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.

• 1:52:52Ben Gilbert?

  Dude, we should open a merch store and call it the acquired hypermarket.

• 1:52:55David Rosenthal?

  So I actually tweeted this on the 4th 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 going to come, bring it back. We're going to do it at Walmart. And again, he was right. And again, like some of the others, he was wrong on timing. So he launches a spin out of Walmart in the late 80s and early 90s called Hypermart USA. And there are photos you can find online. This is what I tweeted on July 4th. I think they only built three of them. It is the most 90s America thing you have ever, ever, ever seen.

• 1:53:33Ben Gilbert?

  It's a great logo.

• 1:53:34David Rosenthal?

  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 and a traditional Walmart.

• 1:54:13Ben Gilbert?

  Dude, I lived right next to one in North Carolina in 2008 and it was awesome. It was the only thing in my like little suburb off the highway where I lived for one summer. There was a, you know, some other stuff in the shopping center, but you kind of had like the Walmart 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.

• 1:54:38David Rosenthal?

  Well, and not only that it was so convenient to have it all in one and, you know, entertainment value, all of the things. They brought the Walmart approach of low prices to grocery too. So most items by and large, on average across the board, the grocery items in a Walmart supercenter are 15% cheaper than a comparable grocery store, which if you're like a middle or lower income family, that's hundreds of dollars a month that you're saving, which is incredibly meaningful to you as a family. So Walmart goes from 0% market share in US grocery at the beginning of the nineties

• 1:55:22David Rosenthal?

  to I think by the end of the decade in the nineties, they had become the largest grocer in America.

• 1:55:28Ben Gilbert?

  Which they still are. They are the largest grocery store in the United States today.

• 1:55:33David Rosenthal?

  Well, now they are not just the largest grocery store. They are the largest grocery store by a factor of over two X, the number two player.

• 1:55:42Ben Gilbert?

  Whoa, which is Kroger, who's two.

• 1:55:45David Rosenthal?

  Kroger, yep. So Walmart has over 20% market share of US groceries. Kroger has under 10% and then Albertsons and Costco are tied at 5% each.

• 1:55:58Ben Gilbert?

  Wow. And is Albertson Safeway now? Do they merge?

• 1:56:02David Rosenthal?

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

• 1:56:08Ben Gilbert?

  Oh, my God.

• 1:56:09David Rosenthal?

  Crazy.

• 1:56:11Ben Gilbert?

  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 50% shy of Amazon's e-commerce revenue in a year.

• 1:56:36David Rosenthal?

  In the last, most recent fiscal year, grocery accounted for 55% of Walmart's total revenue, which is over $300 billion alone, just from grocery.

• 1:56:49Ben Gilbert?

  For a part of the business that didn't exist for the first 30 years, I mean, that is an iPhone-scale company reinvention.

• 1:56:55David Rosenthal?

  And barely existed when Sam died. It reminded me of Ted and Todd within Berkshire Hathaway, buying Apple, the best Berkshire Hathaway investment probably ever.

• 1:57:05Ben Gilbert?

  Yes.

• 1:57:05David Rosenthal?

  That happened in the public markets after Warren had brought on Ted and Todd. Crazy. One last little bit about super centers. I think the war was already won with Kmart, but this was really the death knell with super centers because Kmart tried their own hypermarket concept called Super Kmart's.

• 1:57:25Ben Gilbert?

  Oh, I remember that.

• 1:57:26David Rosenthal?

  And this is where the Walmart distribution strategy just completely trounced to Kmart. It trounced to Kmart in hard goods, but now you're talking about groceries.

• 1:57:37Ben Gilbert?

  The items need to be fresh. They expire after a few days. You need to figure out how to preserve.

• 1:57:41David Rosenthal?

  It's also an even lower margin business.

• 1:57:44Ben Gilbert?

  Yeah.

• 1:57:44David Rosenthal?

  So like, here's Walmart with better logistics, getting better, fresher items in their stores at lower prices. It's totally game over for Kmart. And frankly, it's kind of crazy that a lot of the other traditional grocery chains even have the market share that they do. I mean, I can understand like specialty and higher end stuff like Whole Foods or Sprouts or the like, but Walmart is just so dominant in the grocery category.

• 1:58:12Ben Gilbert?

  Okay, so we talked a little bit about technology at Walmart and they were undoubtedly the best at putting in backend 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, kind of looking at their website over the years, and they did not take the internet very seriously at first. All the way through the 90s, all the way through the early 2000s, I don't think they thought it was an existential threat the way that it truly was for the

• 1:58:52Ben Gilbert?

  business. So they make a few really big moves to try and bolster this team.

• 1:58:59David Rosenthal?

  You say they didn't realize it was an existential threat, and that's true. But just telling the Walmart story now in their DNA, they hadn't historically been a company motivated by threats. They saw opportunities and they pursued opportunities like super centers. Why they didn't pursue the online opportunity is really puzzling.

• 1:59:21Ben Gilbert?

  Yeah. It's almost like no one made the compelling enough case for why they need to invest in building out the internet team until it was kind of too late. That really was the style of make the pitch to leadership of why this needs a massive investment.

• 1:59:36David Rosenthal?

  And Amazon was poaching executives from Walmart, left and right.

• 1:59:40Ben Gilbert?

  Totally. So the first step that they take here is, do you remember the company Cosmics, David? K-O-S-M-I-X?

• 1:59:49David Rosenthal?

  Yes, yes, I do. I remember using it.

• 1:59:52Ben Gilbert?

  Walmart bought them in 2011 for 300 million. Do you know what the founders did beforehand?

• 1:59:57David Rosenthal?

  No, I remember it was like a meta search company.

• 2:00:01Ben Gilbert?

  Yeah, it was called Jungly. It was not for US search. It might have been like meta search for e-commerce in India or something like that. So Amazon had bought Jungly and then those two guys, Venky and Anand, inside of Amazon started Mechanical Turk. Oh, cool. So interesting Amazon history there. So they leave, they start Cosmex, Walmart buys it for 300 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 going to be really disruptive and you know, they've acquired a variety of other companies over the years, including Bonobos

• 2:00:46Ben Gilbert?

  or Bonobos. I've never exactly known how to say it, other than I like their pants. And of course, then in 2016, we did an episode on this. Now we're entering the timeline where acquired was already a thing by the time this happened, which is crazy because now it means we're dinosaurs. They bought Jet.com for $3.3 billion. I would love to talk to Mark Laurie about all this. Yeah. So obviously Mark started Quidsy, 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.

• 2:01:32Ben Gilbert?

  It was a club, right? It was more like Costco. Well, it changed. It originally was, and then I can't remember if it wasn't, it wasn't, or it wasn't, or that it was, but there were multiple strategies. And the quote is, "We tried a lot of things. We innovated. Not all of them are going to work. We learned from our failures." And the party line from Mark and from the Walmart team were that Jet served its purpose to get a bunch of really talented e-commerce focused engineers and product people together. And then it served as a great vehicle to serve as the core at this point of Walmart's e-commerce business. And they really have made a good comeback, right?

• 2:02:09Ben Gilbert?

  Yeah. So Mark Laurie left in 2021 and Walmart's current CEO Doug McMillan does credit him for jumpstarting their e-commerce business, which I think is growing, and this is before COVID because COVID statistics messed up everything for e-comm. But in 2019, I think grew 37%.

• 2:02:28David Rosenthal?

  Which when Walmart itself as a whole was growing like 2%.

• 2:02:32Ben Gilbert?

  Yes. And at this point, it's hard to say if this is a small number or a big number, but only about 13% of Walmart's revenue comes from e-commerce. Now that's $75 billion.

• 2:02:45David Rosenthal?

  Right.

• 2:02:46Ben Gilbert?

  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 want to make it feel like you're shopping at Walmart, whether you're shopping online or in person. And there's sort of a seamless experience between the two. And so they leverage their stores to do things like same day grocery delivery or pick it up at the store or buy it. And we're flexible whether you sort of feel like you bought it in the store and you want to come grab it from us or whether it wants to arrive at your house.

• 2:03:29Ben Gilbert?

  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.

• 2:03:38David Rosenthal?

  They're doing some cool stuff. They launched Walmart Plus.

• 2:03:42Ben Gilbert?

  Which is a prime competitor.

• 2:03:43David Rosenthal?

  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 save money on stuff I buy, but B, so I could try stuff like this.

• 2:04:01Ben Gilbert?

  I'm very curious if you would shop there.

• 2:04:03David Rosenthal?

  That's a good question. I mean, I love Trader Joe's.

• 2:04:06Ben Gilbert?

  Yeah.

• 2:04:07David Rosenthal?

  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, checkout, buy stuff as you're going through the store on your phone, all done seamlessly and then just walk out. Which I think, obviously, Amazon's working on this too with their Just Walk Out technology. But to me, that's like a big value prop. Like, one of the reasons I don't like shopping at Trader Joe's, Target, even Whole Foods too, like physically anywhere, is the checkout lines. It's just like, yeah, like, I hate it.

• 2:04:49Ben Gilbert?

  Yeah, yeah, but I'm not used to waiting for anything anymore because the internet makes it so I don't have to.

• 2:04:53David Rosenthal?

  I think about stuff like this and I'm like, why am I doing this? It's not just like the waste of my time. It's like, this is unnecessary in this day and age.

• 2:05:00Ben Gilbert?

  Right.

• 2:05:01David Rosenthal?

  And I'd be happy to check out on my phone as I go through a store.

• 2:05:05Ben Gilbert?

  I started in preparing for this episode, trying to understand like, how is the digital experience of Walmart these days versus Amazon's experience? Because I obviously am well-versed and Amazon packages arriving at my house every day. So I started buying some stuff on Walmart. I bought some like garden lamps because I needed to install some lights. And I will say, the consumer perspective so far for me has been pretty identical to Amazon. I don't think the selection is as large, but I'm not convinced that I take advantage of Amazon's sort of infinite selection. I think I look for Amazon's Choice or the 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.

• 2:05:47Ben Gilbert?

  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 Tegus. Good friends of the show over there. I read a transcript from a call with a former Amazon director. It's an interesting quote. It's just 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.

• 2:06:32Ben Gilbert?

  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.

• 2:06:50David Rosenthal?

  I suspect we will talk a lot more about this dynamic throughout the season. But Amazon, right, is 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.

• 2:07:07Ben Gilbert?

  Right.

• 2:07:07David Rosenthal?

  So Amazon had to do this.

• 2:07:09Ben Gilbert?

  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.

• 2:07:34David Rosenthal?

  This was so fascinating. I knew that there were McDonald's and Subways and Walmarts, like sort of the store within a store concept and like Target has those too. And also brilliant way to increase your margins as a retailer or allow you to sell at lower prices in Walmart's case. But what you're saying is even more than that, which is super cool. Items on the shelves and like display areas in Walmarts that are integrated into the store.

• 2:08:04Ben Gilbert?

  Especially like greeting cards, that sort of thing, things that require like heavy customization in the way that it's presented.

• 2:08:11David Rosenthal?

  Those are owned, operated and run by third party vendors.

• 2:08:15Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:08:28David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:08:45Ben Gilbert?

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

• 2:09:00David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:09:24Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:09:43David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:10:13Ben Gilbert?

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

• 2:10:38Ben Gilbert?

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

• 2:10:52David Rosenthal?

  And of course, we have to do powers analysis.

• 2:10:55Ben Gilbert?

  And powers, we've got a good amount of episode left here.

• 2:10:58David Rosenthal?

  I know.

• 2:10:59Ben Gilbert?

  All right, so Walmart today, we have talked some about this, but I think it's worth recapping what the shape of the company is actually at this point. So they're in 24 countries, which we haven't discussed. They're a global empire at this point. There's 10,500 stores. Each week, 230 million customers visit one of these stores. 230 million customers, it's wild. The super center concept is basically Walmart now. It wasn't like some of the stores are super centers. Most stores are now super centers.

• 2:11:40Ben Gilbert?

  If you just think about the like standard Walmart discount store in 1996, there were about 2,000 of them. Now there are 368 because the super center is the new thing. So the business is super centers. They did close to $600 billion of revenue last year. They did $25 billion of operating income. That's only about a 4% operating margin for those counting at home. They do have a 24% gross margin, which is interestingly higher than in Sam's heyday, what he sort of believed the discounting business model should bear.

• 2:12:21Ben Gilbert?

  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.

• 2:12:33David Rosenthal?

  The other piece of the business that we haven't talked about at all, but is a interesting both piece of Walmart's business and competitive vector to Walmart is Sam's Clubs, which were started in 1983, I believe, and has been a very successful part of the company. I believe what is like 10, 15% of revenue of Walmart today.

• 2:12:58Ben Gilbert?

  It's been a pretty successful part of the company, but it's losing to Costco.

• 2:13:02David Rosenthal?

  Yes, Costco.

• 2:13:05David Rosenthal?

  Has been this amazing story that is like the Walmart of Walmarts, you know? And Walmart has it too with Sam's Club, but it's interesting you bring up margins.

• 2:13:17Ben Gilbert?

  Costco does $217 billion a year in revenue. Sam's Club does about 75 billion. How is it that they have all of Walmart's advantages? And yet, I think it's like 11% of Walmart's revenues, which is obviously very material, but somehow they did not become dominant in this category.

• 2:13:36David Rosenthal?

  Especially, you know, we were talking about Walmart Plus and this membership option. You know, Costco doesn't really have much of an e-commerce digital business these days. I'm sure they're investing in it, but Walmart really was kind of positioned to have best of both worlds here of membership, subscription business with Sam's Club plus e-commerce. It feels like there's a lot more that they could be doing.

• 2:13:58Ben Gilbert?

  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.

• 2:14:06David Rosenthal?

  I don't know if you have the numbers, but I bet it's way less now.

• 2:14:09Ben Gilbert?

  I think it's declined. Yeah. Okay, so it's worth a little bit of a margin analysis here and in particular gross margins, because we were citing some numbers earlier. If you look at Walmart's 24-ish% gross margin, so that's basically what they get from the goods that they sell on the shelf. You see, okay, it's less than Target, which makes 29, 30% of anything that they sell on the shelf. Well, Costco's gross profit margin is only around 13%. And that's come up like when they first went public in, I think, 92. It used to be like 10%, but the whole business of Costco is totally doing what Walmart did

• 2:14:51Ben Gilbert?

  to the variety stores, to Walmart and the other discounters. It's really the idea that 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 fricking warehouse? It's all about what can we take away and will customers still deal with to get the lowest price?

• 2:15:21David Rosenthal?

  So Saul Price, of course, as we talked about, and Jim Senegal, who worked for him, were big pioneers of the shopping club, Costco, Price Club, Sam's Club model. The original target market for it was not consumers, it was small businesses.

• 2:15:40Ben Gilbert?

  Oh, I didn't know that.

• 2:15:41David Rosenthal?

  And that was the core of the market. And then over time, I think, as Costco grew, I think they realized, oh, consumers like this, too.

• 2:15:49Ben Gilbert?

  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.

• 2:16:01David Rosenthal?

  While we're talking about things that Walmart has not executed on to Sam's level of rigor, shall we say, over the years. International, again, it's like Sam's Club. It's a decent part of the business.

• 2:16:14Ben Gilbert?

  It's 18% of revenue.

• 2:16:16David Rosenthal?

  It's 18% of revenue. It's about half of the stores are international stores. They have some success stories. I think Mexico has been extremely successful for Walmart. Canada has also gone well, but they have some big losses in Europe.

• 2:16:30Ben Gilbert?

  They pulled out of Germany, right?

• 2:16:32David Rosenthal?

  They pulled out of Germany. In the UK, they bought the big retailer chain Asda for about $10 billion, when I think that was in the late 90s, I believe. And they operated that and they were a decent sized player, but never as big as Tesco and some of the other retailers in the UK. They actually ended up trying to sell it a couple of years ago to Sainsbury's for $10 billion. The UK government blocked that deal. And then they ended up selling it off to private equity, I think for about $6 billion just a couple of years ago. So, you know, neutral at best.

• 2:17:10Ben Gilbert?

  We'll see how Flipkart plays out for them. They own, what, 75% of that?

• 2:17:14David Rosenthal?

  Right. So then there's India and Flipkart. Walmart bought 77%, I think, stake in Flipkart back in, I think it was 2018, for over $16 billion, 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.

• 2:17:50Ben Gilbert?

  Hmm.

• 2:17:51David Rosenthal?

  I don't think it's gone super well. I read, I believe there are about 20 or so, 20 or 30 Walmart owned physical locations in India now, but that's not worth a 16, 17 billion dollar purchase price.

• 2:18:06Ben Gilbert?

  No, definitely not. Well, I mean, the last thing that I think is important to understand about Walmart is their growth has really just come down. If we look back, all the way back to, let's see, 1982, they were growing about 40 to 50% a year, and that has basically been on a slow, steady decline all the way until about 2013, where it's been about flat at 3% since then. So they're trying to make all these big investments, and this is revenue, by the way. So it's not like, oh, well, that's just because they're reinvesting in e-commerce. And no, like, the top line is just not moving very far year over year these days.

• 2:18:49David Rosenthal?

  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.

• 2:19:03Ben Gilbert?

  And grocery.

• 2:19:04David Rosenthal?

  Well, and well, they did on grocery, but on discount clubs and the Costco in Sam's Club. If they'd executed well on all those, their growth could have been much, much higher.

• 2:19:14Ben Gilbert?

  Yep. All right. Let's do power and then we'll get into bear case, bull case.

• 2:19:19David Rosenthal?

  Great. Power. So for new listeners of the show, and as a reminder for all of us old timers, Hamilton Helmers, seven powers. There are seven of them and what he's identified as.

• 2:19:31Ben Gilbert?

  Persistent differential returns. So basically what enables Walmart to be more profitable than their closest competitor on a durable basis.

• 2:19:42David Rosenthal?

  Yep. And the seven are counter positioning, scale economies, switching costs, network economies, process power, branding and cornered resource.

• 2:19:52Ben Gilbert?

  We got to separate the takeoff phase from where they are today because I think it's a totally different set of powers.

• 2:19:58David Rosenthal?

  Hmm. Okay, okay.

• 2:19:59Ben Gilbert?

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

• 2:20:19David Rosenthal?

  And it didn't seem like a big opportunity.

• 2:20:21Ben Gilbert?

  No. And in fact, it kind of reminds me of DoorDash, thinking back on that big episode we did that day of the DoorDash IPO, where they sort of looked at the suburbs and they were like, wait, this business, even though everyone's doing food delivery in the cities, it actually makes more sense in the suburbs. Walmart realized that same thing. They were like, well, the cities are going to build out and those people are going to want something like this in their towns. And so we can serve the people who are there now and we will be positioned to serve way more people as those suburbs build out.

• 2:20:51David Rosenthal?

  Yep, totally.

• 2:20:53Ben Gilbert?

  So massive counter positioning, I think.

• 2:20:56David Rosenthal?

  Such a good point in the beginning here. Absolutely right. I think as they built it up though, I mean, scaled economies.

• 2:21:02Ben Gilbert?

  Yes. This is the perfect example of scale economies.

• 2:21:05David Rosenthal?

  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.

• 2:21:23Ben Gilbert?

  There is no reason why anyone should be able to have a lower price than Walmart. Walmart is going to buy in larger quantities than any other retailer for basically any item that they sell. They're going to have more locations to get that thing to consumers in the most convenient way to them. So they're going to have the most consumers excited to buy it, which kind of feeds back into that quantity thing. They own and operate their own logistics, fulfillment, distribution network. So even though they've taken on a lot of sort of risk in doing that and a lot of fixed costs, 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.

• 2:22:05Ben Gilbert?

  Every element I can possibly think of has all of the margins squeezed out of it.

• 2:22:11David Rosenthal?

  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, building their own logistics, all the Amazon vans that you see around.

• 2:22:26Ben Gilbert?

  Yep, absolutely.

• 2:22:27David Rosenthal?

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

• 2:22:34Ben Gilbert?

  They interestingly don't have branding. And this, I think, is a place that they're different than Amazon. Because for Walmart, the definition of branding, as Hamilton puts it out there, is would you pay more for a good that came from this brand than a different brand? And at Walmart, no. You go there because it is the lowest price. And I will not buy something for that's more expensive at Walmart than somewhere else. Walmart brand does not mean that to me. But at Amazon, they have kind of moved away from the, we always have the lowest price. They have convinced you that it is so convenient to shop on Amazon, that even if they're a little more expensive in price, that's kind of okay. And I think it's really interesting that they've taken a different path there.

• 2:23:15David Rosenthal?

  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.

• 2:23:27Ben Gilbert?

  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.

• 2:23:51David Rosenthal?

  I think it might be worth a minute to discuss process power. Do we think Walmart has process power? And there are two areas I'm thinking about with this. One is the operations themselves and everything we've talked about. I don't think you could airlift that out of Walmart and put it somewhere else. Now, you could argue that it's a outgrowth of scale economies that they have it. But I'm also wondering, there's this DNA at Walmart, or at least there used to be under Sam, of What you just said, the lowest price is the thing that matters the most. And they could have, and I think most other companies would have,

• 2:24:36David Rosenthal?

  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.

• 2:25:02Ben Gilbert?

  And the question is, is that still true? Or are they looking for opportunities to keep margin now, given growth has stalled?

• 2:25:09David Rosenthal?

  Right.

• 2:25:10Ben Gilbert?

  And at the end of the day, public late-stage CEOs are paid to get more earnings per share.

• 2:25:15David Rosenthal?

  Right.

• 2:25:16Ben Gilbert?

  Did you see what they were doing with gas stations in the last few years?

• 2:25:20David Rosenthal?

  No.

• 2:25:21Ben Gilbert?

  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.

• 2:25:44David Rosenthal?

  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.

• 2:26:08Ben Gilbert?

  Them and their spouses, yes.

• 2:26:10David Rosenthal?

  Yeah, right. So the focus on keeping all the money in Walmart, keeping prices as low as possible because we don't care about profit margins. We care about winning and keeping customers. It's not necessarily there as much.

• 2:26:25Ben Gilbert?

  Agree. Okay, bear and bull. We've hit a lot of these points already, but in my bull case, there's they kind of should win same day grocery delivery since they have these super centers 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 counter cyclical. Because of their obsession with the lowest price, they actually should do great in a economic downturn.

• 2:27:04David Rosenthal?

  Which I believe they did in 2009.

• 2:27:07Ben Gilbert?

  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 1% 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.

• 2:27:46Ben Gilbert?

  Those are my few bull cases.

• 2:27:49David Rosenthal?

  That makes sense to me.

• 2:27:50Ben Gilbert?

  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

• 2:28:31Ben Gilbert?

  in these sort of food desert type locations, those businesses have done tremendously well and are kind of, it's not that they're pushing Walmarts out, but there's lots of scenarios where someone would opt to choose to shop at a Family Dollar versus going to the bigger Walmart experience.

• 2:28:49David Rosenthal?

  I think, I don't know that I 100% have the full history on the dollar store industry, but I learned a little bit of it through Walmart research. I believe that dollar stores, as we know them today, grew out of the remnants of the old variety stores, like the Ben Franklin's.

• 2:29:08Ben Gilbert?

  Really?

• 2:29:09David Rosenthal?

  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.

• 2:29:24Ben Gilbert?

  Right.

• 2:29:24David Rosenthal?

  So like, I think that eventually became the dollar store industry.

• 2:29:29Ben Gilbert?

  Fascinating. Well, I have a whole new internet rabbit hole I need to go down after this.

• 2:29:34David Rosenthal?

  Listeners, if you know anything about this, definitely hit us up in Slack and we'd love to chat about this.

• 2:29:40Ben Gilbert?

  Yes, for sure. I think there's a bear case around e-commerce, even though they're growing quickly, 37% pre-pandemic, e-comm is still not a profitable segment for them. It's crazy to think that you could be doing 75 billion in e-commerce revenue and that hasn't reached scale that makes it profitable. I guess it's just a massive, massive fixed costs on the employee base to make that happen.

• 2:30:02David Rosenthal?

  I don't know, but when I have in the past used Walmart e-commerce, it's because they run some crazy deals. So I wonder if they're also like running really low margin or even discounting below cost on some stuff.

• 2:30:17Ben Gilbert?

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

• 2:30:34David Rosenthal?

  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.

• 2:30:46Ben Gilbert?

  Yeah, I know they did in Washington. There's a labor point to make here too, which is that I think in closing all those Sam's Clubs, they basically lay off all the employees and then say, all right, now you can interview at this building that will be converted into an e-commerce distribution center and we can figure out if you're a fit. It makes sense, but I think it's like one of 100 death by a thousand cuts things going on between Walmart and labor right now.

• 2:31:12David Rosenthal?

  Oh boy. Well, we'll do value creation, value capture in a minute. And there's a whole nother episode we could do on is Walmart good or bad for the world?

• 2:31:21Ben Gilbert?

  All right. Playbook. We'll do playbook and then I want to get to that point.

• 2:31:24David Rosenthal?

  I'll go first because I have one. I realize that I had teased this quote hours ago in the beginning of the episode and then I never actually said it, but this perfectly encapsulates so many wonderful, great playbook lessons to take from Sam Walton and the Walmart story. But this is my favorite. And this is a quote from Charlie K, the manager of that first Walmart store, number one, where he says, he's talking about Sam saying, I remember Sam saying over and over again, go in and check our competition. Check everyone who is our competition. Don't look for the bad. Look for the good. If you get one good idea, that's one more than you went into

• 2:32:07David Rosenthal?

  the store with, and we must try to incorporate it into our company. We're really not concerned with what they're doing wrong. We're concerned with what they're doing right. And the reason that this grabbed me so much organizational dynamics and behavior and just human behavior is such that your competitors, you always want to like, look for what they're doing wrong and make yourself feel better by like, oh, like they suck. Look how much better we are than them.

• 2:32:32Ben Gilbert?

  Oh, that's such a good point.

• 2:32:33David Rosenthal?

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

• 2:32:54Ben Gilbert?

  Right.

• 2:32:54David Rosenthal?

  A much better way to look at it is it doesn't matter what they're doing wrong. Look at what they're doing right and steal it.

• 2:33:01Ben Gilbert?

  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 going to 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 going to 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?

• 2:33:33David Rosenthal?

  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.

• 2:33:49Ben Gilbert?

  Yes.

• 2:33:50David Rosenthal?

  But, once you've done that, you've done that, you're doing it. Now go make it better. Like, it doesn't matter what everybody else is doing wrong. So I just love that one.

• 2:34:00Ben Gilbert?

  Agree. There's one that we've talked about a bunch, so I'm just gonna like summarize it. Identify a wave and ride it. I never would have known that discounting was a wave that happened before starting this research. And if you were operating a variety store in 1955, you may not have known that discounting was a wave that was going to come. But Sam was in the right place at the right time with the right insight and then built the company to ride the discounting wave. And it's fascinating to me how, just in the course of 50 years or 70 years, it can go from, wait, will this even be a thing? To, there was ever a point in time where it wasn't a thing? It was different?

• 2:34:43Ben Gilbert?

  He both rode that wave, but also created that wave.

• 2:34:47David Rosenthal?

  Yep. Reminds me so much of Jeff Bezos, sitting in the offices of D Shaw in the early 90s, being like, holy crap, the internet is going to be a wave.

• 2:35:00Ben Gilbert?

  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 Walmarts and Walmart had to be buying P&G products, before they kind of figured out, how can we both do this? Because we do both need to serve the same customer. And that took a long time. And so, that ruthlessness of being willing to not buy anyone else's inefficiency, even though it can create tension in the relationship. If you're a business that's winning on price, somebody will be doing that in your space. So, you kind of have to if you want to win.

• 2:35:46David Rosenthal?

  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 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.

• 2:36:29David Rosenthal?

  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.

• 2:36:43Ben Gilbert?

  Yeah, that's a great point. The last one is an ill-formed thought, but I kind of want to just get it out there and it might be word vomit, but Walmart in so many ways is a microcosm of America or really at this point of the world. There are so many customers, there are so many employees, they touch so many facets of life and they have such a large share of wallet for a lot of people that everything that can happen will happen. And so like labor problems, yes, for sure. Significant tensions there.

• 2:37:22David Rosenthal?

  Environmental impact.

• 2:37:24Ben Gilbert?

  Employees doing everything you can think of because there are 2.2 million of them. So if you come up with some statement of like Walmart employees are so wonderful, that is true. And Walmart employees steal is also true. And Walmart employees hate their boss is also true. You and I did some serious spelunking on the Walmart subreddit. I spent a couple hours on there and it's easy to get depressed because the most vocal people create threads there and you're like, God, is this a terrible, terrible corporation? It's one of these things where you realize at this point in the world and at this point in the company's history and at their scale, they are just everything. You walk into a store and you get a microcosm of America.

• 2:38:05David Rosenthal?

  At this point, it's not even a microcosm. It's a macrocosm. When you're talking about 2.2 million people that work there and would you say 240 ish million people shop there every week?

• 2:38:14Ben Gilbert?

  Yeah. Walmart is where you witness humanity.

• 2:38:16David Rosenthal?

  Yes. In all of its glory and the opposite of glory. All right. I got one more, which is, again, I said earlier in the episode, but I think we now have to institute a caveat or an exception to what has been our most golden lesson unacquired, which is the focus on what makes your beer taste better. I guess it is still always in service of making your beer taste better.

• 2:38:47Ben Gilbert?

  Dude, Walmart building a logistics network made their beer taste better.

• 2:38:51David Rosenthal?

  Fair point, but that wasn't obvious, I don't think.

• 2:38:54Ben Gilbert?

  That's true.

• 2:38:55David Rosenthal?

  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.

• 2:39:05Ben Gilbert?

  Yeah. And it certainly was for the first decade.

• 2:39:08David Rosenthal?

  First, probably two decades.

• 2:39:10Ben Gilbert?

  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.

• 2:39:28David Rosenthal?

  Yep. And Sam says in the book, his name is Henry Cunningham, I want to believe, who was the CEO of Kresge when they launched Kmart. He says that Cunningham was like an amazing retailer, brilliant and great competition. And that Sam believes had Cunningham still been running Kmart, as Kmart started to decline, the company would have made different choices.

• 2:39:52Ben Gilbert?

  Fascinating.

• 2:39:53David Rosenthal?

  They had a whole bunch of CEO turnover and all sorts of controversial stuff.

• 2:39:59Ben Gilbert?

  All right. So we're onto the segment where we're going to make a case to each other for Walmart being good for the world and bad for the world. It's almost like a bull and bear on the business, but the global impact. Let's save the employees thing for the moment and first talk about impact on communities. Because I think there's an easy narrative to paint, kind of the same narrative that got painted with Starbucks of bad for communities because it puts the local store out of business. And certainly I don't think Sam Walton would say that they didn't. I think he would say that we put a Walmart in a community and it was better for consumers. And so then people needed to adapt. Of course, existing merchants hated us, but did consumers hate us? No, I don't think so at all. I think it was better for them.

• 2:40:40David Rosenthal?

  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.

• 2:40:56Ben Gilbert?

  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 50% to the Walton family and 50% to a bunch of public shareholders. Every transaction any business makes accrues either positive or negative equity to the business that participated

• 2:41:39Ben Gilbert?

  or facilitated the transaction. Even if that Walmart employs a bunch of local people, the equity is still being built by other shareholders.

• 2:41:47David Rosenthal?

  So there is a lot. I think I said, we could do a whole nother 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, I think it was written in 2006, and it goes really deep into all of these questions, labor impact on communities, all sorts of stuff. Highly recommend reading. Frankly, we're not going to be able to do anywhere near as good a job discussing all that as the book does and as other forums do. But to my mind, like, the biggest takeaway I had from it was, if you just look at individual

• 2:42:28David Rosenthal?

  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.

• 2:42:49Ben Gilbert?

  Yep.

• 2:42:50David Rosenthal?

  The local shops were not gonna survive, the local variety stores.

• 2:42:54Ben Gilbert?

  And it could be someone that doesn't have the types of incentive programs that Walmart has.

• 2:42:59David Rosenthal?

  Right.

• 2:42:59Ben Gilbert?

  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.

• 2:43:15David Rosenthal?

  Yep. Now, here's the way, though, where Walmart's impact is a little more unambiguously pernicious, both for the world and specifically for America, despite all that great stuff. And that's actually in the supplier relationships and the vendor relationships. As Walmart got so big and got so much leverage and they're so unrelenting on pushing down prices. And then as the relationships, you talked a little bit about the P and G relationship, but with all their vendors, you know, Walmart is the biggest customer of all of the vendors and suppliers that they work with. They exert so much pressure for vendors to lower their prices.

• 2:44:00David Rosenthal?

  Ultimately, that leads to a couple of things, led to offshoring of American manufacturing. Walmart was a huge contributor.

• 2:44:10Ben Gilbert?

  At some point, the majority of items sold in Walmarts were made in China.

• 2:44:14David Rosenthal?

  I think during the 80s, it went from like 6% to like 40%. And now, like, I mean, if you take out grocery, I'm sure most stuff in Walmart is not made in America.

• 2:44:23Ben Gilbert?

  Yep.

• 2:44:23David Rosenthal?

  You know, when 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, also like you just, at a certain point, you cannot pay American labor, the wages that you need to pay them and price products where Walmart needs them priced. Like, it just does not work. You have to offshore it. So that's one issue. And, you know, you could argue about whether that's good or bad, but certainly now, you know, post-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

• 2:45:08David Rosenthal?

  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 of that like comes at a real cost.

• 2:45:21Ben Gilbert?

  And quality wasn't afterthought. I mean, even in 92, when Sam published his book, it was only in the last decade where they were realizing how important quality was in addition to price.

• 2:45:30David Rosenthal?

  Now, one area where all of this had a huge, pretty much unambiguously negative externality that I think has gone a long way towards being corrected was environmental impact. You can just imagine all the dynamics we were just talking about, like having a positive environmental impact does not fit into that equation.

• 2:45:48Ben Gilbert?

  Right. You're not using the slightly more expensive power source when you're a vendor to Walmart. You're using the cheapest, no matter how dirty it is.

• 2:45:57David Rosenthal?

  Now, for current management and the previous generation of management of Walmart, to their like big credit in the mid 2000s, they got religion on this.

• 2:46:06Ben Gilbert?

  Yep.

• 2:46:06David Rosenthal?

  And embraced sustainability and positive environmental impact as a way to generate more efficiency. So like Walmart, I think is now the largest US commercial producer of solar power.

• 2:46:20Ben Gilbert?

  Whoa.

• 2:46:20David Rosenthal?

  Because they put solar panels on the roofs of Walmarts and then now in parking lots too. And then it ends up being cheaper.

• 2:46:26Ben Gilbert?

  They also invested a ton in more efficient truck fleets, both in the type of fuel, the shape of the trucks. I want to say they literally doubled the efficiency of the trucking fleet over a decade by just

• 2:46:39David Rosenthal?

  Yep.

• 2:46:40Ben Gilbert?

  little things they did here and there to chip away.

• 2:46:43David Rosenthal?

  And that makes a huge impact because they're one of the largest trucking fleets in the world.

• 2:46:48Ben Gilbert?

  I mean, if you look, there's those graphics that fly around there like, what's the largest employer ever in any state? And like, most of the lower Midwest and much of the South is Walmart. And then there's the other ones that float around. It's like, what's the number one profession in every state? And for half the states, it's truckers. And you're like, hmm, I wonder who those truckers work for in a lot of those states. So yes, it's a massive part of not only the American economy, but of our energy usage.

• 2:47:12David Rosenthal?

  I think it's worth bringing up now, especially given everything that's happened recently and where we live and whatnot. Walmart is one of the biggest, well, was and still is one of the biggest sellers of guns in America.

• 2:47:24Ben Gilbert?

  And they've pared back the AR-15 and the ammo and the, you know, they stopped selling some things, but like only after there was a shooting in their store.

• 2:47:31David Rosenthal?

  Right, right. Now, they still sell guns, obviously. Sam himself, obviously was an avid hunter, had used guns all the time.

• 2:47:40Ben Gilbert?

  Yep.

• 2:47:40David Rosenthal?

  But it wasn't just after the shooting in the store. They've required background checks for a long time, well before that. They stopped selling handguns in the 90s. And now after the shooting in the store, they don't sell guns to people under 21. In 2015, they stopped selling assault rifles. So I'm sure it's one of these issues where like, people on both sides say they're not doing nearly enough, or they're doing way too much.

• 2:48:05Ben Gilbert?

  Too much, yeah.

• 2:48:06David Rosenthal?

  But it is, I think it is a good example of a middle ground. You can argue whether it's enough or not enough or too much, but it like, it's a middle ground.

• 2:48:14Ben Gilbert?

  All these things really come back to that point of Walmart operates at such scale that it is literally just a snapshot of humanity.

• 2:48:21David Rosenthal?

  Yep.

• 2:48:21Ben Gilbert?

  And so if it's a facet of our national conversation or things happening in the world, it's going to be happening at Walmart.

• 2:48:28David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:48:34Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:48:45David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:49:05Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 2:49:18David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:49:29Ben Gilbert?

  Let's move on to grading. How do you think we should grade this one?

• 2:49:32David Rosenthal?

  Yeah, I think we should go for it. I think we should give an overall grade to Walmart, the company, encompassing the whole body of work. The Walton early days, the first several decades, the 40.1% annual compounding in the seventies, the 32 and a half in the eighties.

• 2:49:53Ben Gilbert?

  Three right now.

• 2:49:55David Rosenthal?

  Yeah, three, two, I think it's less than three now. I think it's growing slower than the American economy. Well, maybe not this year, but in recent years. I think let's do the whole totality.

• 2:50:06Ben Gilbert?

  Well, I mean, the way to do it on a year by year or annualized or even decade basis would be the same way that we did Berkshire, which is effectively look at their annual growth rate, set some hurdle rate and then decide what constitutes an A+ and what constitutes an F and do it on a fine grade basis year by year. We're not actually going to do that. And is it a cop out to say that like it's an A++ from founding through the eighties and mid nineties? And then it's been a D on exploiting the next big opportunity since then? That's how I feel. It feels weird to roll those into one letter.

• 2:50:45David Rosenthal?

  Well, I think if we were going to break it out into sub grades for eras, I think I would actually do three eras. I would do. The Walton era, including the seventies and eighties, A++ plus plus.

• 2:51:00Ben Gilbert?

  Yeah.

• 2:51:00David Rosenthal?

  Plus, right? You can't say enough pluses there. Then I think that actually the nineties is also an A plus.

• 2:51:07Ben Gilbert?

  And like literally grading for shareholders. We're not grading for the multi stakeholder world that we live in of their communities.

• 2:51:14David Rosenthal?

  They're grading just purely the business and for shareholders. I think the nineties also an A plus. The super centers like amazing. What a huge innovation. And that was not really Sam that led that. And was also a big part of driving the nail in the coffin of Kmart and is now 55% of the business.

• 2:51:34Ben Gilbert?

  Dude, so let me tell you about the nineties. In 1992, they came in growing 34%. And by 1997, they were growing at 12%.

• 2:51:48David Rosenthal?

  Hmm. Okay. Okay. Fair.

• 2:51:50Ben Gilbert?

  That was like the quintessential decade of their decline.

• 2:51:54David Rosenthal?

  Did growth reaccelerate at all as super centers came online?

• 2:51:58Ben Gilbert?

  It accelerated from 97, it was down at 12% and then it peaked again in 2000 at 22%. But then it's been all downhill from there.

• 2:52:10David Rosenthal?

  Interesting. Interesting.

• 2:52:12Ben Gilbert?

  I mean, you could say all their job really has been since 2002 is to stay the same size. As e-commerce became a thing, literally just defending the castle would have been an A plus. And maybe that is actually a pretty reasonable way to analyze it. Not that it would have been a good idea to invest a dollar necessarily in 2003 and pull it out today. But what is a win if you are already the world's largest retailer? Stay the world's largest retailer through a transformational technology wave.

• 2:52:46David Rosenthal?

  Which they've done. I mean, Sears didn't do that.

• 2:52:49Ben Gilbert?

  No, but we'll put this graph up on the screen. If you look at the gap that Amazon closed in total revenue since the time they were founded to Walmart, they're gonna catch them, no doubt about it.

• 2:53:00David Rosenthal?

  Oh, yeah, for sure.

• 2:53:01Ben Gilbert?

  And it's a little bit of a deceptive graph because part of it is AWS. So there's high margin revenue in there. There's a completely second business.

• 2:53:08David Rosenthal?

  Oh, it all counts. Like Walmart could have done that.

• 2:53:11Ben Gilbert?

  Right.

• 2:53:12David Rosenthal?

  Scoreboard, right? You look at the scoreboard.

• 2:53:14Ben Gilbert?

  Right.

• 2:53:15David Rosenthal?

  Okay, so maybe then 90s is not an A plus. But I still like the super center innovation is huge. But yeah, and then I do think that the 2000s and particularly the 2010s, pretty uninspiring for Walmart.

• 2:53:29Ben Gilbert?

  It's a little silly because like, what actually should you be going for? If Sam Walton cared about the acquired scoreboard, they should have been done in like 1995 or even 2002. We're penalizing them for continuing to exist and doing worse than they did before. So I don't know. I'm unwilling to grade this as one single thing. I'm willing to say it was an A plus up through Sam Walton's death. And then since then, I'll go from like a D to a B because they have actually continued to be the world's largest retailer through tremendous upheaval in the world. And stayed nimble enough to do that.

• 2:54:04David Rosenthal?

  All right. How about perhaps a less controversial or more straightforward way of grading? I would grade Made in America as an A among the canonical tomes that we've used as main sources on acquired.

• 2:54:21Ben Gilbert?

  Okay, like Shoe Dog, Made in Japan.

• 2:54:24David Rosenthal?

  Yeah, of that ilk.

• 2:54:26Ben Gilbert?

  Yeah, sure.

• 2:54:27David Rosenthal?

  So Sam's co-author, who we've mentioned of Made in America, John Huey. Do you know anything about who John Huey is?

• 2:54:37Ben Gilbert?

  No, no idea.

• 2:54:38David Rosenthal?

  He.

• 2:54:40David Rosenthal?

  After writing the book, became the editor in chief of Time.

• 2:54:44Ben Gilbert?

  Oh, wow.

• 2:54:45David Rosenthal?

  And do you know who he replaced as editor in chief of Time?

• 2:54:50Ben Gilbert?

  Is it someone else's co-author?

• 2:54:53David Rosenthal?

  Walter Isaacson.

• 2:54:54Ben Gilbert?

  No way.

• 2:54:55David Rosenthal?

  Yeah.

• 2:54:56Ben Gilbert?

  No one's co-author, but wow.

• 2:54:58David Rosenthal?

  You know, it was written as and because Sam was dying of cancer. So it really has a feel of Steve Jobs and Isaacson, Steve Jobs book. And like, you know, reading it like Sam knows the end is near. He's writing this as he's dying. It's really good. Just highly recommend.

• 2:55:17Ben Gilbert?

  For sure. Okay. I'm sick of this grading. That's not really grading, so let's do carve outs. And also I just got a text. Your Walmart order was delivered. Thanks for shopping with us. Reply help from Warren. So I have to go run and pick up my Walmart order.

• 2:55:30David Rosenthal?

  Oh, you gotta go get it.

• 2:55:31Ben Gilbert?

  My carve out is a podcast that almost certainly no one has listened to because our audience overlap has to be approximately zero, which is the I am home podcast, which is the official podcast of the Nebraska Furniture Mart, which many of you will now know is who listened to our Berkshire episodes will know is a Berkshire Hathaway company. And this is the venue that Ted Weschler chose to go and give a wonderful interview. And so it is so cool to hear one of the big managers at Berkshire these days. And I think Ted's the one that did the Apple investment to give an interview, a very rare interview on the Nebraska Furniture Mart's I am home podcast. So that is my carve out.

• 2:56:14David Rosenthal?

  So good. It's in my queue. I haven't actually listened to it yet, though.

• 2:56:17Ben Gilbert?

  Dude, he even talks like Warren. It's crazy.

• 2:56:20David Rosenthal?

  So, okay, here's what I'm curious about, though. Is the content of the podcast about discussing furniture?

• 2:56:26Ben Gilbert?

  No, it's about what's your day to day like? Give us your story. How did you find your way to Berkshire?

• 2:56:31David Rosenthal?

  So fun. I mean, that's obviously better, but I'm kind of curious what Ted's furniture preferences are.

• 2:56:36Ben Gilbert?

  I think he does talk about that. He bought a bunch of furniture for his house from the Nebraska Furniture Mart.

• 2:56:41David Rosenthal?

  I love it. Is he like a modern guy? Is he a classic guy?

• 2:56:44Ben Gilbert?

  Listen, tune in and find out.

• 2:56:45David Rosenthal?

  Are we talking Mediterranean here? Like?

• 2:56:47Ben Gilbert?

  I don't think Mediterranean, if I had to guess.

• 2:56:49David Rosenthal?

  My carve out is a carve out that has been unacquired before.

• 2:56:55David Rosenthal?

  It was your carve out, but in a different form. Oh. And that is The Godfather. The film. You did do it as a carve out, right? Parts one and two. Parts one and two, yes. Both parts. So good, which I also have recently rewatched. So good. But you know what is even better that I read for the first time? And I can't believe I hadn't read it until the last month or two. Is it the book? Is Mario Puzo's book, The Godfather. It's so good. I think it was better than the movies. Eh, it's as good as the movies. Yeah, careful there, buddy. And I watched both after reading the book. As with anything, when you read the book, you understand so much more about what's going on, why, motivations.

• 2:57:40David Rosenthal?

  Because I feel like especially in movies made back then, you can argue whether this is good or bad. I see both sides, but they left a lot more ambiguous. Like they didn't like explain everything as much as movies do now. Which is great. Which is so great. It's back when film was an art form. It reminds me, not as much as this, but I also did the same thing with 2001 A Space Odyssey. A couple of years ago, I read the book and I had never understood, like the movie, I was just like, this is crazy. You're like, what the hell is the last scene? But then you read the book and you're like, oh, now I totally understand what's going on and I get it. And it's awesome. It's a little bit like that with The Godfather, with the book.

• 2:58:20David Rosenthal?

  And large parts of Godfather, part two are interspersed in the book in part one. It was never intended to be a series. Like it's all just one book. So you get a lot more kind of like, as you go, like Vito's history. Like the Italian backstory is actually part of the first main volume. And when Michael is off in Sicily hiding after he murders the Turk and the police captain. All right. On my list, adding it. It's good. It's good.

• 2:58:53Ben Gilbert?

  With that, listeners, thank you so much for being on this journey with us. After you finish, come discuss with the other 12,000 smart, clever, kind, appreciative members of the Acquired community at acquired.fm/Slack. If you want more acquired, I know this episode is going to clock in like three and a half hours or something insane. But if you're like, you guys, I need more. We just dropped an awesome, awesome interview with Patrick Campbell, going through like things that don't often get discussed about acquisitions for his over $200 million acquisition of ProfitWell by Paddle. That will be coming to the public feed soon that you can find by searching Acquired LP Show in the podcast player of your choice and is already live

• 2:59:34Ben Gilbert?

  at acquired.fm/lp for paid subscribers. And we've got a job board. Go check it out at acquired.fm/jobs. We here on the Acquired team look at every single one of those and our jobs that we think are interesting. So if you're looking for your next shtick, consider that. All right, David, anything else?

• 2:59:56David Rosenthal?

  I don't know what else we could say at this point.

• 2:59:59Ben Gilbert?

  All right, listeners, with that, we'll see you next time.

• 3:00:02David Rosenthal?

  We'll see you next time.