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Season 11, Episode 1

Limited Partner Episode

July 18, 2022
July 18, 2022

The Complete History & Strategy of 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!

If you want more Acquired, you can follow our newly public LP Show feed here in the podcast player of your choice (including Spotify!).


  • Thank you to our presenting sponsor for all of Season 11, Fundrise! If you’re considering raising a growth round of capital in the next year, you should definitely explore raising some of it with the Fundrise Innovation Fund. Just email to, and tell them Ben & David sent you. And if you’re an individual looking for exposure to private growth-stage technology companies, you can invest in the Innovation Fund here.
  • Thank you as well to Pilot and NZS Capital! You can register for the NZS Talkback here.

Walmart's Playbook to Become the World's Largest Company:

🥇Expect to win

Sam Walton got used to winning as an undefeated high school football champion. He carried this through the rest of life and always set nearly unreachable goals... then did the impossible to reach them!

Sam: "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. 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."

🛒 📝 Shop the competition

Sam Walton believes he spent more time in Kmart stores than Kmart management itself, exploring his enemy from within. He always had his yellow legal pad, taking notes on everything they were doing right. He had an intense focus on learning what the competition was doing and stealing the best ideas.

While often founders may deride and downplay their competition, focusing on what they’re doing wrong, Sam was ruthless in stealing and adopting everything they were doing right.

🌊 Surf the discounting wave

Sam Walton created the idea of the mass-market discount store, which is so ubiquitous today... we can't imagine life before it! His creation had two major components:

1. Selling items at extremely low margin and relying on volume to make up for it, and

2. Selling *some* items as zero or negative margin to entice people to come into the store, while making profit elsewhere.

It was a completely new concept in the 60's, and today "discounters" represents over 87% of all retail!

If there is a wave you see coming in a technology, industry, or customer behavior, grab a surf board :)

⚙️ Don’t buy anyone else's inefficiency

Of the retail trifecta, "Price, selection, convenience", price really, really matters in retail. Especially in the rural US in the 1960s and 70s. And to win on price, a business must stay extremely close to its suppliers, relentlessly negotiating low prices, even if it means a contentious relationship with them. 

🍺 Sometimes (but rarely), your ambition is SO vast you need more in-house core competencies than you think

When Walmart started, they didn't imagine they'd need to build their own logistics and distribution network in house. This was something Sam's inner future Bezos believed they could outsource.

But ultimately Walmart’s logistics infrastructure turned out to be a key competitive differentiator that helped keep their prices "always low, always". They even went on to discover they needed to build their own $24m private satellite network! 🛰


Carve Outs:

‍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.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
July 18, 2022

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
July 18, 2022


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
July 18, 2022

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
July 18, 2022


Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as’s contribution — there is likely more revenue in other segments that’s also attributable to, though we can’t be sure how much. (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
July 18, 2022

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
July 18, 2022

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
July 18, 2022

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
July 18, 2022

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
July 18, 2022

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at:
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here:
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at:

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

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

David: So, so great.

Ben: Welcome to Season 11, Episode 1, the season premiere of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

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

Ben: We are your hosts. When we did our Sony episode, we discovered that many Steve Jobs-isms really started as Akio Morita-isms. In all of the research for today's episode, we learned that many of the mental models and quotes ascribed to Jeff Bezos were really the original thoughts of Sam Walton, but of course, that is also not entirely true either since Sam Walton's greatest gift was the ability to digest, learn, adapt, test, and integrate new ideas from others.

Today, we explore Sam's creation which ushered in a new era of American retail and now global retail from the post-World War II period all the way to today. Some astonishing stats on the company is it's the largest by revenue in the world doing nearly $600 billion a year in sales.

David: Although Amazon is close behind now.

Ben: That'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.

David: 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 where it's technically true but not in spirit. Do you know what those places are?

Ben: No.

David: San Francisco, Seattle, Boston, and the fourth place is Manhattan in New York City. It's 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.

Ben: What, 2 ½ hours to get there or something?

David: Yes.

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

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

Ben: Yeah, it's fascinating. This really is one of the most classic business stories in America or in the world. I can't believe that we're not covering it until now. Let's start Season 11 with a bang. There are so many lessons that are totally applicable today, and every entrepreneur can learn from Sam Walton.

For our presenting sponsor in this episode, we are going to break some news about a fascinating new product and strategy that is very relevant for all the founders wondering where their next round of capital will come from. It is Fundrise. Long-time listeners know about their real estate investing product, but their company journey and philosophies are absolutely fascinating. Their CEO and co-founder, Ben Miller, is with us here today. Welcome, Ben.

Miller: Thanks for having me, guys.

Ben: You've built the largest private investment platform in the world for retail investors. Just so listeners have some numbers around that, that's over 350,000 individuals invested with Fundrise totaling $7 billion of real estate. You've done this with zero institutional funding. Can you tell us the story of your capital journey and how it leads to this big announcement?

Miller: We started Fundrise shortly after the great financial crisis. The goal was to try to build a better financial system that was different from what just blew up. The last bubble happened because of imprudence, incompetence, bad incentives, and a little bit of greed. I was concerned when we started Fundrise that if we were owned and funded by the same types of financial institutions, they would actually prevent us from doing what we were trying to do.

Ben: I know that you raised from one individual early on, and then by the nature of the product, Fundrise lets individuals invest in real estate. You basically looked and realized we can actually fund our business instead of raising the traditional venture route from our customers. I think I have this number right. You've raised $155 million into Fundrise—the operating company itself—from your customers.

Miller: Right. It was a complete regulatory innovation. From a scale point of view, we dwarf most venture funds, so why would we turn around and raise money from a venture fund? With all of their incentives for short-term flips, they have to raise their next fund. Our customers are clearly like our business. They're invested in our product. Why can't they also basically participate and help build the company?

Ben: What I understand that you're doing now is you basically said, oh my gosh, it worked. Raising from these individuals on the Fundrise platform for Fundrise was great. I suspect we can do this for other companies too. What are you launching?

Miller: We are launching a registered fund called the Fundrise Innovation Fund. What we're going to do is take all the advantages that we got. There's long-term capital, alignment from the customer, and all the benefits of being public without actually having to go public. We'll handle all the regulatory burden and invest in private tech companies.

Ben: It's awesome. There are a lot of founders that listen to the show, many that will raise a growth stage round here in the next 6, 12, or 18 months. Why is it interesting for them to raise from the Fundrise Innovation Fund?

Miller: The fund is a billion-dollar fund offering. It's a perpetual life fund so it has no incentive to ever sell. You go public, we're a long-term holder. Google, Facebook, all these companies, why would you sell when you went public? The only reason is because the venture investors had to pay their LPs and take their 20% carried interest.

We don't take a 20% carried interest and we don't have normal LPs. It's just a 1.85% asset management fee a year, which is much less than 20% of a typical venture fund. We're just structurally better in incentives. I think it's the future of venture capital.

Ben: Listeners, if you're considering raising a growth round in the next year, you should definitely, definitely explore raising some of it with Fundrise and their Innovation Fund. Just shoot an email to If you're an individual looking for exposure to growth-stage tech companies, especially in this new, more interesting climate potentially to be a growth-stage investor, you can go to Our huge thanks to Fundrise.

After you finish this episode, you should come discuss it with the 12,000 other smart, curious members of the Acquired community at If you are dying for more Acquired, go check out the Acquired LP Show. You can search for that in any podcast player.

The next episode will be an interview with Patrick Campbell on all the juicy details of how his $200 million acquisition of ProfitWell went down step by step deal point by deal point. If you want that early, it is already live for paid Acquired LPs at or by clicking the link in the show notes.

David: It's so cool. Patrick totally bootstrapped ProfitWell almost like Sam Walton totally bootstrapped Walmart.

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

David: Indeed. 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 by going back and rereading The Everything Store and finding out that it was one of Bezos' favorite books and formed the blueprint of how he thought about Amazon in the early days. What's cool reading it is it just struck me that Sam and the Walmart story is the bridge between the business America that was John Rockefeller and Standard Oil and Amazon and Jeff Bezos. This is the connective bridge between those two realities.

Ben: In many ways, he was the last of the Rockefeller-type tycoon, but the first of the modern mega-corp almost-tech business era founders.

David: Very much tech business. What shocked me reading the story is how much Walmart and Sam embraced technology. I think they were arguably the first corporation in America to embrace computing as a business paradigm.

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

David: Okay, we start back in March 1918 in Kingfisher, Oklahoma, which is right in the middle of Oklahoma, not too far from Oklahoma City. At the time, in 1918, the population of Kingfisher was 2500 people. Today, it is a much larger, bustling metropolis of 5000 people, but of course, those 5000 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.

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

David: This is crazy, 2500-person Kingfisher around this time is also the birthplace of the Coleman Company, the outdoor camping gear. It started in Kingfisher, Oklahoma.

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

David: I think that might be right.

Ben: We're on an accidental CPG retailing kick here.

David: I know. It's so great. Anyway, back in March of 1918 in Kingfisher, one Samuel Moore Walton was born to Thomas Gibson Walton and Nancy Lee, their first oldest child. 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 and the country is modernizing.

They wanted to move up in the world, so his dad goes from working on the farm himself to getting into farm financing. He becomes a mortgage broker for farms, working with his brother in the business. This is a theme that's going to recur in the Walton family.

Speaking of brothers, in December 1921, Sam gets one for himself one James Lawrence Walton, 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 truly, genuinely lovely town of Columbia, Missouri.

Ben: Home of Capital Camp.

David: Yes. Home of the University of Missouri, Capital Camp, Permanent Equity, and our friend, Brent Beshore, there.

The '20s were good times for the Walton family. Unfortunately though for Sam and Bud—maybe fortunately for Walmart—they don't really get shaped by the '20s. They're still little kids growing up in their '20s. What really shapes them is the '30s. The '30s were very, very different for all of America, but the hardest hit part of the country during the Depression was the Midwest farming community because of the Dust Bowl.

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 and crops failed. What was the Walton family doing at this time? They were doubly leveraged. It wasn't just that they were farmers. They were financiers of farmers.

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, foreclose on them. Literally kick people out of their farms and out of their homes. He would bring Sam and Bud along with him for this.

Ben: I remember reading in Made in America, I 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. They're like, whoa, there were no deals or negotiations that seemed to be struck. We are foreclosing and we just have to be a good human to you. This is definitely happening.

David: That's probably why he brought the kids along. It's probably hard for somebody to attack him or get too mad if he had his two little kids there with him.

Ben: I wonder, yeah.

David: Crazy times. But yeah, all of this makes an impression on Sam. Sam says in the book in his very same way, "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."" He says after all this, "One thing my mom and dad shared completely was their approach to money: they just didn't spend it."

Ben: I think we've already made that point, but the Walton family goes on to be the wealthiest family in the world. All of Sam's future generations are worth a few $100 billion 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 family.

David: Yeah. Incredible to go from that to this in two generations. Like many kids during the Depression, Sam and Bud, as they're growing up, do all sorts of odd jobs around the house to help out the family. Their mom goes to Colombia, gets some cows, and restarts part of the farming business. She starts a milk business where they help out in milking the cows and delivering to neighbors in Colombia.

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

Ben: He learned retailing at a young age though.

David: Indeed. Then of course, like every good Acquired protagonist, he gets a newspaper route for the Columbia Missourian just like Warren Buffett.

Ben: That's right. That was on Berkshire Part I, that episode we did.

David: Yeah, I think that was part one.

Ben: That's right because he delivered The Washington Post before later going on to become a major shareholder.

David: Besides all of these proto-entrepreneurial ventures that Sam is undertaking as a teenager, he also becomes, at age 13, the youngest Eagle Scout ever certified in Missouri history. Ben, you're an Eagle Scout, how old were you when you became one?

Ben: I got one just in the nick of time when I was 17 ½. 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 these are the rules now, I don't know if it's the rules then—until you're 12, 11 ½, or something like that. It's when you graduate Cub Scouts. Sam got his Eagle at age 13, so it must have been the only thing he did for that 1 ½ year or whatever. That's the fastest advancement to go through five or six ranks in that short period of time.

David: Maybe he counted raising the rabbits and pigeons.

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

David: The other thing—this is pretty crazy—that young Sam as a teenager exhibits is he becomes the quarterback of the football team in his high school. Sam, if you've ever seen any photos or videos, is such an incredible folksy dude. Listening to his talks is just amazing. He's 5'9" 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. It was crazy. He writes about this in the book. He says, "I think that record had an important effect on me. It taught me to expect to win, to go into tough challenges always planning to come out victorious. Later on in life, I think Kmart or whatever competition we were facing just became Jeff City High School, the team we played for the state championship in 1935. It never occurred to me that I might lose; to me, it was almost as if I had a right to win. Thinking like that often seems to turn into sort of a self-fulfilling prophecy."

Man, was that Sam Walton.

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

David: Both of these forces shape Sam, the Depression, the Dust Bowl, foreclosing on farms, his dad's struggles, and he never loses a game. All of that goes right into Walmart.

Ben: So much of Walmart is trying something, doing an experiment, watching it fail on some small scale, and 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 in 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.

David: That was actually Walmart number two. It was in Harrison. We'll get there, but yes, a legendary story. 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 an ROTC scholarship. He still has to pay his living expenses, and mom, dad, and the family aren't going to help out. There's no money in the family.

He keeps his newspaper route, but he's busy and he actually has political aspirations on campus. He becomes the president of the class. He's greeting everybody. He's in ROTC. He's busy, so he hires a few people under him to actually do the delivery of the newspapers and help scale the business.

By the end of college, he's making $4000–$5000 a year from his newspaper activities, which is huge. We're going to get into what his first job pays him in a minute, but $4000–$5000 a year in the '30s during the Depression is a lot of money.

Ben: Yeah, it's crazy.

David: There's a great quote in the book from the circulation manager of the Missourian that says, "We hired Sam to deliver newspapers and he really became our chief salesman. When school started, we had a drive to get the kids in the fraternities and sororities to subscribe. And Sam was the boy we had do that because he could sell more than anybody else. He was good. He was really good."

Ben: It's so interesting that this story parallels the Warren Buffett story in so many ways, but the reasons that they're successful are different. Warren's is about understanding the value of compounding. It's not that Sam didn't, but it's that Sam was a salesman. He's a merchant. He's a retailer. He understands how to learn what people want, procure the thing in the way that they want it, and deliver that to them. They're different superpowers that manifested both in building early successful periodical distribution sub-companies.

David: 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 going to go get a regular job even though he's making so much money from his newspaper businesses.

He interviews with two companies who recruit on campus, JCPenney and Sears. He goes with the offer from JCPenney.

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

David: Yes. I think the first house we lived in in Seattle was a Sears catalog home. This is what's funny. Sam really keeps it real in the book. You could tell this backward-looking narrative of he connected all the dots, he wanted to go learn retail, and 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." 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 to pay tuition. "So I decided to cash in what chips I already had. I visited with two company recruiters who came to campus. Now I realize the simple truth: I got into retailing because I was tired and I wanted a real job."

Ben: Wow. It would not bring him any rest though? Maybe this first job at Penney's or as he calls it, Penney. I don't think he colloquializes the way that people did in our era. I always called JCPenney Penney's.

David: Right. He ultimately ends up getting to meet James Cash Penney himself.

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

David: I know, isn't that awesome? James Cash Penney.

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

David: We're going to talk a lot about Sol Price. He's tired. He just wants a regular job, but he's this natural-born salesman. He goes to work in the Des Moines, Iowa store of JCPenney as a floor salesman and he does great. Literally, James Cash Penney comes and meets with him himself.

The story that Sam tells is JC shows him how to tie packages and 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.

Sam has been in ROTC, he's commissioned, and he's going to join the army. He was looking forward to this. Bud, his brother, joins the Navy and becomes a decorated bomber pilot in the Pacific. Sam thinks he's probably going to go off to Europe, but he fails the physical exam for combat duty. Turns out he had a heart irregularity. He's depressed. He's unhappy about Bud's going off to join the Navy and Sam is going to stay home in America at a desk job.

Before he gets his commission, he leaves De Moines and goes back to Oklahoma. Not exactly sure why, he just traveled back to Oklahoma. He says in the book that he was depressed at the time. He ends up in Claremore, Oklahoma, which is a small town outside of Tulsa.

Ben: It's interesting to point out. We've mentioned six or seven towns so far. 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 references that we've made so far.

David: There, one night at a bowling alley in Claremore, he meets and falls in love with a girl named Helen Robson. Helen was from Claremore, but her father, L.S. Robson, unlike Sam's family, was a very wealthy and successful businessman, financier, and trader in the broader Tulsa area.

He ends up taking a big shine to Sam and would become hugely influential along with Helen because he marries Helen, of course. Sam would say, "The Robsons were very smart about the way they handled their finances: Helen's father organized his ranch and family businesses as a partnership, and Helen and her brothers were all partners. Helen has a college degree in finance, which back then was really unusual for a woman, and Mr. Robson advised us to do the same thing with our family, which we did way back in 1953."

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%.

Ben: 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 hold shares in each store—the management, different people who wanted to invest in the store, and 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. Of course, Sam's the guy, but there were a lot of family meetings to make decisions for the business.

David: This is why, because the family was all partners in Walton Enterprises. They couldn't just sell their stock and the partnership. The family as a whole had to decide to sell. That allowed them to keep majority control of Walmart all through 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. Then, 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, going off and doing fancy thing—"

Ben: Buying NBA and NFL teams.

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

Ben: I love that wording.

David: Sam and Helen get married and Sam gets posted in a bunch of places all around the country doing internal intelligence work for the army. He goes to Utah and plenty of other places. 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, her family, and her father, L.S. They're financiers, so he knows, I now have access to some amount of capital. I can be an entrepreneur. I don't necessarily have to work for somebody.

When the war ends, L.S. initially wants them to move back to Claremore, but Helen and Sam decide together. They're like, well, we want your support, but we don't want to be totally under your wing and in your shadow.

Sam got big ambitions. He and a buddy decide that they want to buy a Federated Department Store franchise in St. Louis. They're going to be big. He comes from JCPenney in Des Moines. He wants to be a big city department store owner, magnate, and entrepreneur.

Helen vetoes this outright. We would not be talking about Walmart if Sam had moved the family to St. Louis. Helen says, look, one, I don't want you doing any partnerships with non-family members. Sam says, "Her family had seen some partnerships go sour, and she was dead-set in the notion that the only way to go was to work for yourself and for your family."

Two, she says, "I don't want to live in a big city. I want to go live in a small town where I grew up 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."

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

David: Totally. It's crazy. She had an undergraduate degree in finance for a woman at that time. She was very involved obviously in the strategy of the business.

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

David: It could not have been a large number. Also, kudos to the family, L.S., and his wife for encouraging her. She had brothers. It would have been easy for him to say, oh, okay, the boys are all going to take over the business.

Ben: Which is what we saw in The New York Times family.

David: Or the Rockefellers too. Sam doesn't stay down for long. I think he was a little disappointed that his wife had overruled him, but he finds a way. He goes back to the company that owned Federated, which is a company called Butler Brothers. They were franchisors of Federated. They're based in Chicago.

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? The Butler Brothers guys are like, we don't really do department stores in towns like that, but we do have another spin-off operation that we run, which is our variety store franchising business.

Ben: There literally weren't enough people they believed to support a department store. Variety stores are like glorified general stores. When you think about a town that's 2000, 3000, or 4000 people, it really is like if you visited an old west town and looked at a general store. It's like on steroids, but a few decades later.

David: Variety store businesses, that's exactly it after the Depression and World War II. That was how small towns and areas were serviced to retail. They're mostly franchise operations. This particular one was Ben Franklin, the brand name. Benjamin Franklin general store type of place.

Ben: When you say franchise operation, because it's way too much of a burden to source your own inventory, carry your own inventory, and maintain all those different vendor relationships, if you're in one of those towns, you're serving 2000 people and you're the one store there, what you really want is to sign a contract and just get the shipment of the stuff that goes into the Ben Franklin stores in all the small towns.

David: Yeah, 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 were also called five and dimes if you've ever heard that term.

Ben: A 5¢, 10¢ store.

David: The reason for that is that in most of them, every item in the store was either priced at 5¢ or 10¢. That was the level of sophistication here. The other big, big difference between how the stores operated in modern retail today, which says I'm really invented, was they weren't self-service.

Ben: He didn't invent that. He stole that.

David: We're going to get to it. So you would walk into these stores and there would just be a counter area upfront that had clerks. 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.

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

David: The merchants weren't making the decisions on the inventory. It was all just being handed down on high from Butler Brothers back in Chicago.

Ben: Yeah. I did not understand when reading this book when he kept referencing stores that were not stores where you walked around and got your own stuff off the shelf, that that is a modern concept. That is crazy.

David: I don't know exactly how the department store model worked like JCPenney or Sears where Sam had worked, but it was also not really what we're familiar with. I think when Sam was working as a salesman in Des Moines at Penney's, it was an even higher touch version of this, I believe, where a customer would come into the store, the salesperson would greet them, escort them around, and curate their shopping trip. Very, very different experience.

Butler Brothers—Sam's having this conversation with them—are like, well, probably, you want a Ben Franklin franchise, and it just so happens that 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.

Newport is a little town of about 7000 people. It's in eastern Arkansas. If you know where Bentonville, Arkansas and Walmart are today, it's not in eastern Arkansas. Sam is like, great, I'll take it. Now, you have to ask yourself, it is 1945 in America. The war has just ended. Unlike 1945 in Japan like we talked about with the Sony story, retail in the US is booming.

Ben: Everyone's coming home, there was the G.I. Bill, everyone's got new homes, everyone's starting families, and there's a lot of stuff to buy.

David: 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 7000-person town. Everybody in retail should be making money hand over fist right now.

The question that Sam didn't ask himself and should have was why does this guy want to sell? He says in the book, "A guy from St. Louis owned it, and things weren't working out at all for him. He was losing money, and he wanted to unload the store as fast as he could. I realize now that I was the sucker Butler Brothers sent to save him. I was twenty-seven years old and full of confidence, but I didn't know the first thing about how to evaluate a proposition like this so I jumped right in with both feet. My naiveté about contracts and such would later come back to haunt me in a big way."

He and Helen buy this store.

Ben: This distressed asset at not a distressed price.

David: Yes. They buy it for $25,000, $5000 of their own savings and a $20,000 loan from L.S., Helen's father. Sam says, this isn't what I dreamt, but 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.

Ben: 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. That really does drive all of his need for experimentation because he finds himself in these situations where he has a goal set and he must invent some way to hit it.

David: It also sets the stage for what was to come. He sets this goal, and then he gets there. This is not a realistic goal.

He says, "Only after we 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 percent of sales—which I thought sounded fine at the time—but which, it turned out, was the highest rent anybody had ever heard of in the variety store business. No one paid 5 percent of sales for rent. And it had a strong competitor—a Sterling Store which was another franchise across the street—whose excellent manager, John Dunham, was doing more than $150,000 a year in sales, double mine."

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. What does Sam do? He goes right across the street into the Dunham Store and he starts trying to figure out why Dunham is twice as successful as he is.

Ben: Yeah. 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 and associates at these stores.

Anytime he's traveling with the family on vacation or anything, he's just going into all these other stores, observing, taking notes, and figuring out what their systems are, what's working, and what's not working, so here he learns that valuable lesson for the first time.

David: So great. I was going to bring this up later, but I think he says in the book that he believes he has spent more time in Kmarts than any nonindividual store employee of Kmart including Kmart's senior management.

Ben: Yeah. Also, we keep referencing Kmart. When I was growing up, it was like Walmart, Kmart. I think Kmart is kind of like Walmart, about the same scale, same size, and kind of a little lower end. 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 Walmart's big brother incumbent.

David: They were the gorillas.

Ben: 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. It's like, well, that really puts it into perspective how big a lead they had.

David: You mentioned a notepad. It's actually a yellow legal pad that Sam uses. Famously, he has this yellow legal pad and he's going into competitor stores. He starts diving into dumpsters trying to get sales receipts, inventory orders, and stuff to figure out how these stores are operating.

He quickly realizes from both Dunham across the street—and also, he's doing this all over the countryside, going into small variety stores all over Arkansas just trying to learn—that price, running promotions, and cutting prices on big marquee attractive items like health and beauty aids, toothpaste, mouthwash, makeup, and that stuff really drives customers in.

He starts doing that and he has some success, but there's a problem. We talked about Butler Brothers as the franchisor. They're controlling all the inventory. Sam as the merchant is just getting whatever they send to him at whatever cost they prescribe.

The Butler Brothers are 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.

What does Sam do? He starts figuring out who the manufacturers are of some of these goods. For manufacturers that are also located there in the south in the Midwest, he starts driving around, knocking on their doors, and asking if they'll do side deals with him and just 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.

Ben: He's operating a small enough scale that Butler Brothers doesn't really notice. To be frank, there wasn't good tracking or accountability at this point. There weren't computers yet.

David: There's no computerized inventory here.

Ben: You'd have to really be paying attention to figure out, oh, maybe Sam is not ordering quite as much of this stuff from us as he should be.

David: 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. He's out, he drives to visit them, and he's got to get a deal done on the spot.

He goes, knocks on the door, and meets these people. He's 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? He says, I bring them the inventory, bring it back, price it low, and just blow that stuff out of the store.

Ben: Which is an invention. This is a brand-new concept that we take for granted now, but it's totally a Sam Walton invention to meet his own needs which is to create something that is astonishingly low price to get people in the store, take no margin on it, and make it a loss leader. Who cares? Get people in the door spending time in your store and they look at other stuff.

This would become a cornerstone of Walmart forever after this and for every other retailer. Even in the pricing of SaaS products now, when you look at it, it's like, oh, I'm on the free plan. It's not that he invented loss leadership as a category, but he figured out how to make it work in the retail model.

David: He figured out how to really merchandise and operationalize. Dunham's across the street running promotions, but Dunham wasn't thinking about, oh, well, maybe I could sell even lower if I go haul my pickup truck out to these manufacturers and get goods at a lower price.

Ben: Right. 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? What could be interesting? You start getting good at doing these direct deals, sourcing your own inventory, and figuring out how to merchandise products that you personally believe will sell.

This is really where he started to hone that skill, craft, and sixth sense for deeply knowing the American consumer—or let's say consumers in this area in his communities—and having a real spidey sense of what would make them go crazy and have a real product-market fit in people's homes.

David: Price, selection, and convenience are the holy trinity of retail, but nobody really knew this yet. Frankly, all of those things are important, but for the majority of people out there in the world, in America at the time, and certainly the vast majority of people in these small towns, it's selection and convenience.

Ben: Life was inconvenient, so you're going to go through some inconvenience to get things. Selection, there wasn't much of no matter what. We just came out of the Great Depression. Price is very important.

David: Customers will go to great lengths to get lower prices.

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

David: It's crazy. He says, "Here's the simple lesson we learned—which others were learning at the same time and which eventually changed 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 $1.00 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 earn far more at the cheaper retail price than you would have by selling the item at a higher price."

Always low prices. Always. Wal-Mart, there it is. We're not quite at Walmart yet though.

Ben: Did you know their slogan for a long time was Always the Lowest Price, Always? But then there was an FTC lawsuit against them where they changed to Always Low Prices because it was false advertising that they didn't always have the lowest price.

David: 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. Then, at some point, they changed it in the '70s to Always the Lowest Price. They're like, we're going to push it even farther. They got away with it for five or six years. The government had a little something to say about that.

All this sounds like Sam says there. It sounds simple, but people didn't know this stuff yet. Retailing had not professionalized. We're not that far removed from Rockefeller, the general store, and post-World War II. This is all new.

This is incredible. He actually hits his goal. By year five of the Newport store, he's doing $250,000 in sales at a $30,000–$40,000 annual profit. Remember, he bought the thing for $25,000. That's including the crazy 5% rent charge in his expenses.

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

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

Ben: 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. He's really showing up on Ben Franklin's radar and the Butler Brothers Corporation's radar, and they 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 of volume and customers.

David: 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 weren'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.

He decides he wants to take over the store. Year five is when the lease expires and there wasn't an option in the contract to renew the lease. The landlord goes to Sam. He's like, you know what, son, you've done a great job. Thank you for turning this property of mine around. I'm going to take it from here.

Ben: Just to contextualize this, it's a 7000-person town. There are not really many other available storefronts. He's got tons of shelves in there with tons of goods. It's 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.

His landlord comes to him and says this and he's like, wait, oh my God, I have no other options.

David: 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 as a saving grace although the reality is Helen's father would have financed Sam's next venture no matter what. But the saving grace for Sam's pride at least was that the landlord did buy out the value of the Ben Franklin franchise license, the hard assets, the inventory, the fixtures, et cetera in the store. He pays Sam and Helen $50,000 to take over the store. I'm going to guess that's a 2X return.

Ben: What was the operating income from the previous year?

David: Thirty to forty thousand dollars.

Ben: Wow, brutal.

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

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

David: Yes. They go up to the other corner of the state in Northwest Arkansas. This is where they started looking around for the next place to set up shop for two reasons.

One, closer to Helen's family in Oklahoma, Claremore. Two, like I said, Sam keeps it real. He was like, there's some really good quail hunting up there and I really wanted to be closer so I could drag my bird dogs out and go hunting.

Ben: 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.

Lots of business decisions being made here on family—we need to be in a small town and we need to only work with family. For Sam, I need to be able to hunt quail in the maximum amount of time that I possibly can.

David: The opportunity that they find and settle on is in a little town of 3000 people—less than half the size of Newport—that already in this town of 3000 people had 3 variety stores operating. Newport had 2 for 7000 people. This town has 3 for 3000 people.

As Sam says, he loves competition. That town is Bentonville, Arkansas. Sam probably almost assuredly is rolling over in his grave right now.

Ben: The new Walmart campus.

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

Ben: Yes. If you thought Warren was a penny-pinching, very plain, no frills, no fancy things entrepreneur, Sam Walton—hard to argue who's more frugal and less showy. Sam eventually got into airplanes for very practical use, but Sam was not a showy guy.

David: 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 start descending on Bentonville. They want to go interview the richest man in America. He still drives an old pickup truck that has cages in the back for his bird dogs because he goes hunting in the four states nearby.

It's this big sensation that the richest man in America drives a beat-up, old pickup truck with cages in the back. He's like, well, what am I going to drive my dogs around, in a Rolls Royce?

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

David: No. 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. Sam decides, 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 franchise network.

He hears through the grapevine that there are two Ben Franklin stores up in Minnesota that were trying a radical new concept. They were redoing the whole way. The store was laid out, the way it worked. They were removing the upfront counters, turning them into checkout counters, and letting customers go into the store, browse the merchandise, pick it up themselves, select it themselves, and then checkout.

He's like, I got to 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 yellow legal pad. He says about that trip, "I liked it. So I did that too"

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

David: I think everybody can apply this to their business. I was thinking about it while reading the book. I started so many passages and I already listened to lots of other podcasts unlike when we started Acquired and I didn't listen to any other podcasts.

Ben: We should find the best ideas and incorporate them, yeah.

David: There's a great quote about this when Walmart actually gets started later. I'm going to tease it for now. On July 29th, 1950, just about 72 years ago, they reopened the Ben Franklin store that they bought.

Ben: Still a franchise.

David: Still a Ben Franklin franchise, still working with Butler Brothers for "most of the inventory." But they want to send a message that this is a new era, doing the self-service new store in Bentonville. They renamed it Walton's Five and Dime and it became the third self-service variety store in the entire country.

Ben: 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, negotiated relationships, prices, and all this stuff, but really what you're buying is people who know what a Ben Franklin is, so they would come to the store.

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.

David: 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. That is completely freaking crazy that a store servicing 3000 people in a little town would handle all of that themselves.

But they launched with a new name. It's a new concept. It's self-service. It causes quite a stir. I couldn't find this exactly, but I believe, in that first year when Walton's Five and Dime is open—remember, the previous Ben Franklin iteration of the store had done $32,000 a year in revenue, something like that—Walton's Five and Dime did $90,000 in sales the first year.

I don't know what the competitive dynamics were between the 3 stores in Bentonville, but remember, the town only had 3000 people. If you assume the previous three stores roughly had an equal market share—it's a big assumption but just for argument's sake—that would mean that the whole market size of Bentonville, the whole TAM, is $90,000. They did $90,000 in revenue, so what was happening here?

Ben: Yeah, is there a massively expanding TAM, did they expand that market because people are just buying more stuff than they otherwise would have?

David: I don't know what happened to the other two stores, whether they went out of business or not. Certainly, they wouldn't have right away. I think what happened was this caused such a stir that people started coming to shop at Walton's Five and Dime from other towns.

Ben: 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 try the cashierless checkout. People came for novelty value here. That taught him the lesson of, oh, maybe we should always have novelty value. Maybe there are reasons why people should be coming to Walmart even if they aren't necessarily looking to buy something.

David: Yup. If you think about it, put yourself in the shoes of customers back then. Sam talks about this a lot in the book. For so long—we'll get into the competition with Kmart—everybody thought Walmart, Sam, and all their customers were just kicks in the sticks. They are just complete morons out there. Nothing could be farther from the truth.

He says, 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.

Clearly, this makes a big splash. Sam realizes that he might have a tiger by the tail here so he starts looking. Unlike in Newport where he was satisfied, the store kept growing and he did $250,000 a year in sales. He starts looking to open up more locations.

Ben: More Five and Dimes.

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

Ben: 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? It wasn't a high-performing store for him, but at least it didn't let them get the square footage.

David: Yes. Clearly, he's very competitor-focused. It's funny. There are so many Jeff Bezos-isms that when you read this book and you learn about Walmart and Sam Walton, you realize that they were originally Walton-isms, Sam-isms, but in the whole Amazon we're customer-focused and we're not competitor-focused, Sam would have said absolutely not. We are absolutely competitor-focused. We're focused on taking the best stuff from our competitors and implementing it here.

Ben: While we're here, we have to say it. Eventually, a Walmart does go back to Newport. 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.

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. Walton did it by discounting but that obviously has an impact on your competitors.

You need to be able to counter a position against someone like a competitor. So when the big realization is, oh, customers always want lower prices, and satisfaction guaranteed, and all the other Walmart-isms, that will have impacts on your competitors. You have to pay attention to those competitors. But ultimately…

David: The customers decide.

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

David: In 1952, just a short while later, Sam opens up a second store in nearby Fayetteville, Arkansas, because again, it's just Sam and Helen, when she can, 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.

The way they convinced him to move to Fayetteville and take over this new concept is they make him an offer he can't refuse. They make him a partner in the store. This is what you were referring to earlier. They give him a percentage of the profits that that individual store makes. 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.

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

So all the pool of existing store managers, whenever they open up another store, Sam and Helen give them the opportunity to invest dollars in the new stores and the new partnerships. Now you're incentivized on the success of the whole network, and you're incentivized to share information. You want everybody to do better.

Ben: They get carry and they should make a GP commit.

David: Exactly. I think this is super brilliant. I was thinking about this, with regard to tech companies today and everything. 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. You're incentivized both on your own personal performance in the store.

Ben: Which is like an RSU-type equivalent.

David: You can't really do this in a tech company, but it's scoped to your performance. It's independent of other store performances. In the equivalent of tech company equity, it's not just that somebody gave that to you or the company gave it to you, you put your dollars into it.

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

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

Ben: 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.

David: Then reading more in the book about this. So during this period and in the early Walmart Corporation period, it was just the store managers who were doing this, not the hourly employees.

Ben: There was a gigantic chasm. I mean, there's still a big chasm today but two completely different classes of humans in those early days between the store managers who were salaried and employed by the partnership and of course the to be called associates but the hourly workers who were not.

David: 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. Then they got equity in these partnerships. It wasn't like these were Wharton graduates that were coming in and doing this

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

David: Totally. One of the first managers was nicknamed The Bear and he had one eye. There are some crazy stories out there. They were bringing donkeys into the store.

Ben: Right. We're talking Walmart. So take us to Walmart, how did we get from the Walton's Five and Dime.

David: 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. This is cool. Home Depot modeled their employee stock purchase program after Walmart's and it's brilliant. It's the same thing. You put up your own money, but you can do it pre-tax dollars out of your paycheck at a 15% discount to the stock price.

Ben: 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 (Employee Stock Purchase Program), Microsoft only lets us have a 10% discount, so it's very kind of Walmart to give a 15% discount for market price.

David: There are stories in the book of hourly associates that made millions of dollars in the '70s and '80s off of the employee stock purchase program. It's pretty cool.

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

David: Yes. It's an amazing story.

Ben: Yeah, we should do that at some point.

David: I'm totally inspired by Sam, 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 newfangled concept is right in the middle of this suburb subdivision, and there's going to be a grocery store, a drugstore, and real estate for a big Ben Franklin store. So Sam calls up Bud and he's like, we got to go in 50-50 on this, this is a huge opportunity. They do, and it is a banger to earn $50,000 in annual sales the first year in Ruskin Heights, 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. This is really a 1960s thing, not only a '50s thing. Sam is convinced though, that it's the future. So he starts going around Arkansas and Missouri evangelizing the towns and city planners about putting in the shopping centers.

Ben: For which they would be the anchor tenant.

David: But it's super slow dealing with local governments. 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. Eventually, because back to Helen's advice, these multi-tenant shopping centers, I see the power in Ruskin, but it's dependent on too many other people. But if I'm willing to invest some capital, I could just put bigger stores in the same locations myself. That's what he starts to do.

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

David: That's a good question. I don't know at this point if they were doing real estate themselves, but certainly, they are building out bigger store concepts, requiring capital to build the stores. It's not like there were existing structures there 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 "family centers" and they start doing unheard of numbers—$1 million, $2 million.

Ben: Are they still sourcing the inventory from Ben Franklin from Butler brothers?

David: Yes. They don't yet have their own distribution, inventory, and logistics network setup. That was the big step of Walmart. These were still just like much larger versions of Ben Franklins and they were working with them to get all the inventory to them.

Ben: Already at this point, they've bent so many rules with Ben Franklin like changing the store layout and concept, where they're going, starting to dictate more terms, and naming them on their own. At this point, they're really starting to treat Butler brothers as more of a component of the Walton business rather than Walton being a franchisee of Butler brothers.

David: Exactly. So these "family centers" that Sam and Bud were building are still Ben Franklin franchises. The Waltons are now taking over more and more of control of the concept, their self-service, they're larger format, but it's still part of the Butler brothers' cartel, shall we say? 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, and all this interesting stuff. But the prices weren't that much different than other stores.

Ben: It's worth knowing that we don't think about the notion of discount stores today being counter positioned against something like all big stores have things at kind of the lowest price you can find them.

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

Ben: Yeah. So there's either specialty high end retail, which is often directly from the manufacturer sort of like vertically integrated or specialty sourced or something, or if you're buying things that we consider a big regular store, they're all discounters. At the time, there were no discounters. Everyone was marking up their goods by about 45%. If you're buying something and then marking it up 45%, it means your gross margin is about 33% as a retailer.

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

Ben: 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 20–24% at any given time, and every store had like a 33% gross margin. Even though Target is like a high end discounter—it's sort of a nicer stuff, more expensive—they're in the 29% category, but everyone was 33% or above gross margin at this point in history.

David: Before this episode, I didn't think of Target as a discounter, but that's what it is. It's a discounter. It is this model that Sam is about to perfect here. So you said there were no discounters yet at this point in time. Just like with self-service, that's not totally true. Actually even more so self-service. There were the two Ben Franklin's in Minnesota that were doing it. You could argue they were first, but Sam was really the first to bring it to market in a real way. There were folks bringing this new discounting model idea to market.

Ben: Was it Ann & Hope? Was that the most successful?

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

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

David: I didn't know. I bet 90% of our listeners didn't know. You probably did know. Sol Price, FedMart Price Club which he starts later, that's Costco. Costco was a merger of Costco in Seattle in the Northwest with Price Club. Costco is the legacy of Sol Price.

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

David: 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. That's Costco.

Ben: Basically, everyone's marking up their goods 45% and nobody has done other than Ann & Hope and a few other select folks that haven't really rolled it out at scale or really popularized the movement. No one has done discounting, but what is discounting? Two major components. One is big loss leadership. 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%. Then when you do that, of course, you don't make as much money per item. But everybody buys more stuff in your store. This hadn't really been proven yet.

David: Yeah, 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. But there's also the peace in the middle, the franchisor, the Butler brothers, remember, they're taking 25% from the manufacturer to Butler brothers, and then out to the stores. That's how most everything operated.

These discounters are like 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 back end, our own supplier relationships, and our own distribution.

Ben: There's a great quote, this is again later in Walmart's development. It's when Sam Walton is informing the Walmart vendor relations team and merchandisers on how to deal with vendors.

He's telling them, "Don't leave in any room for a kickback because we don't do that here. And we don't want your advertising program or your delivery program. Our truck will pick it up at your warehouse. Now what is your best price? And if they told me it’s a dollar, I would say, Fine, I’ll consider it, but I’m 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 who expect the best price they can get. If you buy that thing for $1.25, you’ve just bought somebody else’s inefficiency."

David: Totally.

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

David: There's so much baked into that that people don't even realize. To get to the point where you could do that, you need to operate the entire back-end of retail yourself. Sam and Bud and Walmart, they're starting from they don't have anything. To get to a point where you can have conversations with suppliers like that, you need your own shipping carriers, trucks. You need your own distribution centers. You need your own ordering systems. You need your own technology. They don't have any of that.

Ben: 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 that we can tell the supplier to spin up new inventory so that we will buy it to increase their production. Okay, that's all the future. So at this moment.

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

Ben: And we're in like the 1960s?

David: Late '50s, early '60s at this point, before 1962. He sees what they're doing. They're doing this proto discounting in big cities, and rings around big cities, not necessarily in the primo real estate downtown but where you have access to logistics hubs. You can sort of scrounge together and make this work. The idea that Sam could copy this and go do it back in Arkansas, it's crazy. What manufacturers are going to ship stuff to Arkansas, especially big volume stuff?

He goes, he meets with Sol and Ann & Hope and he's like, you know what, I think I can make this work. I think I can do it. Even he knows what a huge undertaking this is. He actually goes back to the Butler brothers. He's like, we've been great partners. We've really innovated on a lot of stuff together. I've seen this discounting model. I think it's the future. I know customers like low prices. I've got these new large format stores. Why don't we work together on this? I need you to handle the backend. You have the scale to be able to do this. You already distribute out to small towns like mine. Let's partner on this and do it together. And Butler brothers says no.

Ben: By the way, this is like when Vitalik goes to the colored coins guys and says, hey, let's partner on this thing together, distribute a world computer, I think it's the future and they're like no and he's like okay, I'll go start Ethereum. That is this moment for Walmart.

David: 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. they had all these other Ben Franklin franchises out there. 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 going to say?

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

David: Yep. The thing that Sam knew, the minute he saw discounting, was all of those stores were dead anyway.

Ben: Yeah, just a matter of time.

David: Somebody is going to bring discounting to Arkansas, Missouri, Texas, Florida, and everywhere else and those stores are dead.

Ben: It's that insight that people who are 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, so let's not be pejorative. Let's serve them with high quality retail experience.

David: Totally. So 1962, Sam and Bud secured a site in Rogers, Arkansas, which is pretty close to Bentonville. It's got to say, they're going to do this. It's going to be chaos, but they're going to figure out the backend, do this new discounting concept. They just need a name. Sam's got a bunch of candidate names for what to call this new retail concept.

He's talking with one of the early store managers, Bob Bogle, about his ideas. He says, what do you think? Bob says, you've got all these fancy names, but it's pretty expensive. Building the neon signs of Walton's Five and Dime and Ben Franklin. That's a lot of letters. What if you just take part of the Walton name, keep that, make it a place to shop, and call it Walmart. Seven letters, that'll be pretty cheap.

Ben: I love it.

David: The legend is born.

Ben: Sam is basically not mad about this.

David: Obviously, saving money on neon was appealing to his nature. But the other reason he really liked it was he really admired Sol Price and Sol Price had FedMart. That's why he really took a shine to it. So July 2, 1962.

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

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

Ben: Yeah, it's worth pointing out. People often say Sam Walton didn't start Walmart until he was 44. But as you can tell, because we are very deep in the story 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.

David: Yeah, totally. Did it start Newport, Sam's education? Well, it started well before that. But retail entrepreneur education started then, but I think Bentonville's Walton's Five and Dime I think is when you can say it really started. But anyway, July 2, 1962, the very first Walmart opened in Rogers, Arkansas. As you can imagine, it was like chaos. Ben, you were telling the story earlier about the watermelons popping. That was actually at store number two, which was Harrison.

Ben: Is this the one with the donkey rides?

David: Yeah. They had donkey rides and tried to pull together a backend for the first time on their own. Total, total freaking chaos.

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

David: Like a lot less money.

Ben: It's a large square footage store so it's also bigger than most people are used to for a shopping experience. I think when you think about running to a Walmart today is kind of a chore. It's this big parking lot and it's a big standard store. The goal is to make it anything but. The goal was to make it like a UFO is landing in your small town, come see it.

David: Totally. They did all sorts of crazy promotions and circus carnival-type stuff. But at the end of the day, it had low prices on everything.

Ben: Everyday low prices, David.

David: Always the low price. Always. And boy did the customers just love it. So there's a quote from Charlie Cate, who was the store manager of that first Walmart in Rogers. 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. Literally, everything in the store is the lowest price in the whole area. That was the value proposition."

Ben: Which should ring eerily really true to Amazon 40 years later.

David: 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. Later that year or the next year, they opened up two more Walmarts. One in Springdale, which was a much bigger town. That pretty much immediately becomes the highest sales store in the whole Walton empire.

Then a third Walmart, the second one, technically, in Harrison, which we've been talking about. That was also a smaller town. Sam puts it there, we're basically trying to answer two questions with each of these like one, would people in a small town defect and start shopping in this new, crazy, chaotic environment just because of price? Then two in Springdale, which was a larger town, would this idea scale up to a larger town too? The answer to both of those was emphatically yes.

Ben: At this point, they do know they have a tiger by the tail, so they have line of sight to, okay, I bet we can get to like 10 stores. I think Sam even gives an interview where he talks about that's all he would ever want to expand to, something like 10 or 15 stores. He doesn't have a global ambition. In part, the reason for that is he is extremely into overseeing these stores himself.

He wants to be able to visit every single one. He wants to be able to really understand what's going on on the ground, he wants to be able to take the best ideas from one and bring them to the other. He's not really a control freak as much as he's uncomfortable with being disconnected from what's going on in the stores. 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, or somewhere in there because I can't run it. The only way that I know how to run it is if it gets bigger.

David: 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. This is how the legendary, anybody who knows about Walmart corporate culture knows about the Saturday morning meeting, which they actually made monthly I think in the mid-2000s. Now it's optional. Again, Sam would be…

Ben: Rolling over in his grave.

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

Ben: 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 have hourly employees that have to be in your store today. I feel like you can come into a meeting today.

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 we can incorporate things that are working into stores in other places so that we can learn very, very quickly.

David: Yep. Remember, all these managers were equity owners in their own stores, and in most cases, in the stores of all the other managers too. Okay, we keep talking about Kmart. This is crazy. Also, in 1962, the same year as the first Walmart, Woolworth launched Woolco, which obviously doesn't exist anymore, as a discount concept store.

Ben: Their attempt at discounting.

David: The Dayton Hudson Company in Minneapolis launched Target in 1962.

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

David: I know, right? Literally started the same year. And S. S. Kresge, which was a huge nationwide variety store chain based in Detroit, started their own new discounting concept, Kmart.

Ben: 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. If you look at four horses—Woolco, Target, Kmart, which would come out of S.S. Kresge, and Walmart—you probably wouldn't have bet on Walmart to be the dominant one that wins in the discount wave. But they steamrolled the other three.

David: Those other folks because they came out of existing companies weren't as willing to discount on as much. There may be some truth to that, but I think the story is actually a little more nuanced. I think especially Kmart, they were the gorilla and they were really well-run.

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 an amazing story we're going to tell now because all of those others, 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.

At first, that was by far the best. Within five years, by 1967-ish, Kmart had 250 stores all across the country doing $800 million in sales. The new Walmart concept, Walmart revenue was still only around $10 million at that point in time. They are like a gnat five years later. Kmart is like the darling of Wall Street.

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

David: Yeah. They're in Arkansas and Missouri—a regional area. Kmart's now everywhere. They could just leverage this network that they had, all their distribution backend, and 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. 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.

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. 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.

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

David: Totally. Sam has this amazing quote. He says, "The things that we were forced to learn to do, because we started out underfinanced and undercapitalized in these remote small communities, contributed mightily to the way we have 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 Harrisons or the Rogers of the Springdales and all those 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 more business out there in small-town America than anybody including me had ever dreamed of." And of course that they built their own logistics network to service it.

Ben: It's very clear that what they did was, to quote Jathan 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 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 is a dual-pronged approach here between lean, mean, focusing on getting your cost, every penny you possibly can down because your margins on some of these items are going to be so thin.

There was a second component though which is to be a great merchandiser. You both have to be super operationally efficient, but you have to be a good merchant too. Part of this was Sam's spidey sense for what consumers wanted and making sure that they were sourcing that from vendors, that they were putting stores in the right places. We haven't talked about the planes yet, but this is probably a good time.

David: Oh, yes! Let's talk about the planes.

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

David: They didn't have any pilots.

Ben: They had no pilots. 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.

David: By flying sideways.

Ben: 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. It was this, we can do it ourselves, we can do it super lean, and we are not going to hire any middle man to go around all the towns for us and identify spots. No, we'll just fly over and figure out where we want to put a store and we'll figure out how to reach consumers in a way that is bringing them the best merchandise at the absolute lowest operating cost to us.

David: Totally. When I read that story, I was like, ugh, this is amazing. CEO of company decides he needs a plane to be able to travel around faster. He's spending too much time in the car. Sam's like, I'm going to buy a second-hand prop plane with a washing machine motor and I'm going to learn how to fly and fly it myself.

Ben: Amazing.

David: I was thinking about this whole incredibly important piece of the Walmart story where they literally build their own infrastructure for everything from scratch and it reminded me of what we talked about all the time on the show of the Jeff Bezos. Don't build your own infrastructure, focus only on what makes your beer taste better. I think we now have to have a caveat to the Bezos Law. Which is that yes, that is true in most cases, but if what you're doing is in a whole new area and best-in-class infrastructure for what you need doesn't exist, in a case like this, the infrastructure actually can make your beer taste better.

Ben: Oh, if it's actually your core competency. This is a 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 to them at scale, then yeah, you have to do in house.

David: Which makes this the perfect place for the 99% of other companies out there and especially most tech companies and startups to talk about our second sponsor of the episode, our friends over at Pilot.

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

David: Pilot sets up and operates the entire financial stack for startups and growing companies, including finance, accounting, tax, even higher level CFO services like investor reporting. All of which otherwise you would be hiring a bunch of employees to do for yourself or like an old school accounting firm. With Pilot, they take care of all that.

Obviously, we talk all the time on the show about Jeff Bezos and AWS and what we're just saying, focus only on what makes your beer taste better, Pilot is one of the very, very best examples of that not just in and of itself, it is also backed by Jeff Bezos himself and Sequoia, Index, and lots of other great investors.

For the vast majority of companies, hiring your own finance team will net you absolutely zero incremental new customer or product value. Not to mention adding all the overhead and people management complexity that you have to deal with.

The other traditional option before Pilot, and I used to work with lots of companies that did this, was go find an old school accountant in your local area to handle your finances for you. Except old school accountants aren't typically well-versed in the nuances of say a SaaS business, so that was not a great solution.

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

David: Stripe, Brex, Gusto, Shopify, and Square—Pilot plugs into all of those providers. They take literally all the headache of finance and accounting off of your plate as a founder, provide you with a team of financial experts and accountants to both do your books and all the technology and infrastructure like we're saying that you need to get it right.

If you're still using an old school accounting firm or even worse, a startup hiring your own internal finance team, unless it is core to what makes your beer taste better. I know a lot of founders that were doing this too still using QuickBooks yourself, like going and learning how to be an accountant yourself, that is not a good use of your time. Go on over to, make your life way easier, and have them eliminate the pain of tax prep and bookkeeping from your company for good.

Thanks to our friends Pilot Co-Founders Waseem, Jessica, and Jeff. All Acquired listeners, if you use that link, you will get 20% off your first 6 months of service.

Ben: Twenty percent, big discount.

David: Indeed. Thank you Pilot.

Ben: Discounting. 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 1000 employees and the public markets, the reception, the bankers, this was not a household name. Even though it was a consumer brand, you would treat it the way that you treated an enterprise IPO today. It's not like the Airbnb IPO that gets a lot of reception. Some stats on the actual IPO, first of all, it was postponed because the market fell apart on them, much like many startups are going through right now.

But on October 1, 1970, it went public, and only 800 shareholders participated in the IPO. They sold 300,000 shares at $15. That's the actual IPO the night before. Quick math shows they raised $4.5 million in that IPO. It started trading for around $15 and $60 so they had a modest little pop the next day. But they really were not having meaningful research coverage. A lot of the research coverage they were getting was 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, 1971, they did grow top line revenue, 77%. Despite the Walmart that we know of today, they're a very slow growth company. 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 the 2010s, the annual growth rate for Walmart is in the 2–3% range. Not a fast-growing company by a topline revenue by any standards now.

But shortly after the IPO, despite not attracting a lot of attention, that was not the case. We'll link to it in the show notes, but I pulled up in the 1972 annual report which is a gem.

David: Such a good find.

Ben: Compared to the stuff that you need to write now for your annual report, which is mostly compliant stuff that you want to even page through, this is 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.

David: In 1977, they did half a billion dollars in sales going at that rate. I did some math on the [...] by decade. Walmart's compound annual revenue growth rate for the whole decade of the 1970s was 40.1%—40.1% for the whole decade. Then in the 1980s, it was 32.4%. That was starting from a $25 million revenue base.

Ben: Those two decades propelled them and somehow still hold the crown for the highest revenue company in the world. You look at Amazon and some people that you think might be approaching them, approaching but still not better.

David: Still, Walmart is king.

Ben: Yeah.

David: There are two last really important pieces of the story that we need to fill in here. One, during this period actually starting right after those first early years of the first Walmart and that is computers.

Ben: Yes.

David: This is wild. In 1966, just 4 years after the first Walmart goes in, Sam Walton, who at this point is 1966, he is just about 50s, 48 years old, I think?

Ben: Yup.

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

Ben: 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.

David: 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 Marks who was President of the National Mass Retailers Institute and was also at that seminar.

He says, "Without the computer, Sam Walton could not have done what he's done. He could not have built a retailing empire the size of what he's built, the way he built. 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."

Ben: I love that. I literally have that in my notes too. I'm glad that you grabbed that quote. This was the start of Walmart becoming a technology company. We 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.

The way that he made sure Walmart could benefit from this is he always left a 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, do you really think that we need to move our whole inventory system over to computers. That's super expensive. Convince me what we need to do that.

But the fact that he went to these conferences, enrolled in this stuff, created this headcount meant that he was open to it. He just wouldn't be the one to make the decision because he probably wouldn't have picked the right technology choice or might have done it too early or too late. I think this was an interesting compromise for him to do this. Later on, there was a proposal made for a $24 million private satellite network specifically for Walmart.

David: This was pre-dial up. This was in the '70s, right?

Ben: Was it that early?

David: Yeah. I think this was in the '70s and '80s.

Ben: Yeah, you're right, 1987. Let's see, the market cap at this point is probably around $10, $20 billion somewhere in there. They invested $24 million to link all stores with a two-way voice and data transmission and a one-way video communication from Bentonville. Basically, there was not enough bandwidth available on any other communication lines.

David: Yeah, whatever was being used at the time.

Ben: To sync back at a very fast manner all of the sales data from stores. We talked about how Sam was obsessed with getting the data as quickly as possible, learning from it, and disseminating those learnings. They ended up okay-ing a $24 million proprietary satellite network.

Then because Sam had this philosophy, remember he'd thought it couldn't scale past 15, 20 stores of meeting to visit all of the stores himself and have that personal communication, the satellite network enabled Sam to virtually visit these stores from the home office and broadcast satellite transmissions of himself. They eventually instituted this for the Saturday morning meeting too where he would broadcast over their proprietary satellite network in 1987.

David: 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, efficiency, margins, keeping prices low, and beating competition. As they start to invest in computers and they start to bring the talent into the company to do this, including the first person who Sam brings in, who he meets at this conference, a guy named Ron Mayer, who ill-fatedly Sam would briefly make CEO of Walmart.

Ben: Then discovered he was not ready to retire.

David: Yeah, exactly.

Ben: Which is a very TSMC story.

David: Totally.

Ben: Similar to Morris Chang.

David: And he's very gracious to Ron in the book. He says, look, the problem was me, I was not ready to retire. But Ron and the team that he builds in and the technology, they build the first concept of a distribution center. Think [...] Kmart, they have warehouses. You would order goods from your vendors, from your suppliers, come into a warehouse, and then you'd ship them out elsewhere. But they just sit in the warehouse and then you pick stuff off in the warehouse and go elsewhere.

Walmart, as they're investing in technology, started taking daily individual orders for custom whatever SKUs and whatever amounts each store in the Walmart network needs. They buy in big, big bulk, in big packaging from their vendors that come into what used to be called a warehouse is now called a distribution center on one side.

Walmart does a whole bunch of stuff in the middle of the warehouse. They unbox all the stuff, take it out of the packaging. They reboxed 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.

Originally, they were doing this with common logistics carriers like UPS, FedEx, or other carriers, then they started building their own trucking lines. They can just get so efficient with this. This is how Walmart starts to expand out from the South and from the Midwest across the country. 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. When they go head to head in a geography, Walmart can price lower, still be making a profit, and Kmart just bleeds cash in those stores.

Ben: Yeah. It's amazing how far Walmart has come because the first store didn't use a distribution center. They would have to order from all the manufacturers and all the vendors.

David: Dropship directly to the stores.

Ben: You can only sell what you have in the store. When they opened the first distribution center, what they basically did was because they saw the growth of cities moving outward, like the suburbs are starting to happen, they would build the distribution center, sort of like a hub and spoke. They would pick the city that they wanted to go into that was farthest from that distribution center and they would build a store there. Then they would start building slowly back toward the distribution center.

You basically planted your flag out in the middle of nowhere but would become an area where a lot of people lived, that suburbia blossomed.

David: One day drive of a truck from the distribution center, right?

Ben: Yes. That at some point they've got dozens of stores that are driving distance filled in this whole radius back to the distribution center so they could make a lot more margin because they could get the price down as much as possible because they could negotiate these huge discounts with vendors because they have the distribution center which will send all the stores that are connected to it is a pretty brilliant methodology.

I don't really realize they invented this concept of a distribution center. I always forget that before Walmart, there were franchise variety stores, but there really wasn't large-scale discount retail that used this model.

David: By 1990, Walmart passed Sears to become the largest retailer in America. All through the '70s and the '80s Kmart was the gorilla. And then by the early '90s, Kmart, which had been so dominant, started really feeling the squeeze from Walmart because Walmart is now pretty much nationwide at this point.

Ben: 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. All these "coastal elites" who are underrating Walmart, it's for a lack of exposure. The first store opened in Washington in 1993 and Amazon was founded in 1994.

David: Wow.

Ben: Of course, on The Coast and then in the big cities, you don't feel the dominance of Walmart in the same way.

David: Here's some really fun history that I had no idea about. In the mid to late '80s, Kmart was at the height of its power, the height of its pride, right before Walmart was finally going to tip them over. During that time, they go on a drunken acquisition spree. Did you know about this?

Ben: No.

David: Kmart between the mid-80s and the early '90s acquired Sports Authority, OfficeMax, Builder's Square, Waldenbooks, and Borders. This just had all sorts of light bulbs going off in my head.

Ben: Reminds me in The New York Times during that era too.

David: 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. I always wonder, 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.

Ben: Wow. I never knew what happened to Borders.

David: Early to mid-90s, when the writings on the wall, Kmart starts selling off all of these acquisitions that they had made to just try and raise cash. They ultimately filed for bankruptcy in January 2002. And then in 2004, Kmart and Sears merged.

Ben: Wait, Kmart and Sears merged?

David: Yes! In 2004. We're going to take these two legacy, previously biggest retailers out there, storied brands, and we're going to merge them together and it's going to work. I vaguely was aware of this and I thought, oh, 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. That combined entity 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, had launched Supercenters.

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

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

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

David: Yes. I've always wondered why Amazon is so obsessed with grocery over the years.

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

David: Yup. They bought Whole Foods. 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.

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

David: And Walmart nailed it. But it wasn't Sam. 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 to competition. In Brazil, Carrefour, the French company, their operations in Brazil, had these big centers called hypermarkets. These hypermarkets were like a combination of a Walmart and a grocery store.

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

David: 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, 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. He launched a spin out of Walmart in the late '80s and early '90s called Hypermart USA. There are photos you can find online. This is what I tweeted on July 4th, I think they only built 3 of them. It is the most '90s America thing you have ever, ever seen.

Ben: It's a great logo.

David: Red, white, and blue all over the place. It's just an enormous, enormous footprint store, square footed like a cathedral of capitalism. They are pretty amazing, but they were too big. It didn't catch up. 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 to David Glass. The company and then after his death started a smaller scale version of a hypermarket that they called Supercenters. That was not as blown out as what Carrefour was doing in Brazil, but combined traditional grocery stores and the traditional Walmart.

Ben: Dude, I lived right next to one in North Carolina in 2008 and it was awesome. It was the only thing in my little suburb off the highway where I lived for one summer. There was some other stuff in the shopping center but you have the Walmart Supercenter. It was amazing. You go and you get all your groceries, they have everything else. I'm so sold on that concept. It's not surprising at all to me that that massively took off.

David: Not only that it was so convenient to have it all in one end, entertainment value, all of the things, they brought the Walmart approach of low prices to grocery too. 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. If you're 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.

Walmart went from 0% market share in US grocery at the beginning of the '90s to by the end of the decade in the '90s, they had become the largest grocer in America.

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

David: Now, they are not just the largest grocery store, they are the largest grocery store by a factor of over 2X the number 2 player.

Ben: Which is Kroger. Who's two?

David: Kroger, yup.

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

David: Wow. And is Albertsons Safeway now? Did they merge?

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

David: Oh my God.

Ben: Crazy.

David: That's like Amazon's dominance in ecommerce. If you add two through nine in ecommerce and Walmart is second place to Amazon, it is still not equivalent to Amazon's total sales in a year. In fact, I think it's something like two through nine added together are still 50% shy of Amazon's ecommerce revenue in a year.

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

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

David: 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, happened in the public markets after Warren had brought on Ted and Todd, crazy.

One last little bit about supercenters. I think the war was already won with Kmart, but this was really the death knell with supercenters because Kmart tried their own hypermarket concept called Super Kmart.

Ben: I remember that.

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

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

David: It's also an even lower margin business. Here's Walmart with better logistics, getting better, fresher items in their stores at lower prices. It's totally game over for Kmart. Frankly, it's kind of crazy that a lot of the other traditional grocery chains even have the market share that they do. They can understand specialty in higher end stuff like Whole Foods, Sprouts, or the like, but Walmart is just so dominant in the grocery category.

Ben: Okay, we talked a little bit about technology at Walmart. They were undoubtedly the best at putting in back-end systems to build a really impressive data network, and use that data in the '80s and '90s. Of course, the internet happens. Walmart is pretty slow to adapt to that.

I spent some time on the Wayback Machine looking at their website over the years. They did not take the internet very seriously at first. All the way through the '90s, all the way through the early 2000s, I don't think they thought it was an existential threat the way that it truly was for the business. They make a few really big moves to try and bolster this team.

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

Ben: Yeah. It's almost like no one made a compelling enough case for why they needed 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.

David: And Amazon was poaching executives from Walmart left and right.

Ben: Totally. The first step that they take here is, do you remember the company Kosmix, David?

David: Yes, I do. I remember using it.

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

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

Ben: Yeah, it was called Junglee. It was not for US search. It might have been like a meta search for ecommerce in India or something like that. Amazon had bought Junglee, and then those two guys, Venky and Anand, inside of Amazon started Mechanical Turk.

David: Oh, cool.

Ben: Interesting Amazon history there. They leave, they start Kosmix, and Walmart buys it for $300 million. That became 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 ecommerce thing is going to be really disruptive.

They've acquired a variety of other companies over the years including Bonobos. I've never exactly known how to say it other than I liked their pants. 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 for $3.3 billion.

David: I would love to talk to Mark Lore about all this.

Ben: Yeah, obviously Mark started Quidsi, He sold that to Amazon, got a new and nice tiff with Jeff Bezos, and left and 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. It basically didn't work. The actual thing, Walmart shut down.

David: It was a club, right? It was more like Costco.

Ben: Well, it changed. It originally was, and then I can't remember if it wasn't that it wasn't or it wasn't that it was. But there were multiple strategies. The quote is, "We tried a lot of things, we innovated, not all of them are going to work, we learn from our failures."

The party line from Mark and from the Walmart team was that Jet served its purpose to get a bunch of really talented, ecommerce-focused engineers, and product people together, and that it served as a great vehicle to serve as the core at this point of Walmart's ecommerce business.

David: And they really have made a good comeback, right?

Ben: Yeah. Mark Lore left in 2021. Walmart's current CEO, Doug McMillon, does credit him for jumpstarting their ecommerce business, which I think is growing. This is before COVID, because COVID statistics messed up everything for ecom. But in 2019, I think, it grew 37%.

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

Ben: Yes. 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 ecommerce. That's $75 billion. It is growing much faster than Amazon's ecommerce business, but it's because Amazon's ecommerce business is at ludicrous scale. It's five or six times larger than Walmart's ecommerce at this point.

The Walmart strategy here is quite interesting because it leverages their distribution centers and their stores. They want to make ecommerce 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. There's sort of a seamless experience between the two.

They leverage their stores to do things like same-day grocery delivery, pick it up at the store, or buy it and we're flexible, whether you sort of feel like you bought it in the store and you want to come grab it from us or whether it wants to arrive at your house. We'll have to see how that strategy plays out versus Amazon coming at it from the other direction and having to build physical infrastructure to come through on those promises.

David: They're doing some cool stuff. They launched Walmart+.

Ben: Which is a prime competitor.

David: Right, which is a prime competitor. But like you're saying about this sort of like integrating it all into one experience, physical and ecommerce, one of the cool things about Walmart+, I wish there are a Walmart in San Francisco (a) so I could save money on stuff I buy, but (b) so I could try stuff like this.

Ben: I'm very curious if you would shop there.

David: That's a good question. I love Trader Joe's. 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+ 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. To me, that's a big value prop. One of the reasons I don't like shopping at Trader Joe's, Target, or even Whole Foods too physically anywhere is the checkout lines, I hate it.

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

David: I think about stuff like this and I'm like, why am I doing this? It's not just a waste of my time, it's like, this is unnecessary in this day and age. I'd be happy to check out on my phone as I go through a store.

Ben: I started preparing for this episode trying to understand, how is the digital experience of Walmart these days versus Amazon's experience? Obviously, I'm well versed and Amazon packages arriving in my house every day.

I started buying some stuff on Walmart. I bought some garden lamps because I needed to install some lights. I will say the consumer perspective so far for me has been pretty identical to Amazon.

I don't think the selection is as large, but I'm not convinced that I take advantage of Amazon's sort of infinite selection. I think I look for Amazon's choice, or the wire cutter pick, or if that's something that has five stars in over 1000 reviews and just buy that thing. That methodology is very available on Walmart.

I was trying to dig in and study from a technology perspective what are examples of things that Amazon is more advanced on. Actually, this was a great use of [...]. 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. 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. 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."

That sort of makes sense that on Walmart, it would be sort of like a focus on a crude implementation first and 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 the functionality of the website.

David: I suspect we will talk a lot more about this dynamic throughout the season. Amazon is both a first-party seller and a marketplace. Because of that marketplace dynamic, there are just exponentially more SKUs on Amazon than on Amazon had to do this.

Ben: Walmart does have third-party sellers online. They do actually lease space in stores to vendors. That's another part of the modern Walmart business model. 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. Of course, they can check out conveniently at the Walmart checkout, but the revenue goes to you and you just pay Walmart for that space.

David: This was so fascinating. I knew that there were McDonald's and Subways in Walmart. It's like a store within a store concept. Target has those too and also a 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 display areas in Walmarts are integrated into the store.

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

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

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

David: Of course, we have to do powers analysis.

Ben: And powers. We got a good amount of episodes left here.

David: I know.

Ben: For our next sponsor, we have something extremely unusual. This segment is brought to you by our great friends at NZS Capital. We reached out to Brinton, Brad, Joe, and John, to propose the idea of doing a paid sponsorship. They did jump on it but had one caveat. They told us that the only thing we could ask listeners to do is read one of their white papers, think about it, and offer feedback to help further refine the thesis.

David: Indeed. Many of you already know NZS from the special episode we did with them last fall on complexity investing and semiconductors. But for those of you who don't know, they're a long-only global equity fund that manages money for institutional and accredited investors. They have over a billion dollars under management. The team worked together for many years before starting NZS in 2019. They're among our very favorite thinkers on Acquired. They've been such great contributors to our thinking here on the show.

Ben: Today, we want to talk about an idea that really started the NZS investment philosophy 10 years ago, which is complexity investing. This grew out of research work by the famous Santa Fe Institute. The idea kind of applied to investing is that it is literally impossible to predict the future because every market and every company is a complex adaptive system.

This means that an investor simply cannot take in the vastness of inputs to a company like competitors, geopolitical changes, or new technology inventions (hence, the complex part) to consider is how all of these inputs then interplay with each other and cause the system itself to change (hence, adaptive) to predict the future with any level of precision.

David: Yup. Walmart is such a perfect example of this. Who could have predicted that these little small town guys from Arkansas would beat Kmart? If you're willing to accept that you can't predict the future, then the question is, what do you actually do as an investor?

NZS's thesis that they lay out in the paper is that you should invest based on two dimensions, resilience and optionality. Resilience, meaning, how resilient is a given company to varying degrees of change? Is it a company like Walmart, which given all the change happening in the world, the internet, and all that, they're still the largest company by revenue in the world? They can withstand large shocks to the operating environment. Or is it more like a Tesla in the early days, which was highly path dependent and a million little things could have completely derailed the company?

Ben: Yeah. Of course, resilience alone is not sufficient to tell if something is a good investment. Obviously, early Tesla shares paid off hugely. Resilience was not the core value prop of making that investment. This is where the second dimension, optionality, comes in.

Optionality is very similar to how we think about venture capital, all about asymmetric upside. A million little things could have derailed Tesla. But would the payoff have been worth the risk if the narrow set of outcomes where things worked perfectly actually happened? If the variant of the multiverse, where all those things actually did work, was the one that happened, what would the payoff have been? The answer is a very large payoff.

David: Because that is the version of the multiverse that we live in.

Ben: That did indeed happen. Yes. The key insight that NZS believes is that you can basically plot every business at the intersection of these two dimensions. How resilient is it, and what degree of optionality does it have? The best opportunities to invest come from businesses that have high degrees of both, which are totally rare, but absolutely exist. A good illustration of this today might be Apple, for example.

David: If you're interested in these ideas, if you think they're cool like we do, you should go check out the white paper that NZS wrote on complexity investing. It also has some really fun diagrams and illustrations in it.

Ben: Yes. It's not white paper in the boring scientific sense. It's interesting to read and there are great illustrations.

David: You can do that by clicking the link in the show notes. Even though we're not clients of NZS, it is well worth reading.

Ben: Yup. Finally, since they really do want feedback, you can, of course, email Brinton, Brad, or any of them from the email addresses on the paper when you download it. Or even better, we're going to do a Zoom call with them to talk about all these ideas together.

There is a second link in the show notes for you to add it to your calendar for Tuesday, August 16th, 2022 at 4:00 PM Pacific Time. We would love to see you there. Our huge thanks to the team at NZS capital.

David: Thank you, NZS.

Ben: All right, 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. They're in 24 countries, which we haven't discussed. They're a global empire at this point. There are 10,500 stores. Each week, 230 million customers visit one of these stores—203 million customers, that's wild.

The supercenter concept is basically Walmart now. It wasn't like some of the stores are supercenters. Most stores are now supercenters. If you just think about the standard Walmart discount store in 1996, there were about 2000 of them. Now there are 368 because the supercenter is the new thing.

The business supercenters 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. If I were to sort of postulate, I think, because discount stores have just become stores, there actually is room for a little bit more margin than sort of originally believed.

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

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

David: Yes. Costco has been this amazing story that is like the Walmart of Walmarts. Walmart has it too with Sam's Club, but it's interesting you bring up margins.

Ben: 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?

David: Especially, we're talking about Walmart+ and this membership option. Costco doesn't really have much of an ecommerce digital business these days. I'm sure they're investing in it. But Walmart really was kind of positioned to have the best of both worlds here of membership, subscription business with Sam's Club, plus ecommerce. It feels like there's a lot more that they could be doing.

Ben: There are some crazy stats about Sam's Club. Somehow in the '90s, one in three US households had a Sam's Club membership.

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

Ben: I think it's declined. Yeah. Okay it's worth a little bit of a margin analysis here, and in particular, gross margins, because we were citing some numbers earlier. If you look at Walmart's 24-ish percent gross margin, 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. Costco's gross profit margin is only around 13%.

That came up when they first went public. In, I think, '92 it used to be 10%. But the whole business of Costco is totally doing what Walmart did to the variety stores to Walmart and the other discounters. It's really the idea that, 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?

What if you can't buy small quantities of things? What if there's not really someone to help you get something off the shelf? What if it's all just in a freaking warehouse? It's all about what can we take away and will customers still deal with to get the lowest price?

David: Sol Price, of course, as we talked about, and Jim Sinegal 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.

Ben: Oh, I didn't know that.

David: That was the core of the market. Then over time, as Costco grew, I think they realized, oh, consumers like this too.

Ben: 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 Sinegal's thing to Sam Walton.

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

Ben: It's 18% of revenue.

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

Ben: They pulled out of Germany, right?

David: They pulled out of Germany. In the UK, they bought the big retailer chain Asda for about $10 billion. I think that was in the late '90s, I believe. They operated that and they were a decent size 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. Then they ended up selling it off to private equity, I think, for about $6 billion just a couple of years ago. Neutral at best.

Ben: We'll see how Flipkart plays out for them. They own 75% of that.

David: Right. 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. I'm not as studied on the history of this. I think Walmart had wanted to enter India for a long time. It had been negotiating with the government trying to make it happen for years and years and years and couldn't.

I think part of the idea, I believe, of buying Flipkart was this will be our vector to bring Walmart into India. I don't think it's gone super well. I read, I believe, there are about 20 or 30 Walmart-owned physical locations in India now, but that's not worth $16, $17 billion purchase price.

Ben: No, definitely not. 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 1982, they've grown about 40–50% a year. 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.

They're trying to make all these big investments. This is revenue, by the way. It's not like, oh, well, that's just because they're reinvesting in ecommerce. No, the top line is just not moving very far year over year these days.

David: To be fair, it is the biggest top line of any company in the world. 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 ecommerce and you include international, had they executed well on both of those.

Ben: And grocery.

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

Ben: Yup. All right, let's do power and then we'll get into bear case, bull case.

David: Great. Power. For new listeners of the show, and as a reminder for all of us old timers, Hamilton Helmer's Seven Powers, there are seven of them and what he's identified as...

Ben: Persistent differential returns. Basically, what enables Walmart to be more profitable than their closest competitor on a durable basis.

David: Yup. The seven are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

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

David: Okay.

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

David: And it didn't seem like a big opportunity.

Ben: No. 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, the cities are going to build out. Those people are going to want something like this in their towns, so we can serve the people who are there now. We will be positioned to serve way more people as those suburbs build out.

David: Yup, totally.

Ben: Massive counter positioning, I think.

David: It's such a good point in the beginning. You're absolutely right. I think as they built it up, scale economies.

Ben: Yes. This is the perfect example of scale economy.

David: Literally, the perfect example. 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, the distribution, logistics network, and the operations that they built behind it.

Ben: 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. 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. Even though they've taken on a lot of sort of risk and doing that and a lot of fixed cost, to the extent that they're utilizing all that at 100% utilization or as close to 100% as possible, they don't have to pay anyone else margin to use their network. Every element I can possibly think of has all of the margin squeezed out of it.

David: Which is also interesting when you think about Amazon and everything Amazon has been doing for the last, especially, 5, 10 years. They're doing all the same things. Amazon Air building their own logistics, and all the Amazon vans that you see around.

Ben: Yup, absolutely.

David: Okay, do we have any others on here? Switching costs. With Walmart+, maybe, but not.

Ben: They interestingly don't have branding. This, I think, is a place that's different from Amazon. 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?

At Walmart, no. You go there because it is the lowest price. I will not buy something that's more expensive at Walmart than somewhere else. The Walmart brand does not mean that to me.

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. I think it's really interesting that they've taken a different path there.

David: I don't think Amazon was ever just about being the lowest price. I think it was more about we are the best combination of price selection and convenience.

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

David: I think it might be worth a minute to discuss process power. Do we think Walmart has process power? 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.

You could argue that it's 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. They could have, and I think most other companies would have taken their distribution and operation advantages and increased their profit margins.

That is like anathema at Walmart. It's always like, we will keep the lowest prices possible for our consumers. We will take the absolute bare minimum margin possible, pass it all along to consumers rather than taking it for the company.

Ben: The question is, is that still true, or are they looking for opportunities to keep margin now given growth has stalled?

David: Right.

Ben: At the end of the day, public late stage CEOs are paid to get more earnings per share.

David: Right.

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

David: No.

Ben: They used to have this partnership where there was a gas station company that operated in Walmart parking lots. 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. I think there's probably some truth to that at this point in their growth and saturation.

David: Walton enterprises, 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.

Ben: Them and their spouses, yes.

David: Yeah, right. 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.

Ben: Agree. Okay, bear and bull. We've hit a lot of these points already. But in my bull case, there's the kind of should win same day grocery delivery since they have these supercenters everywhere. You can make a bull case from the blending of ecommerce 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, 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 an economic downturn.

David: Which I believe they did in 2009.

Ben: 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. That drops their average below the average of the country. That's sort of an interesting way to look at it.

Averages are stupid, especially at this scale, because they hide all the interesting list of the distribution, but their average customer is far more price sensitive and far more likely to be in an unfortunate economic position in a downturn than other companies so they serve those people well. Those are my few bull cases.

David: That makes sense to me.

Ben: 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 ecommerce and technology.

Kroger, Safeway, and Albertsons are extremely compelling businesses in the grocery segment. Old, but very stiff competition. Then you have this other movement happening, which is the gigantic proliferation of Family Dollar and Dollar General where there's a different customer base that especially in the sort of food desert type locations, those businesses have done tremendously well. It's not that they're pushing Walmarts out, but there are lots of scenarios where someone would opt to choose to shop at a Family Dollar versus going to the bigger Walmart experience.

David: 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 Franklins.

Ben: Really?

David: When they got disrupted by the discounters, Butler brothers and Ben Franklin didn't survive, but I think the shell of what all of those stores were. Remember, they were fixed prices. They were the Five and Dimes. I think that eventually became the dollar store industry.

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

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

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

David: I don't know but when I have in the past used Walmart ecommerce, it's because they run some crazy deals. I wonder if they're also running really low margins or even discounting the low cost on some stuff.

Ben: Because they don't break it out, I don't know if that means it's not profitable. I don't know what profit we're talking about there. Amazon, for a long time, was not profitable because they were reinvesting in more distribution centers and stuff like that. Maybe it's that, but there's a work in progress going on with Walmart ecommerce.

David: Yup. They have, in recent years, been closing a large number of Sam's Clubs. I think a lot of that real estate they've been converting into ecommerce distribution centers.

Ben: 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 ecommerce distribution center and we can figure out if you're a fit. It makes sense, but I think it's like one of 100 deaths by 1000 cuts things going on between Walmart and labor right now.

David: Oh, boy. We'll do value creation, value capture in a minute. There's a whole another episode we could do on is Walmart good or bad for the world?

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

David: I'll go first because I have one. I realized that I teased this quote hours ago in the beginning of the episode, and then I never actually said it. But this perfectly encapsulates so many wonderful great playbook lessons to take from Sam Walton and the Walmart story, but this is my favorite.

This is a quote from Charlie Cate, the manager of that first Walmart store number one, where he's talking about Sam, saying, "I remember Sam saying over and over again, go in and check our competition. Check everyone who is our competition. Don't look for the bad, look for the good. If you get one good idea, that's one more than you went into the store with. 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."

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 look for what they're doing wrong and make yourself feel better by like, they suck, look how much better we are than them.

Ben: Oh, that's such a good point.

David: I don't know if you see this, but being VCs, and we invest in some of the wonderful founders and work with folks, but this is really like a disease that I've noticed over the years. Startup founders and management teams 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 the wrong way to look at it. 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.

Ben: Most times you talk to a founder, of course, most times we talk to founders, they're pitching for investment. They're going to have a different posture. 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?

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

Ben: Agree. There's one that we've talked about a bunch, so I'm just going to summarize it. Identify a wave and ride it. I never would have known that discounting was a wave that happened before starting this research. If you were operating a variety store in 1955, you may not have known that discounting was a wave that was going to come.

Sam was in the right place at the right time with the right insight, and then built the company to ride the discounting wave. It's fascinating to me how, just in the course of 50 years or 70 many years, it can go from, wait, will this even be a thing to there was ever a point in time where it wasn't a thing? It was different. He both rode that wave, but also created that wave.

David: Yup. It reminds me so much of Jeff Bezos sitting in the offices of D. E. Shaw in the early '90s and being like, holy crap, the internet is going to be a wave.

Ben: Yup, for sure. A big one is don't buy anyone else's inefficiency. If you're going to compete on price, you must avoid buying anyone else's inefficiency at all costs. It means having often very contentious relationships with your suppliers.

P&G and Walmart were enemies for years, even though P&G had to sell in Walmart and Walmart had to be buying P&G products before they kind of figured out how can we both do this because we do both need to serve the same customer. That took a long time. 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.

David: Yup. I don't know that this is a playbook per se, but in an industry like retailing, Walmart's business, Amazon's business, and the like, price really, really, really matters. Selection and convenience matters too. That's why Amazon's a thing and the Whole Foods exists, specialty retailers, and all that. But price really, really, really matters. What you're saying is absolutely applicable in cases like that.

When price really matters, your margins really matter. Your margin is my opportunity, 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.

Let's say you're in the media industry. That is a high margin industry. The software industry, that is a high margin industry. Not to say prices don't matter. Of course, they do. But 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.

Ben: 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. It might be word vomit. 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. They have such a large share of wallet for a lot of people that everything that can happen will happen. Labor problems, yes, for sure. Significant tensions there.

David: Environmental impact.

Ben: Employees doing everything you can think of because there are 2.2 million of them. If you come up with some statement of like, Walmart employees are so wonderful, that is true. Walmart employees steal is also true. Walmart employees hate their boss is also true.

You and I did some serious spelunking on the Walmart subreddit. I spent a couple of hours there. 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 at their scale, they are just everything. You walk into a store and you get a microcosm of America.

David: At this point, it's not even a microcosm. It's a macrocosm. You're talking about 2.2 million people that work there and 240-ish million people shop there every week.

Ben: Yeah. Walmart is where you witness humanity.

David: 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 on Acquired, 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.

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

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

Ben: That's true.

David: In fact, it was completely non-obvious that Kmart just borrowed Kresge's distribution network. Everybody thought that that was the way to go.

Ben: Yeah. It certainly was for the first decade.

David: First, probably, two decades.

Ben: Yeah, that helped them get a massive lead. There'll be some very, very credible argument that I totally would have bought, which is, if you think you can get two decades of lead with this strategy, there probably will be something that materializes during that time where being that far ahead means you just win.

David: Yup. His name was Henry Cunningham, who was the CEO of Kresge when they launched Kmart. He says that Cunningham was an amazing retailer, brilliant, and great competition. Sam believes had Cunningham still been running Kmart as Kmart started to decline, the company would have made different choices.

Ben: Fascinating.

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

Ben: All right. We're on to the segment where we're going to make a case to each other for Walmart being good for the world and bad for the world. It's almost like a bull and bear on the business, but the global impact. Let's save the employees' thing for the moment and first talk about impact on communities. I think there's an easy narrative to paint, the same narrative that got painted with Starbucks being bad for communities because it puts the local store out of business.

Certainly, I don't think Sam Walton would say that they didn't. I think that he would say that we put a Walmart in a community and it was better for consumers, so then people needed to adapt. Of course, existing merchants hated us. But did consumers hate us? No, I don't think so at all. I think it was better for them.

David: Especially for customers and everywhere, saving money and saving significant amounts of money on your everyday purchases, that's huge. If you are living in the middle class or lower class, that is enormous. That makes a huge difference in your life.

Ben: Yeah. That said, there are 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 or the equity that gets built from that transaction happening happens in your community, versus the equity accruing 50% of the Walton family and 50% to a bunch of public shareholders, every transaction, any business makes accrues either positive or negative equity to the business that participated or facilitated the transaction, even if that Walmart employs a bunch of local people, the equity is still being built by other shareholders.

David: There is a lot. I think I said we could do a whole another three or four hours on discussing this. I read the book, The Wal-Mart Effect, as part of research. It's really good. It's really even-handed, really well done. It was written in 2006. It goes really deep into all of these questions, labor, impact on communities, and all sorts of stuff. I 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, the biggest takeaway I had from it was, if you just look at individual communities, I think you can make a pretty good argument.

This is Sam's argument, and like you were saying, that Walmart is good on balance. It saves consumers money. That's super important. It 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 going to happen. The local shops were not going to survive, the local variety stores.

Ben: It could be someone that doesn't have the types of incentive programs that Walmart has. 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. There are ways to make hundreds of thousands of dollars on top of your pay by being a Walmart employee.

David: Yup. 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. That's actually in the supplier relationships and the vendor relationships.

As Walmart got so big, got so much leverage, and they're so unrelenting on pushing down prices, and then as the relationships we talked a little bit about the P&G relationship but with all their vendors, Walmart is the biggest customer of all of the vendors and suppliers that they work with. They exert so much pressure for vendors to lower their prices. Ultimately, that leads to a couple of things that led to offshoring of American manufacturing. Walmart was a huge contributor.

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

David: I think during the '80s, it went from 6–40%. If you take out grocery, I'm sure most stuff in Walmart is not made in America. 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, 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.

It just does not work. You have to offshore it. That's one issue. You could argue about whether that's good or bad. But certainly now, 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 the quality of products, which is also related. The other thing is that whether you're making stuff in America or elsewhere, if you keep pushing down those margins so far, you've got to use lower quality materials in your product. There's just this constant barrage to push down quality, push down labor cost, and all that comes at a real cost.

Ben: And quality was an afterthought. 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.

David: 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.

Ben: 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.

David: For current management and the previous generation of management of Walmart, to their big credit, in the mid-2000s, they got religion on this and embraced sustainability and positive environmental impact as a way to generate more efficiency. Walmart, I think, is now the largest US commercial producer of solar power because they put solar panels on the roofs of Walmarts, and then now in parking lots too, and then it ends up being cheaper.

Ben: They also invested a ton in more efficient truck fleets, both in the type of fuel, the shape of the trucks. I want to say they literally doubled the efficiency of the trucking fleet over a decade by just little things they did here and there to chip away.

David: That makes a huge impact because they're one of the largest trucking fleets in the world.

Ben: If you look, there are those graphics that fly around there like what's the largest employer in any state? Most of the Lower Midwest and most of the South is Walmart. Then there's the other one that floats around. It's like, what's the number one profession in every state? For half the states, it's truckers. You're like, I wonder who those truckers worked for in a lot of those states. Yes, it's a massive part of not only the American economy, but of our energy usage.

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

Ben: They've paired back the AR-15 and the ammo. They stopped selling some things, but only after there was a shooting in their store.

David: Right. Now, they still sell guns, obviously. Sam, himself, obviously was an avid hunter. He'd use guns all the time, 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.

After the shooting in the store, they don't sell guns to people under 21. In 2015, they stopped selling assault rifles. I'm sure it's one of these issues, where people on both sides say they're not doing nearly enough or they're way too much too much. I think it is a good example of a middle ground. You can argue whether it's enough, not enough, or too much, but it's a middle ground.

Ben: All these things really come back to that point of Walmart operating at such a scale that it is literally just a snapshot of humanity. If it's a facet of our national conversation or things happening in the world, it's going to be happening at Walmart.

David: Totally.

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

David: 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, of 40.1% annual compounding in the '70s, the 32.5% in the '80s.

Ben: Three right now.

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

Ben: The way to do it on a year by year, 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+, what constitutes an F, and do it on a fine grade basis year by year.

We're not actually going to do that. Is it a cop out to say that it's an A++ from founding through the '80s and mid-90s, and then it's been a D on exploiting the next big opportunity since then? That's how I feel. It feels weird to roll those into one letter.

David: I think if we were going to break it out into subgrades for eras, I think I would actually do three eras. I would do the Walton era, including the '70s and '80s, A++++. You can't say enough pluses there. Then I think actually the '90s is also an A+.

Ben: Literally grading for shareholders. We're not grading for the multi-stakeholder world that we live in of their communities.

David: Grading just purely the business and for shareholders. I think the '90s is also an A+. The supercenter is 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. It's now 55% of the business.

Ben: Dude, let me tell you about the '90s. In 1992, they came in growing 34%. By 1997, they were growing at 12%.

David: Okay, fair.

Ben: That was the quintessential decade of their decline.

David: Did growth rate accelerate at all as supercenters came online?

Ben: 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.

David: Interesting.

Ben: You could say their jobs really have been, since 2002, to stay the same size as ecommerce became a thing. Literally just defending the castle would have been an A+. Maybe that is actually a pretty reasonable way to analyze it. Not that it would have been a good idea to invest $1 unnecessarily 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.

David: Which they've done. Sears didn't do that.

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

David: Oh, yeah, for sure.

Ben: It's a little bit of a deceptive graph because part of it is AWS. There's a high margin revenue there. There's a completely second business.

David: It all counts. Walmart could have done that. Scoreboard, right? You look at the scoreboard.

Ben: Right.

David: Okay. Maybe, then '90s is not an A+. But the supercenter innovation is huge. I do think that the 2000s and particularly the 2010s, pretty uninspiring for Walmart.

Ben: It's a little silly, because what actually should you be going for? If Sam Walton cared about the Acquired scoreboard, they should have been done in 1995 or even 2002. We're penalizing them for continuing to exist and doing worse than they did before. I don't know.

I'm unwilling to grade this as one single thing. I'm willing to say it was an A+ up through Sam Walton's death. Since then, I'll go from 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.

David: 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 times that we've used as main sources on Acquired.

Ben: Okay, like Shoe Dog, Made in Japan.

David: Yeah, of that ilk.

Ben: Yeah, sure.

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

Ben: No idea.

David: He, after reading the book, became the editor-in-chief of Time. Do you know who he replaced as editor-in-chief of Time?

Ben: Is it someone else's co-author?

David: Walter Isaacson.

Ben: No way.

David: Yeah, totally.

Ben: No one's co-author, but wow.

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

Ben: For sure. Okay, I'm sick of this grading that's not really grating, so let's do carve outs. Also, I just got a text. Your Walmart order was delivered. Thanks for shopping with us. Reply help for more. I have to go running and pick up my Walmart order.

David: You got to go get it.

Ben: 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 who listen to our Berkshire episodes will know is a Berkshire Hathaway company.

This is the venue that Ted Weschler chose to go to and give a wonderful interview. It is so cool to hear one of the big managers at Berkshire these days. I think Ted is 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. That is my carve out.

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

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

David: Okay, here's what I'm curious about, though. Is the content of the podcast about discussing furniture?

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

David: So fun. That's obviously better, but I'm kind of curious what Ted's furniture preferences are.

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

David: I love it. Is he a modern guy? Is he a classic guy?

Ben: Tune in and find out.

David: Are they talking Mediterranean here?

Ben: I don't think Mediterranean, If I had to guess.

David: My carve out is a carve out that has been on Acquired before. It was your carve out, but in a different form. That is The Godfather.

Ben: The film?

David: You did it as a carve out, right?

Ben: Parts one and two.

David: Parts one and two, yes.

Ben: Both parts.

David: So good, which I also have recently rewatched. It's so good. But you know what is even better is that I read for the first time, and I can't believe I hadn't read it until the last month or two.

Ben: Is it the book?

David: Is Mario Puzo's book, The Godfather. It's so good. I think it was better than the movies. It's as good as the movies.

Ben: Careful there, buddy.

David: 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. 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. They didn't explain everything as much as movies do now.

Ben: Which is great.

David: Which is so great.

Ben: It's back when film was an art form.

David: 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. The movie, I was like, this is crazy.

Ben: You're like, what the hell is the last scene?

David: Yeah. But then you read the book and you're like, oh, now I totally understand what's going on. I get it, it's awesome. It's a little bit like that with The Godfather, with the book. Large parts of Godfather Part Two are interspersed in the book in part one. It was never intended to be a series. It's all just one book, so you get a lot more kind of like as you go to Vito's history...

Ben: The Italian backstory is actually part of the first main volume.

David: And when Michael is off in Sicily hiding after he murders the Turk and the police captain.

Ben: All right. On my list, adding it.

David: It's good.

Ben: With that, listeners, our thank you to Fundrise, Pilot, and NZS Capital. Thank you so much for being on this journey with us. After you finish, come discuss with the other 12,000 smart, clever, kind, and appreciative members of the Acquired community at

If you want more Acquired, I know this episode is going to clock in three and a half hours or something insane, but if you're like, you guys, I need more, we just dropped an awesome interview with Patrick Campbell going through 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 at for paid subscribers.

We've got a job board. Go check it out at We, here on the Acquired team, look at every single one of those and our jobs that we think are interesting. If you're looking for your next schtick, consider that. All right, David, anything else?

David: I don't know what else we can say at this point.

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

David: We'll see you next time.

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