Table of Contents
- Lessons Learned
- Starting on a Dime
- Swimming Upstream
- Creating a Culture
- Finding the Formula
- Making the Customer #1
- Meeting the Competition
- Thinking Small
- Leaving a Legacy
As a small child, Sam Walton and his siblings were expected to work. But, he does not recall this as punitive. Work introduced him to the world and people, and he would find it personally rewarding throughout his life.
The Waltons learned to be contributors, not takers. His parents just didn’t spend money. He learned it takes hard work to get your hands on a dollar and that “Nobody owes anybody else a living.”
Sam did not find this parsimonious. Rather, he came to understand how competitive business is and how “job security lasts only as long as the customer is satisfied.”
An early partner, Charlie Baum, says money is immaterial to Sam Walton. It does not motivate Walton; instead, “Money drives him crazy.” For all appearances, Baum says, “I’d swear he was broke.”
Former Wal-Mart CEO David Class agrees that Walton has taught their culture to believe in the value of a 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.”
Starting on a Dime
It never occurred to Walton that he might lose. It was almost as if he had a right to win. And, this is how Wal-Mart did it while competing with other variety stores. Walton would buy an item for $0.80 each and sell it at $1.00. At that, he would sell three times more items than if it were priced at $1.20.
“…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.”
Brother Bud Walton supports this with stories of washing windows, sweeping floors, and trimming the windows. Family members managed stock, checked in freight, and ran through alleys between stores to move product that was not selling from one store to another. As Walton remembers, “What we were obsessed with was keeping our prices below everybody else’s.”
John Walton remembers that the family invested every penny made in one store in another store. And, David Glass described Sam Walton as arising every day “bound and determined to improve something.”
After 15 years, Wal-Mart switched to larger format stores ramping up to $2,000,000 per year per store on a philosophy of “we sell for less” and “satisfaction guaranteed.”
Having started underfinanced and undercapitalized, the Waltons dealt with “a lifetime of swimming upstream.” This early and continuing struggle may be the secret of their success. As Sam Walton says, “in the community, I really am an establishment kind of guy… in the marketplace, I have always been a maverick who enjoys shaking things up and creating a little anarchy.”
His core approach was simple. He wanted customers to think of low prices and guaranteed satisfaction when they thought of Wal-Mart. He wanted them to believe they wouldn’t find an item cheaper anywhere else, and “if they didn’t like it, they could bring it back.”
Creating a Culture
If store employees are to care for customers, Sam Walton believed you must take care of the people in the stores. Walton invariably introduced himself as “Sam Walton from Arkansas.” One manager said, “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”
Walton valued timely information. He checked every competitor, looking for the good not the bad. And, he would find the more you turn your inventory, the less capital you require. And, all this involves logistics—getting merchandise to the store at the right time, communicating how it’s being priced and how it’s being marked down.
In 1966, before retail computers, Walton managed inventory, logistics, and distant stores. Still, he could not have succeeded without pioneering the use of computers. Sam Walton never did anything in size or volume until he had to. He always played it close to the belt.
Necessity shaped Walton’s growth strategy. For example, wanting to place stores within reach of district managers who could visit and control, the Waltons built each store within a day’s drive of a distribution center.
Finding the Formula
Wal-Mart disrupted and eventually ended the thinking behind legacy variety stores. The competition never really committed to discounting. With Wal-Mart’s strategy of keeping costs and prices as low as possible, maintaining a low expense infrastructure, and ensuring customer satisfaction, they ended the variety store concept in the heartland.
Having disrupted variety store marketing, Walton felt the more you share profits—salaries, incentives, bonuses, or stock discounts—with your associates, the more profit will accrue to the company. The way management treats associates is exactly how the associates will then treat the customers.
Making the Customer #1
Sam Walton saw that the real profit in retail lies in satisfied, loyal, repeat customers. In the whole Wal-Mart scheme of things, the most important contact ever made is between the associate in the store and the customer.
Big mansions, flashy cars, and executive excess are counter-productive because they are distractions from what your mind is supposed to be concentrating on: serving the customer.
Humble and earnest, Sam Walton would lead Saturday morning meetings that became legendary, sometimes serious and most time fun, sometimes democratic and other times dictatorial.
“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 holders, its communities, and the rest of its stakeholders in an extraordinary fashion—almost without parallel in American business.” —Roberto C. Goizueta, chairman and CEO, Coca-Cola
Meeting the Competition
In the Walton ethos, business is a competitive endeavor, and job security last only as long as the customer is satisfied. So, Walton has a few suggestions for those who want to compete with Wal-Mart:
- Avoid coming at us head-on; do your own thing better than we do ours.
- Get out on the floor and meet every one of the customers.
- Get your product assortment right and make sure your salespeople have excellent knowledge of the products goes out of their way to take care of customers.
To compete, any business must understand that business conditions change and that survivors must adapt to those changing conditions. Every buyer must be tough. Walton would tell his buyers, ‘You’re not negotiating for Wal-Mart, you’re negotiating for your customer. Your customer deserves the best price you can get. So, don’t feel sorry for a vendor. He knows what he can sell for, and Wal-Mart wants his bottom price.”
You must be fair, upfront, and honest, but you must drive a bargain for millions and millions of customers. When you think like a customer, you will do a better job of procurement and purchasing.
Yet, there were some mistakes:
- Hypermarts in Dallas/Ft. Worth, Topeka, and Kansas City had disappointing results but led to re-sized Wal-Mart Supercenters.
- A Dot Discount Drug concept grew to 25 stores with disappointing results, and they tried a home improvement center called Save Mor that failed.
- And, Sam Walton cast the deciding vote to buy the Kuhn Brothers Big K markets which would continue to decline in performance and value.
On the other hand, Sam’s Clubs started in 1983, and nine years later, it was a $10 billion business with 217 stores. Selling merchandise in bulk to customers who pay a membership fee for access to a just-in-time warehouse. Sam’s Clubs would succeed well.
Joe Hardin, Sam’s Clubs President/CEO, points out, “When you own and manage your distribution and logistics channel [as Wal-Mart does], you have a great competitive advantage over companies that rely on third-party suppliers. It automatically shortens your lead times, but also you can constantly look for ways to improve your operation and try to make it more efficient.”
The gap from the time in-store merchants place their computer orders until they receive replenishment averages only about two days. Compared to the five or more days consumed by competitors, the time savings and flexibility are great.
Sam’s Club spends less than 3 percent to ship goods to the stores, while it probably costs the competition between 4.5 to 5 percent to move those same goods to their stores. So, “The math is pretty simple: if we both sell the same goods for the same price at retail, we’ll earn 2.5 percent more profit than they will right there.”
Walton noted that in 1991, Wal-Mart sold:
- Enough men’s and women’s underwear and socks to put a pair on every person in America, with some to spare;
- 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;
- 55 million sweat suits and 27 million pairs of jeans;
- 20 percent of all the telephones bought in the U.S.; and,
- More Proctor & Gamble products than P&G sold to all of Japan.
A computer never substitutes for getting out in your stores and learning what’s going on. A computer can tell you down to the dime what you’ve sold. But, it can never tell you how much you could have sold. To find out what is selling and what isn’t, what the competition is up to, what kind of job our managers are doing, what the stores look like, what the customers have on their minds, Wal-Mart management visits its stores once a week.
For example, Wal-Mart has stores in Panama City, Florida and 5 miles away in Panama City Beach. Still, their merchandise mix and customer base are worlds apart. Only regular management visits can optimize those differences.
Walton admits that as a smaller company, he did not see the value of shifting responsibility and authority toward the department manager who is stocking the shelves and talking to customers.
But, as Wal-Mart grew, he created a “Store Within a Store” concept that makes Department Heads managers of their own businesses.
“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.”
To stay lean and resist duplicating bureaucracy, Walton tried to operate at a 2 percent general office expense structure, including the Waltons’ salaries. And, they still operate at a far lower percentage in office overhead than thirty years earlier.
Consistent with their philosophy to “think small to grow big,” Wal-Mart controls expenses better than the competition. For twenty-five years running, Wal-Mart ranked number one for the lowest ratio of expenses to sales. Walton said, “You can make a lot of different mistakes and still recover if you run an efficient operation.”
Leaving a Legacy
Sam Walton insists that companies who are not focusing on the customers’ interests are just going to get lost in the shuffle—if they haven’t already. “Those who get greedy are going to be left in the dust.”
“You start with a given: free enterprise is the engine of our society; communism is pretty much down the drain and proven so, and there doesn’t appear to be anything else that can compare to a free society based on a market economy.”
Anyway, the next time some overeager, slightly eccentric shopkeeper opens a business near you, Sam Walton recommends: “See what they’ve got to offer, see how they treat you and decide for yourself if you ever want to go back. Because this is what it’s really all about. In this free country of ours, that shopkeeper’s success is entirely up to you: the customer.”