Sam Walton changed retail forever.
The founder of Wal-Mart, created more wealth in the 20th century than almost anybody else.
At one point, Sam Walton was the richest man in America.
Today, Wal-Mart is a company of astounding size. It’s an essential element of rural life in America — a one-stop shop for all our essential goods.
Some statistics about Wal-Mart, taken from Sam Walton: Made in America, an autobiography of Sam Walton, the founder of Wal-Mart.
“Every week, nearly 40 million people shop in Wal-Mart. Last year, we sold enough men’s’ and women’s underwear and socks to put a pair on every person in America, with some to spare.
We sold 135 million men’s and boys’ briefs, 136 million panties, and 280 million pairs of socks. We sold one quarter of all the fishing line purchased in the U.S., some 600,000 miles of it, or enough to go around the earth twenty-four times.
We sold 55 million sweatsuits and 27 million pairs of jeans, and we sold almost 20 percent of all the telephones bought in the U.S. And here’s one I’m really proud of: in one week last year, we sold as much Ol’ Roy private label dog food as we did in all of 1980. With sales of $200 million last year, Ol’ Roy became the number-two dog food in America, and remember, we only sell it in Wal-Mart.
Another one: Procter & Gamble sells more product to Wal-Mart than it does to the whole country of Japan.”
Mind-bending.
How did Wal-Mart grow so large? Why did the company succeed? What can we learn from Sam Walton’s success?
Rising Up the Retail Ranks
Some history.
Walton’s first foray into retail was a stint at J.C. Penny, where he worked as a management trainee and earned $75/month.
After leaving the military, Walton took over management of his first variety store in 1945, at the age of 26. Aided by a $20,000 loan from his father-in-law and $5,000 he had saved from his time in the Army, Walton purchased his first variety store in Newport, Arkansas. The store was called Ben Franklin. At the time of purchase, the store earned $80,000 per year. With Walton at the helm, the store grew fast to $225,000 in revenue in just three years.
Stocked with a wide range of goods, both stores grew fast. As Walton made money in one store, he’d invest in another.
Walton was known for his fierce competitiveness. He didn’t care about being right; he cared about winning retail. Walton was so obsessed with retailing that he wasn’t worried about destroying his old beliefs if he found new evidence that contradicted it.
“Business is a competitive endeavor, and job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living.”
With fire and fury, Walton made the best of low-margins.
Walton family members managed inventory, checked in freight, and ran between stores to move product that was not selling from one store to another. Profit from one store was re-invested in another one.
Just fifteen years after its founding, Walton had become the largest independent variety store operator in the United States. Walton wrote:
“[Even then] the business itself seemed a little limited. The volume was so little per store that it really didn’t amount to that much. I mean, after fifteen years—in 1960—we were only doing $1.4 million in fifteen stores.”
Walton hesitated to spend unnecessary money. He played it close to the belt, never doing anything in size or volume unless he had to.
As Wal-Mart grew, so did Walton’s debt:
“It’s true enough that I was nervous about spending any unnecessary money in those days. We were generating as much financing for growth as we could from the profits of the stores, but we were also borrowing everything we could. I was taking on a lot of personal debt to grow the company—it approached $2 million, which was a lot of money at the time. The debt was beginning to weigh on me.”
Only then did Walton learn about the advantages of large stores. Walton called them “Family Centers.” They earned $2 million per year in sales per store, which was unthinkable for small towns at the time.
Eager to expand his operations, Walton turned his attention to Wal-Mart. While “Ben Franklin” only discounted some of their items, Wal-Mart would discount everything. Wal-Mart’s brand would be built on low prices.
At the beginning, Wal-Mart company struggled to raise money. Since nobody wanted to gamble on the first Wal-Mart, Walton borrowed vast sums of money and put up 95 percent of the dollars.
Since its founding, Wal-Mart has been driven by two maxims — both of which still guide the company today: (1) “We Sell for Less” and (2) “Satisfaction Guaranteed.”
Improvement: A Daily Ritual
David Glass, who would later replace Sam Walton as CEO of Wal-Mart, described Walton’s commitment as such:
“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.”
Walton soaked up wisdom from everybody he could — from competitors to Wal-Mart’s entry-level associates.
He stalked competing retailers, borrowed their best ideas and incorporated the lessons into Wal-Mart’s ethos.
Walton was only concerned with what his competitors were doing right — not what they were doing wrong. Walton believed he could learn from every store and every employee.
In the words of one Wal-Mart associate:
“When he meets you, he looks at you—head cocked to one side, forehead slightly creased—and he proceeds to extract every piece of information in your possession. He always makes little notes. And he pushes on and on. After two and a half hours, he left, and I was totally drained. I wasn’t sure what I had just met, but I was sure we would hear more from him.”
As Wal-Mart grew, Walton expanded his domain of exploration. During a trip to Brazil, Walton was impressed by the giant Carrefours stores. Seeing the Brazilian chain inspired Walton to launch an experiment called Hypermart — giant stores with groceries and general merchandise under one roof.
By the time Walton returned to America, he was eager to launch the newfound Hypermart initiative.
Walton writes:
“I argued that everybody except the U.S. was successful with this concept and we should get in on the ground floor with it. I was certain this was where the next competitive battlefield would be. Eventually, we opened two Hypermarts in the Dallas-Fort Worth area, one in Topeka, and one in Kansas City. By now we had gotten enough respect in the business so that Kmart jumped right in behind us with their own Hypermart concept called American Fare.”
Unexpected challenges emerged as the Hypermart initiative grew:
“Our Hypermarts weren’t disasters, but they were disappointments. They were marginally profitable stores, and they taught us what our next step should be in combining grocery and general merchandising—a smaller concept called the Supercenter. But I was mistaken in my vision of the potential the Hypermart held in this country.
We conducted other similar, but less publicized, experiments that didn’t work out so well either. Our dot Discount Drug concept grew to twenty-five stores before we decided it wasn’t going to be profitable enough. And we tried one home improvement center called Save Mor in the building which had housed the original Wal-Mart in Rogers, which was also not a success. As David Glass says about me, once I decide I’m wrong, I’m ready to move on to something else.”
The Hypermart failure did not discourage Walton from launching future experiments.
The Sam’s Club experiment launched in 1983. In just nine years, Sam’s Club became a $10 billion business with 217 stores around the country. Here’s how Walton describes Sam’s Club:
“Sam’s are big stores in warehouse-type buildings aimed at small-business owners and other customers who buy merchandise in bulk. A membership fee entitles a customer to shop at Sam’s, which charges wholesale prices for name-brand, often high-end merchandise—everything from tires to cameras to watches to office supplies to cocktail sausages and soft drinks. If you’ve never been in one, they’re a lot of fun to shop, and the people who work there are a little crazy. Like the old days at Wal-Mart, they’re liable to do anything on a moment’s notice to move the merchandise.”
Sam’s Club is a straightforward business with no advertising. The whole marketing team simply sells the Sam’s Club concept. For $25 per year, small businesses can access a just-in-time warehouse with all the same price advantages that large companies receive.
Sam’s Club and Wal-Mart were separate businesses, each with a different management team. Even as Sam’s Club went upmarket, Wal-Mart doubled down on low prices and low margins.
Low Prices
Walton’s philosophy of Wal-Mart is simple: sell the highest quality goods at the lowest possible prices. Frugality is built into Walton’s DNA.
Walton was a child of the Great Depression. Since money was tight during the 1930s, Walton performed chores to make financial ends meet.
In the mornings, Walton milked the family cows. Once the milk was bottled, Walton took on his next job. He worked as a newspaper boy for the Columbia Daily Tribune and sold magazine subscriptions in his spare time.
Walton’s appreciation for the value of a dollar was crucial for Walmart’s success:
“I’m asked why today, when Wal-Mart has been so successful, when we’re a $50 billion-plus company, should we stay so cheap? That’s simple: because we believe in the value of the dollar. We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money. Every time Wal-Mart spends one dollar foolishly, it comes right out of our customers’ pockets. Every time we save them a dollar, that puts us one more step ahead of the competition—which is where we always plan to be.”
Walton’s commitment to frugality allowed him to beat big variety stores, even when the odds were against him.
When Wal-Mart would arrive in a new town, customers would flock to Wal-Mart instead of the traditional variety stores. In response, these variety stores eventually converted to discounting.
Existing variety stores were unable to compete with Wal-Mart’s frugal ethos:
“Kuhn’s Big K became a discount chain. Sterling launched its Magic Mart discount chain. And Duckwall went into discounting. On paper we really didn’t stand a chance. What happened was that they didn’t really commit to discounting. They held on to their old variety store concepts too long. They were so accustomed to getting their 45 percent markup, they never let go. It was hard for them to take a blouse they’d been selling for $8.00, and sell it for $5.00, and only make 30 percent. With our low costs, our low expense structures, and our low prices, we were ending an era in the heartland. We shut the door on variety store thinking.”
Variety stores were unable to compete with Wal-Mart’s scale advantages.
By increasing their volume, Wal-Mart lowered prices; by lowering prices, they increased market share, and by increasing market share, they built structural advantages which allowed this virtuous cycle to perpetuate.
Here’s Walton:
“If you’re interested in “how Wal-Mart did it,” this is one story you’ve got to sit up and pay close attention to. Harry was selling ladies’ panties—two-barred, tricot satin panties with an elastic waist—for $2.00 a dozen. We’d been buying similar panties from Ben Franklin for $2.50 a dozen and selling them at three pair for $1.00. Well, at Harry’s price of $2.00, we could put them out at four for $1.00 and make a great promotion for our store.
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 the higher price. In retailer language, you can lower your markup but earn more because of the increased volume.”
Underfinanced and undercapitalized, Wal-Mart’s culture of frugality was born out of necessity. To Walton’s surprise, he discovered that there was much, much more business in small-town American than anybody — including Walton — had ever dreamed of.
Low prices were Wal-Mart’s number one goal. To achieve them, everybody worked like crazy to keep expenses low — never paying more than $1 per square foot in rent.
In the name of low prices, Wal-Mart’s early stores were unprofessional and didn’t look good. Neither did it’s Bentonville, Arkansas headquarters.
To keep prices low, Walton had to control expenses better than his competition:
“This is where you can always find the competitive advantage. For twenty-five years running—long before Wal-Mart was known as the nation’s largest retailer—we ranked number one in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.”
To improve efficiency, Walton focused on a single metric: ratio of sales to inventory.
Ratio of Sales to Inventory
Walton preached the importance of “swimming upstream.” That tendency, Walton believed, was a secret to Wal-Mart’s success.
In its early years, Wal-Mart operated primarily in small, remote communities.
At the time, during the 50s and 60s, America was changing fast. Wal-Mart’s success didn’t take place in a vacuum.
“All the kids who had grown up on farms and in small towns had come home from World War II or Korea and moved to the cities where all the jobs were. Except they weren’t really moving to the cities; they were moving to the suburbs and commuting into the cities to work. It seemed like every family had at least one car—and many had two—and the country had started building its interstate highway system, all of which changed a lot of the traditional ways Americans were accustomed to doing business. The downtowns of big cities started to lose population and business to the suburbs, and the big downtown department stores had to follow their customers and build branch stores out in the suburban malls.”
This spawned a whole host of car-oriented chains:
“Traditional diners and cafés suffered because of the new car-oriented chains like McDonald’s and Burger King, and the old city variety stores like Woolworth’s and McCrory’s just got smashed by Kmart and some of the other big discounters. The oil companies stuck service stations on practically every other corner, and pretty soon something called convenience stores—7-Elevens and such—came along and started filling up the other corners.”
Wal-Mart’s success attracted competitors.
To differentiate itself against the rising competition, Wal-Mart took control of its distribution and logistics channels. This vertical integration gave the company a competitive advantage over competitors that relied on third-party suppliers.
To increase Wal-Mart’s competitive edge, Walton minimized its ratio of sales to inventory.
Walton writes:
“The gap from the time our in-store merchants place their computer orders until they receive replenishment averages only about two days. That probably compares to five or more days for a lot of our competitors, which don’t ship as much merchandise through their own network. The time savings and flexibility are great, but the cost savings alone would make the investment worthwhile. Our costs run less than 3 percent to ship goods to our stores, while it probably costs our competitors between 4 ½ to 5 percent to get those same goods to their stores. The math is pretty simple: if we both sell the same goods for the same price at retail, we’ll earn 2 ½ percent more profit than they will right there.”
By controlling distribution and logistics channels, Wal-Mart shortened its lead times and broke away from its competition.
Through vertical integration, Wal-Mart could offer lower prices and continue to earn a profit — both of which gave Wal-Mart a sustainable competitive edge.
The 2% Rule: Avoid Bureaucracy and Decentralize
As Wal-Mart expanded across America, Walton could no longer manage the everyday details of the business.
New stores meant new employees and new employees meant new challenges.
Walton began to fear bureaucracy. Walton instructed his employees to keep the company lean. Otherwise, expenses would multiply as the pace of progress slowed.
To fight bureaucracy, Wal-Mart kept below a 2 percent general office expense structure.
As Walton instructed:
“2 percent of sales should have been enough to carry our buying office, our general office expense, my salary, Bud’s salary—and after we started adding district managers or any other officers—their salaries too. Believe it or not, we haven’t changed that basic formula from five stores to two thousand stores. In fact, we are actually operating at a far lower percentage today in office overhead than we did thirty years ago, and that includes tremendous expenses for computer support and distribution center support—though not the actual cost of running the distribution centers. Really, it includes everything that we supply centrally in the way of support for the stores.”
I call this the “2% Rule.”
Walton held a strong belief in the importance of pushing down responsibility and authority.
Walton continues:
“The bigger we get as a company, the more important it becomes for us to shift responsibility and authority toward the front lines, toward that department manager who’s stocking the shelves and talking to the customer. When we were much smaller, I probably wasn’t as quick to catch on to this idea as I should have been.”
Walton continues:
“Anytime a company grows as fast as Wal-Mart has, pockets of duplication are going to build up, and there will be areas of the business which we may no longer need. No boss or employee really likes to dwell on such matters: it’s only human nature not to want to have your job, or the jobs of the people who work for you, eliminated.”
As Wal-Mart localized decision making, individual stores earned autonomy. This allowed Wal-Mart to control its expenses better than its competitors.
Here’s Walton:
“For twenty-five years running—long before Wal-Mart was known as the nation’s largest retailer—we ranked number one in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.”
Walton’s obsession with efficiency inspired the store within a store initiative:
“In Store Within a Store we make our department heads the managers of their own businesses, and in some cases these businesses are actually bigger in annual sales than a lot of our first Wal-Mart stores were.
We share everything with them: the costs of their goods, the freight costs, the profit margins. We let them see how their store ranks with every other store in the company on a constant, running basis, and we give them incentives to want to win. We’re always trying for that fine balance between autonomy and control.
Like any big retailer, Wal-Mart obviously has certain procedures which we require our stores to follow or items they must stock. But we have taken steps to make sure our stores have some autonomy.”
Wal-Mart executives were surprised by the diversity of shopping patterns across the Wal-Mart network:
“We have to do [focus] store by store, department by department, customer by customer, associate by associate. For example, we’ve got one store in Panama City, Florida, and another only five miles away in Panama City Beach, but actually they’re worlds apart when it comes to their merchandise mix and their customer base. They’re entirely different kinds of stores.
One is built for tourists going to the beach, and the other is more like the normal Wal-Mart, built for folks who live in town. That’s why we try our best to put a merchant in charge of each store, and to develop other merchants as the heads of each department in those stores. If the merchandise mix is really going to be right, it has to be managed by the merchandisers there on the scene, the folks who actually deal face to face with the customers, day in and day out, through the seasons.”
Wal-Mart’s strategy of pushing down responsibility was nested within a more important mantra: focus on the customer.
Focus on the Customer
Walton credits Wal-Mart’s focus on the customer as the most important single ingredient of Wal-Mart’s success.
Walton believed that companies who don’t think about the customer and focus on their interests will get lost in the shuffle — if they haven’t already. Those who are greedy will be left in the dust, he says.
Describing Sam Walton, Roberto Goizueta, the Chairman, and CEO of Coca-Cola once said:
“Sam Walton understands better than anyone else that no business can exist without customers. He lives by his credo, which is to make the customer the centerpiece of all his efforts. And in the process of serving Wal-Mart’s customers to perfection (not quite perfection, he would say), he also serves Wal-Mart’s associates, its share owners, its communities, and the rest of its stakeholders in an extraordinary fashion—almost without parallel in American business.”
To Walton, everything is done on behalf of the customer.
Take negotiation; Walton writes:
“There’s a difference between being tough and being obnoxious. But every buyer has to be tough. That’s the job. I always told the buyers: ‘You’re not negotiating for Wal-Mart, you’re negotiating for your customer. And your customer deserves the best price you can get. Don’t ever feel sorry for a vendor. He knows what he can sell for, and we want his bottom price.’
And that’s what we did, and what Wal-Mart still does. We would tell the vendors, ‘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 for 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.
We used to get in some terrific fights. You have to be just as tough as they are. You can’t let them get by with anything because they are going to take care of themselves, and your job is to take care of the customer.”
Wal-Mart keeps its prices as low as possible by keeping its costs as low as possible.
Everything flows back to Walton’s lifelong obsession: serving the customer.
Note: Sam Walton: Made in America is the source for all information above.
