How Sam Walton Turned a Tiny, Failing Variety Store Into Walmart
Sam Walton’s autobiography sits at the top of Jeff Bezos’s reading list, and it’s not difficult to see why. It’s a story of the creation of a colossal retail empire—from scratch.
In Made In America, Sam Walton recounts his journey from a little variety store in a small town to an international behemoth that Walmart would later become. Walton gives many reasons for his success: putting the customer first, company culture, paying employees well, thinking small, discounting, small town expansion strategy, etc., but the one reason that stood out to me—the one thing that remains constant throughout the book—is his perennial willingness to learn.
Walton operates primarily in what Carol Dweck calls a growth mindset, which means that rather than seeing something as a success or failure, he focuses instead on ways it could be improved. Something that isn’t working well isn’t necessarily broken, it’s just something that can be made better. Walton’s job was simply to find ways to improve it. And he did it in a simplest, most obvious way possible: he learned from his competitors. Wherever Walton went, he would go into every store to see what they were doing, what they were selling, how they were selling it, for what price they were selling it. He would pester the staff, firing a barrage of questions at them while he took notes on his yellow notepad. A competitor that was doing well wasn’t a threat—it was a reservoir of ideas.
In Mastery, Robert Greene divides the path to ultimate proficiency into three phases. First comes the apprenticeship, a time to learn the fundamentals from others who are experienced in the field of your pursuit. Then comes the creative-active phase, when the apprentice begins to do things on their own, to experiment, to make mistakes and learn from them. Finally, when conscious knowledge has been wholly absorbed and internalized, comes mastery. This is when you begin to act intuitively, to make unconscious connections within your vast store of experience that call to mind the right course of action or idea without your being able to explain precisely what makes it right. A master is someone whose gut instinct is right most of the time.
Walton’s story can similarly be divided into three stages: 1) the apprentice phase when he learned to run a variety store under a franchise, 2) the creative-active phase when he expanded to a network of stores and left his franchiser to operate under his own brand, and 3) the mastery phase when he scaled up his successful enterprise to massive proportions.
I. Apprenticeship: Learning to run a variety store
Walton opened his first Walmart store (then called “Wal-Mart”) in his 40s, but he actually began his merchandising career at 26, right after his service in the Army. Borrowing $20,000 from his wife’s father, he bought a Ben Franklin variety store in Newport, a small town in Arkansas with a population of around 7,000. The store was ran as a franchise, which meant that almost everything was controlled by Ben Franklin headquarters: what to sell, what to sell it for, how much to buy it for, etc. On the other hand, Ben Franklin had a program that taught him everything about how to run a store and keep accounts. While Walton didn’t have the freedom to do whatever he wanted, the franchise relationship gave him the training he needed to get started.
The store turned out to be “a real dog.” The rent was twice the market rate and a nearby store was taking most of the customers, doing double Walton’s revenue. This didn’t deter Walton. Having no experience in a new industry turned out to be a “real blessing” for him because this was when he learned his most valuable lesson: “you can learn from everybody.” And it just happened that a successful model was right across the street in the form of his profitable competitor. Walton’s wife, Helen, recalls:
… what really drove Sam was that competition across the street—John Dunham over at the Sterling Store. Sam was always over there checking on John. Always. Looking at his prices, looking at his displays, looking at what was going on. He was always looking for a way to do a better job.
Here’s what Walton did next. He began experimenting, something he continued to do throughout his career, trying out new promotions and new ways to cut costs. First, on the costs front, he began buying directly from manfacturers so that he could save on the markup Ben Franklin was charging him when he was getting his products through them. Most manufacturers didn’t want to sell directly to him—he was too small, and they didn’t want to upset Ben Franklin—but he kept shopping around and would eventually find some who were willing to work with him.
Second, he had discovered the discounting business model—the model upon which Walmart’s success would later be built. Walton explains:
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 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.
He couldn’t implement this idea fully because of the franchise program restrictions, but he began experimenting with it and used it to get customers into his store.
Lastly, he began trying out different promotional techniques. He first put a popcorn machine on the sidewalk, which turned out to be very popular. This spurred him on to buy an ice cream machine, for which he had to take out a bank loan. This also attracted attention, and he paid off the loan in a couple of years.
Very soon, Walton completely turned the situation around, making his Newport store profitable and overtaking his competitor across the street. In fact, he did so well that in just five years his business became the number one Ben Franklin franchise in the whole six-state region.
Just when everything was going great, disaster struck. The lease contract Walton signed didn’t give him the option to renew, which meant that the future of the store depended wholly on whether or not the landlord would let him stay. The landlord happened to be a department store owner, and, seeing Walton’s success, decided to take advantage of this oversight. He refused to renew the lease and forced Walton to sell him the store. It was a painful, expensive lesson, but it also presented an opportunity: Walton could now start all over again, start something bigger and better. He took the money from the sale and opened a new store in Bentonville.
II. Creative-active: Setting out on his own
By the time Walton started his second store he was well versed in the fundamentals of running a small retail business. He was ready to try new things, ready to try building something bigger than last time. He started innovating—or rather, he looked for innovative approaches that his competitors were using in the variety store industry, and applied them to his own store. One such thing was the concept of a self-service checkout:
… I read an article about these two Ben Franklin stores up in Minnesota that had gone to self-service—a brand-new concept at the time. I rode the bus all night long to two little towns up there—Pipestone and Worthington. They had shelves on the side and two island counters all the way back. No clerks with cash registers around the store. Just checkout registers up front. I liked it. So I did that too.
His Bentonville store became the third variety store in the whole of the country to use self-service checkout. The idea of learning from competition would lie at the heart of how Walton ran his business and how he taught his managers to run their stores. Charlie Cate, manager of one of the first Walmart stores, recalls Walton saying:
Check everyone who is our competition. And don’t look for the bad. Look for the good. If you get one good idea, that’s one more than you went into the store with and we must try to incorporate it into our company. We’re really not concerned with what they’re doing wrong we’re concerned with what they’re doing right, and everyone is doing something right.
As before, Walton attracted people’s attention by running a sale. The launch of the Bentonville store had such things as: “free balloons for kids, a dozen clothespins for nine cents, iced tea glasses for ten cents apiece.” This worked wonderfully, and the store took off.
Rather than staying content with his success in Bentonville, Walton went out looking for new locations in nearby towns. He opened another store in Fayetteville, again as a Ben Franklin franchise. Then another in Kansas City. As driving between the stores was taking up too much time, Walton bought a little airplane, an Air Coupe. His brother Bud, himself a pilot, described this plane as having “a washing machine motor,” and wouldn’t go near it for two years. But Walton didn’t mind. The moment he took to the skies he started opening even more stores: Little Rock, Springdale, Siloam Springs, Neodesha, Coffeyville. He would take all the profits he made from his current stores and put them into opening new ones, growing his empire one store at a time. Although Walton only operated in a relatively small area in the south, after about 15 years he became the largest independent variety store operator in the United States.
There was, however, one big problem. A new breed of store was taking over the market. The so-called “discount” stores worked on the principle of selling more at a smaller price margin. The revenue they lost in cutting their prices was made up by selling much greater volumes. Additionally, the heavy discounts simultaneously worked as promotions, an effective way to attract new customers.
As we’ve already seen, Walton was familiar with this model and was already experimenting with it. He knew that this is where the market was heading and was ready to go all in. But there was one hitch. Most of his stores were still ran as Ben Franklin franchises, which greatly limited what he could do. He went up to Butler Brothers in Chicago (the owners of the Ben Franklin franchise), and pitched the discount idea to them. They weren’t interested. He pitched more franchisers. They weren’t interested either. Walton now had to make an important decision:
We really had only two choices left: stay in the variety store business, which I knew was going to be hit hard by the discounting wave of the future; or open a discount store.
Walton decided to set out on his own and create Walmart. Actually, the name “Walmart”—or “Wal-Mart” as it was first called—was Bob Bogle’s idea, who was the first manager at Walton’s “Five and Dime” store. As Bogle recalls, while they were flying over the Boston Mountains, Walton gave him a card with a few potential names written on it. Each one of them was three or four words long. Walton asked him which one Bogle liked best. Instead of picking one, he wrote down his own: “W-A-L-M-A-R-T.” The lettering on the storefront was an expensive fixture, so Bogle appealed to Walton’s thriftiness: “To begin with, there’s not as many letters to buy … This is just seven letters.” Walton thought about it but made no reply. A few days later, as Bogle arrived at the new building, he saw the letters “W-A-L” up on the roof, and the sign maker was ready to head up the ladder with the “M.”
On July 2, 1962, Walton opened the very first Walmart in Rogers, Arkansas. It wasn’t a resounding success. The store did $200,000 to $300,000 a year in revenue, which was more than Walton’s variety stores, but it was still a lot less than what other discounters were doing. His competition was bringing in millions of dollars per store. This didn’t discourage Walton. He knew the discounting approach worked. It certainly worked better than the traditional variety store model. The gap between him and his competitors showed just just how big an opportunity lay before him. In a way, this new start was a little like the time when Walton opened his first store Newport. He was entering new territory, and he was up for a fight.
III. Mastery: Achieving massive scale
David Glass, who would be Walmart CEO from 1988 to 2000, wrote this about the opening of the third Walmart store in Springdale:
It was the worst retail store I had ever seen. Sam had brought a couple of trucks of watermelons in and stacked them on the sidewalk. He had a donkey ride out in the parking lot. It was about 115 degrees, and the watermelons began to pop, and the donkey began to do what donkeys do, and it all mixed together and ran all over the parking lot. And when you went inside the store, the mess just continued, having been tracked in all over the floor. He was a nice fellow, but I wrote him off. It was just terrible.
Walton notes that this was a particularly bad day. But the thing is, despite the scrappiness of the operation, all of Walton’s stores were profitable. The scrappiness was part of what made the stores work. The whole thing was a work in progress, a process of trying new things, keeping what worked, pruning what didn’t—a process of gradual iteration and improvement. It was scrappy not because Walton’s team didn’t know what they were doing, but because it was the starting point. It was scrappy because it wasn’t the finished piece—it was a draft. And this draft turned out to have so much potential that Glass, for whom this early Walmart was “the worst retail store” he had ever seen—would later lead the company as its CEO.
Walmart wasn’t the first discounter, nor the fastest growing. In fact, hardly anyone took note of the little retailer from Arkansas when it launched. S. S. Kresge, a variety chain with over 800 stores, opened a new discount store in 1962—the same year Walmart launched—and called it Kmart. Woolworth started the Woolco chain, Dayton-Hudson opened its first Target store. In 5 years, Kmart had over 250 stores. Walmart had just 19. But this wasn’t a sprint, it was a marathon, and, one by one, Walton continued to open new stores.
One of the growing pains was solving logistics. Rather than have wholesalers deliver goods to every one of the stores separately, a much simpler solution would have been to have a central warehouse to which all goods could be delivered, and from which Walmart could then ship them to its stores in the quantities they required. When it was no longer possible to continue as they were, Walton was persuaded to upgrade their infrastructure, buying a 15,000-foot general office and a 60,000-foot warehouse. The warehouse was actually 40,000 feet smaller than what the staff wanted—Walton’s thriftiness held him back from expanding until absolutely necessary—and Bob Thornton, who was hired to run it, had to fight to get the necessary equipment installed:
Another thing. I had designed that distribution center around an in-floor towline system, you know, a track that moves carts around the floor. Sam says “Well, Bob, I just don’t think we can do that. We can’t spend that kind of money.” At that point I literally didn’t know how to run a warehouse without one so I just said, “Hey, Sam, if we don’t have a towline system, then you don’t need me because I don’t know what to do without it.” So he gave in to that. The truth is, Sam never did anything in size or volume until he actually had to. He always played it close to the belt.
The warehouse would become the keystone to Walmart’s expansion strategy. Rather than go into big cities, like the competition was doing, Walton chose to target smaller towns. He would drive for about a day from the warehouse in one direction to find out the maximum delivery range, and open a new store there. He would then fill in more stores in between. When it came to larger cities, rather than going into the center, he would open stores on the periphery, in the direction the city was growing. After a while, the city would envelop those stores, giving Walmart populated locations at a bargain.
Although Walton was known for his thriftiness, he was forced to finance his expansion by taking out loans in his name. With more growth came more debt. As the debt become unbearable, Walton decided to do something about it. There was one way he could get rid of the burden once and for all, and that was by taking the company public. He found a Wall Street underwriter he thought was a good fit—White, Weld—and with their help took the company public. On October 1, 1970, the burden was lifted:
… coming back from New York that day, I experienced one of the greatest feelings of my life, knowing that all our debts were paid off. The Walton family only owned 61 percent of Wal-Mart after that day, but we were able to pay off all those bankers, and from that day on, we haven’t borrowed one dime personally to support Wal-Mart. The company has rolled along on its own and financed itself.
Furnished with fresh funding, the company pursued its steady march of expansion. From 1970 to 1980—a period of only 10 years—Walton went from a few stores doing low eight figures in revenue to 276 stores with $1.2 billion in sales:
1970: 32 stores, $31 million revenue
1972: 51 stores, $78 million revenue
1974: 78 stores, $168 million revenue
1976: 125 stores, $340 million revenue
1978: 195 stores, $678 million revenue
1980: 276 stores, $1.2 billion revenue
So for the most part, we just started repeating what worked, stamping out stores cookie-cutter style. The only decision we had to make was what size format to put in what market. We had five different store sizes—running from about 30,000 to 60,000 square feet—and we would hardly ever pass up any market because it was too small.
In the middle of the 1970s, the company experienced its greatest challenge to date. In 1974, Walton decided that it was a good time to step back from his role as CEO. The trouble was, two of his top chiefs, Ron Mayer, who ran finance and distribution, and Ferold Arend, who ran merchandising, didn’t really get along. Mayer was made CEO, while Arend became president. As time went on, the rift between the two leaders deepened, and employees began to split up into two opposing camps. All the while, Walton continued to get involved in the day to day operations, hindering Mayer from running the company the way he wanted.
In 1976, Walton came to see that he stepped back prematurely, and that it would be better to take over as CEO again rather than let things continue the way they were, with internal fractions and a founder who wouldn’t let go of the reins. As he returned to his post he left many people deeply unhappy with the situation, including Mayer, who was forced to step down. Mayer couldn’t be persuaded to stay in another role and left. This triggered what became known in the company as “the exodus”:
First, a whole group of senior managers who had been part of Ron’s team—our financial officer, our data processing manager, the guy who was running out distribution centers—all walked out behind him. You can imagine how Wall Street felt about that. A lot of folks wrote us off immediately.
… It was a real, bona fide exodus, and by the time it was over, I’ll bet one third of our senior management was gone. For the first time in a long time, things looked pretty grim.
What happened next is remarkable. Walton found new talent to fill the gaps—better talent. Not only did the company rebound, it pressed forward with renewed strength. For a while, Walton was trying to hire David Glass, but he wasn’t interested. After Mayer left, Walton finally convinced Glass to come aboard to run finance and distribution. Glass, in Walton’s words, “made [Walmart] a stronger company almost immediately.” He also hired Jack Shewmaker to run operations and merchandise. Not only did they handle the crisis, they “blew the doors off” their previous performance.
Besides building a robust logistics system, Walton focused on creating a culture that focused on teamwork, innovation and, perhaps most important, putting the customer first. When Walton visited his tennis ball supplier South Korea, he noticed that the whole of the factory staff did an exercise routine in the morning. He loved the idea and brought it to Walmart in the form of a morning cheer. When he noticed that certain stores had high levels of shrinkage (i.e. theft), he came up with a solution: Walmart would pay bonuses to stores that managed to keep shrinkage below a certain percentage. Shrinkage soon fell to half the industry average. Although Walton’s frugality led him to save on everything—including salaries—he changed his mind later when he came to realize that paying your employees more not only leads to happier employees, but happier customers:
The larger truth that I failed to see turned out to be another of those paradoxes—like the discounters’ principle of the less you charge, the more you’ll earn. And here it is: the more you share profits with your associates—whether it’s in salaries or incentives or bonuses or stock discounts—the more profit will accrue to the company. Why? Because the way management treats the associates is exactly how the associates will then treat the customers.
In 1980 Walmart had 276 stores doing $1.2 billion in revenue ($1 million in profits). In just ten more years Walmart would have 1,528 stores bringing in $26 billion in revenue ($1 billion in profits), becoming the largest retailer in the world.
David Glass on Sam Walton:
Two things about Sam Walton distinguish him from almost everyone else I know. First, he gets up every day bound and determined to improve something. Second, he is less afraid of being wrong than anyone I’ve ever known. And once he sees he’s wrong, he just shakes it off and heads in another direction.
As I’ve mentioned above, this attitude towards failure—seeing it as an essential part of learning and getting better—is a perfect description of someone who operates primarily in a growth mindset. What made Walton special was his method of learning: he used his competitors as repositories of ideas. Walton even calls Kmart, his biggest competitor, the laboratory:
… Kmart had interested me since the first store went up in 1962. I was in their stores constantly because they were the laboratory, and they were better than we were. I spent a heck of a lot of my time wandering through their stores talking to their people and trying to figure out how they did things.
Walton would literally go into every store he passed to see the way they ran their operations: what prices they charged, how they arranged their goods, what promotions they ran, etc. He would even pester the clerks with questions, trying to get them to reveal some of their logistics. He then used this information to make small improvements to his own stores. If he found some idea he liked, he implemented it right away. By tenaciously gathering these ideas and making them his own, little by little his businesses began to grow and thrive. He was never the best at anything, but this didn’t stop him from learning from those who were.
Is another Walmart possible today? Not only does Walton think so, at the end of the book he actually gives his advice on how to start one. The first thing he would do is niche down. Rather than selling everything, pick a niche and dominate it by offering more variety than the general stores—e.g. focus on plumbing supplies, specialist tools, crafts, apparel, etc. Pick one thing and offer better selection and expertise than anyone else. You can always expand later.
The second thing Walton recommends is doing things that don’t scale. He gives the example of going out on the shop floor and meeting every one of your customers. In the digital age this could be personally answering emails to provide exceptional customer support. When you’re still small and don’t have many customers, you can provide a level of service far beyond that offered by a large corporation.
In 1994, just two years after the book was published, Jeff Bezos founded Amazon. He rode the Internet wave, predicting rightly that consumers will shift to buying things online. He niched down, focusing first on books in order to establish himself as a market leader and build a strong brand. Once he dominated the online books market, he gradually expanded to other things until Amazon became the “everything store.” Like Walton, Bezos focused on moving large volumes of goods at slim margins, using aggressive discounting and sales to attract massive traffic. Lastly, he focused on customer service, providing a level of support beyond his competitors which helped remove people’s hesitations about shopping online.
The same principles—focusing on a niche (at least initially) coupled with exceptional customer service—can be used to compete with Amazon. As Walton writes, the next big retailer could be the little shop that just opened up down the street—or, in the age of e-commerce, that little online store.