Sam Walton: Great From the Start

Sam Walton’s retailing career began September 1, 1945, in Newport, Arkansas. He paid a princely $25,000 to Butler Brothers to franchise a 5,000-square-foot Ben Franklin’s variety store. In this excerpt from Giants of Enterprise: Seven Business Innovators and the Empires They Built, author and HBS professor Richard S. Tedlow depicts the huge success Walton made of his first store—against all odds. The book is scheduled for publication later this year by HarperBusiness. Excerpted with permission of the author.
by Richard S. Tedlow

Sam Walton's first store was a second-rate store in a second-rate town in what no one would have classified as a first-rate state. Millions, literally, of small stores failed during the course of the twentieth century in America. There were about 1.7 million retail establishments in the United States in 1945. Why wouldn't this one be among the many that didn't make it?

Surely, any analyst of the situation in 1945 would have found in Walton a good candidate for failure. As he himself put it, "For all of my confidence I hadn't had a day's experience in running a variety store . . .." He could have added that he had not had a day's experience in running a business of any kind. He paid a price for this inexperience and excessive enthusiasm before his store even opened. He had selected the wrong store and paid too much for it. "Only after we closed the deal, of course, did I learn that the store was a real dog." The rent for this "dog" was 5 percent of sales. This sounded fine to Walton; but after signing the lease, he discovered that this "was the highest rent anybody'd ever heard of in the variety store business. No one paid 5 percent of sales for rent." Here was another economic factor which was going to make it difficult to use low prices as a competitive weapon. And there were more problems with the lease, serious problems, which it would take Walton another half decade to discover.

First he learned all the rules. Then he broke all the rules which did not make sense to him—which meant almost all of them.
—Richard S. Tedlow

Walton seemed to have a lot of strikes against him. But he was a spectacular success in his first store. Why? Much of what was to make him a great merchant was evident from the very beginning. First he learned all the rules. Then he broke all the rules which did not make sense to him—which meant almost all of them. Everything he did seems so obvious. It seems that way because it is. Sam Walton did not become a billionaire because he was a genius (although he was without question smart, shrewd, and astute). The real explanation for his success was that he had the courage of his convictions.

Butler Brothers had a training program for variety store franchisees, so Walton was off to Arkadelphia, Arkansas, for two weeks of education prior to opening his store. He found it useful. "You can learn from everybody," he said, and one of the key characteristics of his career was that he kept learning until the day he died. He learned from Butler Brothers, from retail publications, and from his competitor, John Dunham, with his Sterling Store. According to Helen Walton, his wife, "Of course, 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 .... I'm sure it aggravated him quite a bit early on."

It did not take long for Walton to begin to chafe under the tight controls of Butler Brothers. He began scouting around for less expensive suppliers, and he found them. If there was inspiration in his business strategy, it lay in the next step. Having found less expensive suppliers than Butler Brothers, he did not sell his products at prevailing prices. Instead, he discounted his merchandise, passing the savings he achieved on to the consumer, and made his profit on volume rather than on margin. "Simple enough," as Walton himself admitted. But it took him a decade to appreciate fully the power of the idea. Once seizing on it, never wavering from it became the centerpiece of Wal-Mart's greatness.

Sam Walton: Great From the Start
Sam Walton

That was still a long time in the future. Butler Brothers was not thrilled by Walton's freelancing ways, but the numbers he was putting up seemed to mollify them. Sales increased more than 45 percent to $105,000 in his first full year of ownership. The following year, sales were up another third to $140,000. The year after that he surpassed his rival Dunham as sales increased 25 percent to $175,000. After thirty months in business, Walton was able to repay his father-in-law's loan in full. In his fifth year at the Ben Franklin on Front Street in Newport, Arkansas, Sam Walton—the sucker Butler Brothers had been looking for—sold $250,000 worth of merchandise and made a profit of between $30,000 and $40,000. His loser of a store in the middle of nowhere had posted a compound annual growth rate in sales of over 28 percent. He was the leading variety store operator in Arkansas, and probably in the adjacent states as well.

And then, in a heartbeat, he lost everything.

The problem was the lease Walton had signed back in 1945 for his Front Street store. It contained no renewal clause. Options to renew were standard features of leases such as the one Walton had originally entered into. L. S. Robson, Walton's father-in-law, was reportedly shocked by Walton's mistake.

Not only had Walton built a successful business in Newport, he had invested a lot of himself in the town. He was an active member of the Rotary Club, a member of the board of deacons of the Presbyterian church ("even though I was a Methodist, it worked out real well"), and president of the Chamber of Commerce.

Equally important, Helen loved the town. Three of her four children—John Thomas (1946), James Carr (1948), and Alice (1949)—were born during those five years. "We had built a life there," she recalled in 1992. "I still have good friends from those days." Now they were going to have to leave because there was no other space available to relocate the store.

"It was the low point of my life," Walton recalled.

"I felt sick to my stomach. I couldn't believe it was happening to me. It was really like a nightmare. I had built the best variety store in the whole region and worked hard in the community—done everything right—and now I was being kicked out of town. It didn't seem fair. I blamed myself for getting suckered into such an awful lease, and I was furious at the landlord. Helen, just settling in with a brand-new family, was heartsick at the prospect of leaving Newport. But that's what we were going to do."

There is a great deal to be learned from Walton's assessment of the situation. First of all, this really hurt. Second, he blamed himself. Third, he had been a sucker—there is that word again. Fourth, even though he took responsibility, he found something fundamentally unfair in what had befallen him. He had "done everything right," yet his reward was exile.

Many another great entrepreneur suffered similar setbacks. Many made mistakes for which they had only themselves to blame. Many encountered situations in which their failure to achieve their goals was experienced as fundamentally unfair. Great entrepreneurs are, speaking generally, people of enormous, innate optimism… They believe that honest, intelligent effort will be greeted by appropriate reward. What they do not believe is that life is unfair. When they do everything right, and the result turns out wrong, the cause is a temporary cosmic misunderstanding which will be corrected in due course. Sometimes corrected with a vengeance….

Also like other great entrepreneurs, Walton traveled light. He did not ruminate. "I've never been one to dwell on reverses, and I didn't do so then.... I know I read my leases a lot more carefully after that, and maybe I became a little more wary of just how tough the world can be .... But I didn't dwell on my disappointment."'

It is worth asking why P. K. Holmes, Walton's landlord, did not renew his lease. There were some obvious reasons for him to keep rather than evict Walton. His flair was creating a lot of what Newport had precious little of, excitement. Walton was repeating his high school and college experiences, becoming the most popular man around. And there was what cannot have been the completely insignificant question of money. Before Walton, the local Ben Franklin did $72,000 in sales. Five years into Walton's tenure, it did a quarter of a million. At a rental fee of 5 percent of sales, that meant the difference between $3,600 and $12,500 or $8,900 for Mr. Holmes. $8,900 in 1945 is, inflation adjusted, over $85,000 in 2000. Mr. Holmes received this bounty for doing nothing whatever himself. It was pure luck for him that Helen Walton wanted to live in a small town, that Butler Brothers needed to unload the local Ben Franklin, and that the "sucker" on whom it was unloaded turned out to be the greatest merchant ever.

Think about the future. Let's say that Walton's store eased from its 28 percent compound annual growth rate in sales down to 18 percent. In five years, the sales of that store would be about $572,000. Five percent of that is over $28,000. Not a bad income for sitting around and watching the grass grow. One can imagine worse tenants.

The fact that Walton had acquired the lease to a store in Newport that Kroger was vacating and then set up a small department store himself, which he called the Eagle Store, might not have been completely irrelevant in Holmes's thinking. Walton did not intend to go into the department store business in a serious way. He bought the lease to prevent his "friendly" rival John Dunham from acquiring the property and expanding his Sterling Store. Newport already had a couple of department stores. One of these was owned by P. K. Holmes. Walton's transaction did not go unnoticed.

However, Walton believed, probably correctly, that Holmes refused to renew his lease at any price because he saw how well the Ben Franklin was doing. He purchased the store's inventory and fixtures at what Walton himself concedes was "a fair price," $50,000. So Walton did not leave Newport empty-handed. With the store intact, Holmes gave it to his son. Thus, Walton suffered from nepotism in a sense just as George Eastman had. Holmes must have figured there was no particular reason to be content with 5 percent of something when he could have 100 percent of that same thing all in the family.

Eastman returned to the Rochester Savings Bank as a director after he had made his fortune. Walton never came back to Newport as a resident, but he did as a merchant. This is what he had to say:

"Wal-Mart No. 18 … opened in 1969, and it marked our return to Newport ... nineteen years after we had basically been run out of town. By then, I was long over what had happened to us down there, and I didn't have revenge in mind…. As it happened, we did extraordinarily well with our Newport Wal-Mart, and it wasn't too long before the old Ben Franklin store I had run on Front Street had to close its doors. 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."

Perhaps Walton did not have revenge uppermost in mind. But odds are it was there somewhere. He found room to mention Wal-Mart No. 18 in his autobiography, which was written on his deathbed.