Made in America

(Zen Buddha Silence by Marilyn Barbone)

(Image:  Zen Buddha Silence by Marilyn Barbone.)

April 8, 2018

Made in America is the autobiography of Sam Walton, founder of Wal-Mart.  It’s a terrific book.  H. Ross Perot commented:

Every person who dreams of building a great business must read this book.  Sam Walton set the standard for listening to his customers and listening to the people who do the work.  In addition to being a great entrepreneur and business leader, Sam Walton was, above all, a fine, decent, kind, generous man.

Outline:

  • Learning to Value a Dollar
  • Starting on a Dime
  • Bouncing Back
  • Swimming Upstream
  • Raising a Family
  • Recruiting the Team
  • Taking the Company Public
  • Rolling Out the Formula
  • Building the Partnership
  • Stepping Back
  • Creating a Culture
  • Making the Customer Number One
  • Meeting the Competition
  • Expanding the Circles
  • Thinking Small
  • Giving Something Back
  • Running a Successful Company: Ten Rules That Worked For Me

Sam Walton:

…ours is a story about the kinds of traditional principles that made America great in the first place.  It is a story about entrepreneurship, and risk, and hard work, and knowing where you want to go and being willing to do what it takes to get there.  It’s a story about believing in your idea even when maybe some other folks don’t, and about sticking to your guns.  But I think more than anything it proves there’s absolutely no limit to what plain, ordinary working people can accomplish if they’re given the opportunity and the encouragement and the incentive to do their best.  Because that’s how Wal-Mart became Wal-Mart: ordinary people joined together to accomplish extraordinary things.

(Photo by Sven, via Wikimedia Commons)

 

LEARNING TO VALUE A DOLLAR

Walton says growing up during the Great Depression impacted his views on money.  Walton’s dad – who was a very hard worker – had a number of jobs, including banker, farmer, farm-loan appraiser, insurance agent, and real estate agent.  When he was out of work in the Great Depression, Walton’s dad eventually went to work for his brother’s Walton Mortgage Company.

In twenty-nine, thirty, and thirty-one, he had to repossess hundreds of farms from wonderful people whose families had owned the land forever… All of this must have made an impression on me as a kid…

Walton’s mother started a little milk business.  Young Walton helped his mom.  Walton also started selling magazine subscriptions.  And he had a paper route from the seventh grade through college.

I learned from a very early age that it was important for us kids to help provide for the home, to be contributors rather than just takers.  In the process, of course, we learned how much hard work it took to get your hands on a dollar, and that when you did it was worth something.  One thing my mother and dad shared completely was their approach to money: they just didn’t spend it.

(Image by Hohum, via Wikimedia Commons)

Walton remarks that he didn’t know much about business, even after earning a college degree in the subject.  When he got to know his wife Helen’s family, he learned a great deal from Helen’s father L. S. Robson.  Walton writes:

He influenced me a great deal.  He was a great salesman, one of the most persuasive individuals I have ever met.  And I am sure his success as a trader and a businessman, his knowledge of finance and the law, and his philosophy had a big effect on me.  My competitive nature was such that I saw his success and admired it.  I didn’t envy it.  I admired it.  I said to myself: maybe I will be as successful as he is someday.

Helen’s father organized the family businesses as a partnership.  Walton later adopted this approach, creating what would later be called Walton Enterprises.

How does Walton view money?

Here’s the thing: Money has never meant that much to me, not even in the sense of keeping score.  If we had enough groceries, and a nice place to live, plenty of room to keep and feed my bird dogs, a place to hunt, a place to play tennis, and the means to get the kids good educations – that’s rich.  No question about it.  And we have it.  We’re not crazy.  We don’t live like paupers the way some people depict us.  We all love to fly, and we have nice airplanes, but I’ve owned about eighteen airplanes over the years, and I never bought one of them new.

When it comes to Wal-Mart, Walton has always been very cheap.  Wal-Mart didn’t buy a jet until the company approached $40 billion in sales “and even then they had to practically tie me up and hold me down to do it.”  In the early days of Wal-Mart, when they went on buying trips, they’d pack as many as eight people into one room.

Why did Wal-Mart continue to be cheap even after it had become a behemoth?  Walton:

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

Walton was always ambitious:

Mother must have been a pretty special motivator, because I took her seriously when she told me I should always try to be the best I could at whatever I took on.  So, I have always pursued everything I was interested in with a true passion – some would say obsession – to win.  I’ve always held the bar pretty high for myself: I’ve set extremely high personal goals.

(Photo by Travelling-light)

As a kid, Walton was a class officer several years.  He was also a Boy Scout.  And he played football, baseball, and basketball.   In both high school and college (at the intramural level), he continued to play sports.

In high school, Walton was student body president and he was active in many clubs.  He enjoyed basketball and was a “gym rat,” always at the gym playing hoops.  When Walton was a senior, his basketball team went undefeated and won the state championship.  This was one of his “biggest thrills.”

Walton continues:

My high school athletic experience was really unbelievable, because I was also the quarterback on the football team, which went undefeated too – and won the state championship as well… I guess I was just totally competitive as an athlete, and my main talent was probably the same as my best talent as a retailer – I was a good motivator.

Walton comments that his ambition and competitive spirit led him to consider as a distant goal running for President of the United States.  In the meantime, he became president of the student body while at the University of Missouri.  Walton:

I learned early that one of the secrets to campus leadership was the simplest thing of all: speak to people coming down the sidewalk before they speak to you.  I did that in college.  I did it when I carried my papers.  I would always look ahead and speak to the person coming toward me.  If I knew them, I would call them by name, but even if I didn’t I would still speak to them… I ran for every office that came along.

(Illustration by Madmirror)

While in college, Walton continued delivering papers.  He had hired a few helpers by this point, and was making $4,000 to $5,000 a year.  [That’s the equivalent of at least $60,000 to $75,000 in 2018 dollars.]  Walton also waited tables and was a lifeguard.  He graduated from the University of Missouri in June 1940.

Walton thought he was going to be an insurance salesman because his high school girlfriend’s father sold insurance for General American Life Insurance Company.  It seemed like a lucrative career and Walton knew he could sell.

Walton wanted to attend Wharton business school, but he realized that even with his paper route and other jobs, he wouldn’t have enough money to pay for it.  Walton met with two company recruiters who came to the Missouri campus.  One was from J. C. Penney and the other from Sears Roebuck.

Walton says he got into retail – starting at J. C. Penney – simply because he was tired and wanted “a real job.”  Although he was only making $75 a month, Walton loved retail.  That’s where he stayed for the next fifty-two years.

Walton almost lost his job because he had never learned handwriting very well.  Fortunately, the store manager, Duncan Majors, was a great motivator and believed in Walton.  Duncan Majors was proud of having trained more Penney managers than anyone else in the country at that time.  He spent time training and developing all his boys.

By early 1942, as an ROTC graduate, Walton prepared to join the war effort.  But he flunked the physical due to a minor heart irregularity.  Walton wandered south, toward Tulsa, thinking he might like to work in the oil business.  Instead, he got a job at a big Du Pont gunpowder plant in the town of Pryor, outside Tulsa.  That’s where he met his wife Helen Robson at a bowling alley.  She was smart, educated, ambitious, opinionated, strong-willed, and energetic, and she was an athlete who enjoyed the outdoors.

Walton served in the military:

I wish I could recount a valiant military career – like my brother Bud, who was a Navy bomber pilot on a carrier in the Pacific – but my service stint was really fairly ordinary time spent as a lieutenant and then as a captain doing things like supervising security at aircraft plants and POW camps in California and around the country.

By 1945, Walton knew he wanted to go into a retailing and to own his own store.  He read every book he could on retailing.

People today, looking back, know that Wal-Mart initially had a small-town strategy.  This was just luck.  Helen, Sam Walton’s wife, said she wouldn’t live in any town with more than 10,000 people.

Walton discovered that there was a Ben Franklin variety store that he could run in Newport, Arkansas – a cotton and railroad town of 7,000 people.  The current owner was losing money and wanted to sell the store.  Walton bought it for $25,000 – $5,000 of his own money and $20,000 from Helen’s father.  Walton made a mistake, however, by not examining the lease agreement carefully.

(Photo by PenelopeIsMe, via Wikimedia Commons)

Walton set an ambitious goal:

I wanted my little Newport store to be the best, most profitable variety store in Arkansas within five years… Set that as a goal and see if you can’t achieve it.  If it doesn’t work, you’ve had fun trying.

One important lesson Walton grasped early on was that you can learn from everybody.  Walton would spend the rest of his career implementing this principle.  He would visit as many stores as possible and speak with as many people as possible.

At the beginning, Walton’s main competition was across the street: Sterling Store, managed by John Dunham.  Walton spent huge amounts of time visiting Sterling Store in order to absorb as much as he could.

Walton also learned a great deal from the Ben Franklin franchise program.  It was a complete course in how to run a store.  The only trouble was that franchisees weren’t given much discretion.  Walton was told what merchandise to sell and how much to sell it for.  Walton also had to buy the merchandise at set prices.  Soon Walton started buying merchandise directly from manufacturers.  He was always looking for “offbeat suppliers” from whom he could get a good deal.  Walton did a lot of driving.

Walton says he learned a simple lesson that would later change the way retailers sell and customers buy:

…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… In retailer language, you can lower your markup but earn more because of the increased volume.

Walton tried many different promotional things.  For instance, they put a popcorn machine and then an ice cream machine out in front of the store.  Both turned out to be profitable.

No matter how well things were going, Walton was a tinkerer:

…I never could leave well enough alone, and, in fact, I think my constant fiddling and meddling with the status quo may have been one of my biggest contributions to the later success of Wal-Mart.

(Illustration by lkonstudio)

When Walton took over the Ben Franklin store, it had done $72,000 in annual sales.  The first year Walton managed the store, it did $105,000 in sales.  The second year was $142,000 and the third year was $175,000.

After five years, Walton ended up reaching his goal:

That Little Ben Franklin store was doing $250,000 in sales a year, and turning $30,000 to $40,000 a year in profit.  It was the number-one Ben Franklin store – for sales and profit – not only in Arkansas, but in the whole six-state region.

Unfortunately, Walton was unable to keep the store because he forgot to include a clause in the lease that gave him an option to renew after the first five years.  Walton notes that it was the low point of his business career.  But he remained determined:

I’ve never been one to dwell on reverses, and I didn’t do so then.  It’s not just a corny saying that you can make a positive out of most any negative if you work at it hard enough.  I’ve always thought of problems as challenges, and this one wasn’t any different… I didn’t dwell on my disappointment.  The challenge at hand was simple enough to figure out: I had to pick myself up and get on with it, do it all over again, only even better this time.

 

BOUNCING BACK

Helen’s father and Walton drove to Bentonville, Arkansas.  They found an old variety store whose owners were looking to sell.  But the two parties couldn’t reach an agreement.  Later, on his own, Helen’s father was able to reach an agreement with the sellers.

Although the store had done only $32,000 in sales before Walton bought it, he had big plans.  Walton had heard about two Ben Franklin stores that were using a new concept: self-service.  All the merchandise was sitting on shelves for the customers to pick out.  The check-out registers were at the front of the store.

(Illustration by Alexmillos)

Walton adopted the self-service concept for his Bentonville store.  He called it Walton’s Five and Dime.  The store did well right away.  Part of the reason was Walton’s friendliness and his habit of yelling at people from a block away.

Walton then started looking for other stores that he could manage in other towns.  He found one in Fayetteville and used the same name: Walton’s Five and Dime.  It, too, was set up using self-service.  Walton comments:

This was the beginning of our way of operating for a long while to come.  We were innovating, experimenting, and expanding.  Somehow over the years, folks have gotten the impression that Wal-Mart was something I dreamed up out of the blue as a middle-aged man, and that it was just this great idea that turned into an overnight success.  It’s true that I was forty-four when we opened our first Wal-Mart in 1962, but the store was totally an outgrowth of everything we’d been doing since Newport – another case of me being unable to leave well enough alone, another experiment.  And like most other overnight successes, it was twenty years in the making.

Walton made his first real hire at the manager level: Willard Walker.  Walton found Willard by looking in competitors’ stores.  He would continue using this approach to finding talent going forward.  Also, Walton offered Willard equity in the business.

Meanwhile, Walton’s brother Bud had bought his own Ben Franklin store in Versailles, Missouri.  So Walton asked his brother if he wanted to go fifty-fifty on a new Ben Franklin store that was going to be part of a shopping center in Kansas City.  Bud agreed.

Based on what he saw in Kansas City, Walton got the notion of going into shopping center development.  He persisted with the idea for two years.  But it didn’t work.

I probably lost $25,000, and that was at a time when Helen and I were counting every dollar.  It was probably the biggest mistake of my business career.  I did learn a heck of a lot about the real estate business from the experience, and maybe it paid off somewhere down the line – though I would rather have learned it some cheaper way.

Wal-Mart executive David Glass:

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 developed a love of flying.  His first plane, a two-seater, only went 100 miles an hour, but it allowed him to get places in a straight line.  One time, the motor cut off for about a minute.  Walton thought he was done.  But he was able to circle around and land with a dead engine.

(Photo by TSRL, via Wikimedia Commons)

As Walton proceeded to open up new stores, he created business partnerships that included – along with other partners – himself, Bud, Sam’s dad, Helen’s two brothers, and even Sam and Helen’s kids, who invested their paper route money.

John Walton (one of Sam and Helen’s four kids):

This is hard to believe, but between my paper route money and the money I made in the Army – both of which I invested in those stores – that investment is worth about $40 million today.

In less than fifteen years, they had become the largest independent variety store operator.  But in 1960, they were still only doing $1.4 million a year.  Walton continued to look for ways to improve.

Soon he learned that if they built a huge store, they could sell as much as $2 million a year from one location.  Walton traveled the country to look at the “early discounters.”  For example, in California, Sol Price had started Fed-Mart.  Closer to Arkansas, there was Herb Gibson, who sold cheaper than anyone else, but also sold higher volume than anyone else.

Soon Walton built his first discount store – what would become the first Wal-Mart.  Because they couldn’t use Ben Franklin at all, Walton had to make arrangements with a distributor in Springfield, Missouri.  Since nobody wanted to take a chance on the first Wal-Mart, Sam and Helen had to borrow even more than they already had:

We pledged houses and property, everything we had.  But in those days, we were always borrowed to the hilt.

By the time they had three Wal-Marts up and running, Walton knew that it would work.

 

SWIMMING UPSTREAM

Wal-Mart’s challenges strengthened it:

Many of our best opportunities were created out of necessity.  The things that we were forced to learn and do, because we started out underfinanced and undercapitalized in these remote, small communities, contributed mightily to the way we’ve grown as a company.  Had we been capitalized, or had we been the offshoot of a large corporation the way I wanted to be, we might not ever have tried the Harrisons or the Rogers or the Springdales and all those other little towns we went into in the early days.

(Illustration by Miaoumiaou)

Early on, Wal-Mart didn’t have systems or computers.  Walton recalls that much of what they did was poorly done.  But they stayed focused on low prices:

The idea was simple: when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed.  They could be pretty sure they wouldn’t find it cheaper anywhere else, and if they didn’t like it, they could bring it back.

Wal-Mart lacked established distributors.  Salesmen would randomly show up.  It was difficult to get the bigger companies like Proctor & Gamble to show any interest.

The basic discounter’s strategy was to sell health products – toothpaste, mouthwash, headache remedies, soap, shampoo – at cost.  This brought people into the store.  The discounter would price everything else also at low prices, but with a 30 percent markup.

Gradually, Walton phased out his variety stores until all the stores were Wal-Marts.

Headquarters would give a profit and loss statement to each individual Wal-Mart store.  Problems could be handled immediately.  Most store managers owned a piece of their stores, so they were incentivized to maximize profit over time.  Walton:

For several years the company was just me and the managers in the stores.  Most of them came to us from variety stores, and they turned into the greatest bunch of discount merchants anybody ever saw.  We all worked together, but each of them had lots of freedom to try all kinds of crazy things themselves.

Walton mentions Don Whitaker as being like an operations manager.  Claude Harris was the first buyer.

Walton talks about the importance of merchandising:

…there hasn’t been a day in my adult life when I haven’t spent time thinking about merchandising.  I suspect I have emphasized item merchandising and the importance of promoting items to a greater degree than most any other retail management person in this country.  It has been an absolute passion of mine.  It is what I enjoy doing as much as anything in the business.  I really love to pick an item – maybe the most basic merchandise – and then call attention to it.  We used to say you could sell anything if you hung it from the ceiling.  So we would buy huge quantities of some thing and dramatize it.  We would blow it out of there when everybody knew we would have only sold a few had we just left it in the normal store position.  It is one of the things that has set our company apart from the very beginning and really made us difficult to compete with.  And, man, in the early days of Wal-Mart it really got crazy sometimes.

(Illustration by Beststock Images)

For instance, one of Wal-mart’s managers, Phil Green, created the world’s largest display of Tide.  It was eighteen cases high, 75 or 100 feet long, and 12 feet wide.  Everyone thought Phil was crazy, but he sold all of it at deeply discounted prices.

Wal-Mart executive David Glass comments:

The philosophy it teaches, which rubs off on all the associates and the store managers and the department heads, is that your stores are full of items that can explode into big volume and big profits if you are just smart enough to identify them and take the trouble to promote them.

Glass explains that in retail, you’re either operations driven or merchandise driven.  If a retailer is merchandise driven, they can always improve operations.  But retailers that are operations driven often don’t learn merchandising.  Early every Saturday morning, Wal-Mart managers would meet and critique their own and others’ merchandising.  Walton:

We wanted everybody to know what was going on and everybody to be aware of the mistakes we made.  When somebody made a bad mistake – whether it was myself or anybody else – we talked about it, admitted it, tried to figure out how to correct it, and then moved on to the next day’s work.

Wal-Mart associates also continued Walton’s practice of constantly checking out the competition in order to find ways to improve.

 

RAISING A FAMILY

On family vacations, it was a given that Walton would visit as many stores as possible.

Walton never pressured his kids at all to go into retailing.  But they got involved anyway.  Rob became the first company lawyer for Wal-Mart.  Jim got involved with locating and buying store sites.  John became the second company pilot.  (John was a Green Beret medic who later created a business that builds boats.)  Alice was a buyer for Wal-Mart and then developed her own investment company.

Walton worries that his grandchildren might join the “idle rich.”

Maybe it’s time for a Walton to start thinking about going into medical research and working on cures for cancer, or figuring out new ways to bring culture and education to the underprivileged…

 

RECRUITING THE TEAM

Walton notes that he has the personality of a promoter but the soul of an operator.  He never stops trying to improve things.  When the idea of discounting began to catch on, Walton visited every store and every headquarters he could.  He gleaned something from each visit.  He may have gotten the most from his study of Sol Price, an excellent operator who had started Fed-Mart in southern California in 1955.  Walton:

I guess I’ve stolen – I actually prefer the word “borrowed” – as many ideas from Sol Price as from anybody else in the business.

Most discounters failed.  Walton explains:

It all boils down to not taking care of their customers, not minding their stores, not having folks in their stores with good attitudes, and that was because they never even really tried to take care of their own people.  If you want the people in the stores to take care of the customers, you have to make sure you’re taking care of the people in the stores.  That’s the most important single ingredient of Wal-Mart’s success.

As Wal-Mart continued to expand, it had to hire more executives.  Ferold Arend was the company’s first vice president of operations (and later president).

Logistics also became increasingly important.  Walton got the idea of using computers long before they were very useful.  But computers kept improving.  Abe Marks comments on Walton:

He was really ten years away from the computer world coming.  But he was preparing himself.  And this is a very important point: 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 it.  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.

A warehouse was long overdue.  But Walton had already borrowed heavily and the company also had borrowed heavily.  Walton:

…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 [over $14 million in 2018 dollars]… The debt was beginning to weigh on me.

(Photo by Adonis1969)

Wal-Mart needed someone to run operations.  Walton hired a fellow named Ron Mayer.  Walton says 1968 to 1976 – the time Ron was in charge of operations – was the most important period in Wal-Mart’s history.  Walton:

We were forced to be ahead of our time in distribution and in communication because our stores were sitting out there in tiny little towns and we had to stay in touch and keep them supplied.  Ron started the programs that eventually improved our in-store communications system.  Building on the groundwork already laid by Ferold Arend, Ron also took over distribution and began to design and build a system that would enable us to grow as fast as we could come up with the money.  He was the main force that moved us away from the old drop shipment method, in which a store ordered directly from the manufacturer and had the merchandise delivered directly to the store by common carrier.  He pushed us in some new directions, such as merchandise assembly, in which we would order centrally for every store and then assemble their orders at the distribution center, and also cross-docking, in which preassembled orders for individual stores would be received on one side of our warehouse and leave out the other.

 

TAKING THE COMPANY PUBLIC

The company’s cash shortage forced it to give up five sites where they were going to build new stores.  Going public could solve the cash problem.  Thus far, there were a number of different partnership agreements for the various stores.

So Rob started to work on the plan, which was to consolidate all these partnerships into one company and then sell about 20 percent of it to the public.  At the time, our family owned probably 75 percent of the company, Bud owned 15 percent or so, some other relatives owned a percentage…

(Photo by Designer491)

Anybody who bought stock in Wal-Mart’s first public offering in late 1970 – at a price of $16.50 per share – and who held it, did extraordinarily well.  Walton:

…let’s say you bought 100 shares back in that original public offering, for $1,650.  Since then, we’ve had nine two-for-one stock splits, so you would have 51,200 shares today.  Within the last year, it’s traded at right under $60 a share.  So your investment would have been worth right around $3 million…

An investment of $1,650 in late 1970 would have turned into $3 million over the ensuing two decades.  An investment of $16,500 would have become $30 million.  Since then, Wal-Mart has continued to grow, albeit more slowly.

Going public allowed Walton to pay off all his debts.

Walton never worried about market expectations, especially over the short term:

If we fail to live up to somebody’s hypothetical projection for what we should be doing, I don’t care.  It may knock our stock back a little, but we’re in it for the long run.  We couldn’t care less about what is forecast or what the market says we ought to do.  If we listened very seriously to that sort of stuff, we never would have gone into small-town discounting in the first place.

 

ROLLING OUT THE FORMULA

Jack Shewmaker, later president and COO, made this remark about working at Wal-Mart in 1970:

It would be safe to say that in those days we all worked a minimum of sixteen hours  day.

(Illustration by Roman Doroshenko)

Kmart was expanding rapidly, but wouldn’t go into towns with below 50,000 population.  Gibson’s, another prominent discounter, wouldn’t go into towns much below 10,000.  But Wal-Mart knew it could be profitable even in towns with under 5,000.  As for big cities:

We never planned on actually going into the cities.  What we did instead was build our stores in a ring around a city – pretty far out – and wait for the growth to come to us.  That strategy worked practically everywhere.

The airplane became a useful tool for looking at real estate.  When Walton was flying, he would get low and turn the plane on its side when he passed over real estate of interest.

Walton would visit individual stores as often as possible, and he expected his executives to do the same.  But much of the day-to-day operations Walton left to folks like Ferold Arend and Ron Mayer, then later Jack Shewmaker, and after that David Glass and Don Soderquist.  Walton sees his role as picking good people and then giving them maximum authority and responsibility.  Many have pointed out that Walton is extremely good at picking the right people.

Every Saturday morning, Walton would go to work at 2 or 3 a.m.  He would spend several hours examining data for many of the stores.  This allowed him to be prepared for the Saturday morning meeting at 7:30 a.m.  Walton:

But if you asked me am I an organized person, I would have to say flat no, not at all.  Being organized would really slow me down.  In fact, it would probably render me helpless.  I try to keep track of what I’m supposed to do, and where I’m supposed to be, but it’s true I don’t keep much of a schedule.

Walton fondly recalls this initial period:

Managing that whole period of growth was the most exciting time of all for me personally.  Really, there has never been anything quite like it in the history of retailing.  It was the retail equivalent of a real gusher: the whole thing, as they say in Oklahoma and Texas, just sort of blowed.  We were bringing great folks on board to help make it happen, but at that time, I was involved in every phase of the business: merchandising, real estate, construction, studying the competition, arranging the financing, keeping the books – everything.  We were all working untold hours, and we were tremendously excited about what was going on.

(Photo by Bjørn Hovdal)

Wal-Mart’s phenomenal growth:

Year Stores Sales
1970 32 $31 million
1972 51 $78 million
1974 78 $168 million
1976 125 $340 million
1978 195 $678 million
1980 276 $1.2 billion

Walton observes:

On paper, we really had no right to do what we did.  We were all pounding sand, and stretching our people and our talents to the absolute maximum.

Walton would hire people who lacked experience but showed potential.  He believed that a lack of knowledge and experience could be overcome with passion and a willingness to work extremely hard.

Distribution continued to be challenging:

…I don’t think our distribution system ever really got under complete control until David Glass finally relented and came on board in 1976.  More than anybody else, he’s responsible for building the sophisticated and efficient system we use today.

 

BUILDING THE PARTNERSHIP

Giving associates a stake in the business, and giving them the chance to participate in decisions that would impact profitability, was an essential part of Wal-Mart’s growth and success.

(Photo by Adonis1969)

Walton realized that the more you share profits with associates, the more profitable the company can become.  Walton explains:

…the way management treats the associates is exactly how the associates will then treat the customers.  And if the associates treat the customers well, the customers will return again and again, and that is where the real profit in this business lies, not in trying to drag strangers into your stores for one-time purchases based on splashy sales or expensive advertising.  Satisfied, loyal, repeat customers are at the heart of Wal-Mart’s spectacular profit margins, and those customers are loyal to us because our associates treat them better than salespeople in other stores do.

Walton says this biggest regret is not including associates in the initial profit-sharing plan when the company went public in 1970.  But in 1971, Walton started giving associates part ownership of the business.  Many associates realized they were better off working at Wal-Mart – which is non-unionized – than they would be working somewhere that is unionized.  Why?  Both because associates can become part owners and because Wal-Mart executives have a policy of always listening to any associate with an issue or idea.

 

STEPPING BACK

One of Walton’s hobbies was tennis, which he preferred to golf since golf takes too long.  Walton’s tennis partner George Billingsley says about Walton:

He loved the game.  He never gave you a point, and he never quit.  But he is a fair man.  To him, the rules of tennis, the rules of business, and the rules of life are all the same, and he follows them.  As competitive as he is, he was a wonderful tennis opponent – always gracious in losing and in winning.  If he lost, he would say, ‘I just didn’t have it today, but you played marvelously.’

Walton also enjoyed training his dogs:

I pride myself on being able to train my own dogs, and I’ve never had a dog handler, like some of these country gentlemen friends of mine.  I enjoy picking out ordinary setter or pointer pups and working with them…

Walton nearly always had his dogs with him when he drove around.  He loved the outdoors and was a believer in conservation.  Also, he liked to hunt birds.  Some of his best friends were bird hunters.

(Photo by Cynoclub)

Walton stepped back somewhat from Wal-Mart in 1976.  Unfortunately, two factions in the company developed and they began to compete fiercely.  The old guard, including many store managers, were loyal to Ferol.  The new guard lined up behind Ron.  (Many in the new guard had been hired by Ron.)  Soon everybody began taking sides.  It was very unhealthy.

Walton made the problem much worse by appointing Ron CEO.  Walton thought things might run OK this way.  But Walton couldn’t stay out of things.  He continued doing everything he was doing before.

The truth is, I failed at retirement worse than just about anything else I’ve ever tried.

Walton didn’t think the company was going in the right direction, so he decided to step back in as CEO.  He asked Ron to stay as vice chairman and CFO.  But Ron had wanted to run the company, so he decided to leave.

Before he left, Ron told Walton that Wal-Mart had such a strong organization that it would continue to do well.  But Ron’s faith in Wal-Mart didn’t prevent roughly one third of senior managers from leaving after Ron left.

Walton believes most setbacks can be turned into opportunities.  He promoted Jack Shewmaker to executive vice president of operations, personnel, and merchandise.  And Walton hired David Glass as executive vice president in charge of finance and distribution.

These two guys are completely different in personality, but they are both whip smart.  And with us up against it like we were, everybody had to head in the same direction.  Once again, Wal-Mart proved everybody wrong, and we just blew the doors off our previous performances.  David made us a stronger company almost immediately.  Ron Mayer may have been the architect of our original distribution systems, but David Glass, frankly, was much better than Ron at distribution, and that was one of the big areas of expertise I had been afraid of losing.  David also was much better at fine-tuning and honing our accounting systems.  He, along with Jack, was a powerful advocate for much of the high technology that keeps us operating and growing today.  And not only did he turn out to be a great chief financial officer, he also proved to be a fine talent with people.  This new team was even more talented, more suited for the job at hand than the previous one.

 

CREATING A CULTURE

(Photo by Maurizio Distefano)

Saturday morning meetings often began with a cheer.  Walton:

It’s sort of a “whistle while you work” philosophy, and we not only have a heck of a good time with it, we were better because of it.  We build spirit and excitement.  We capture the attention of our folks and keep them interested, simply because they never know what’s coming next.  We break down barriers, which helps us communicate better with one another.  And we make our people feel part of a family in which no one is too important or too puffed up to lead a cheer or be the butt of a joke…

In 1984, Walton lost a bet to David Glass and “had to pay up by wearing a grass skirt and doing the hula on Wall Street.”  (Glass bet that the company would achieve a pretax profit of more than 8 percent; Walton bet against it.)  While outsiders might have viewed it as a publicity stunt, Walton observes that it’s a part of Wal-Mart’s culture to make things interesting, unpredictable, and fun.

…we thrive on a lot of the traditions of small-town America, especially parades with marching bands, cheerleaders, drill teams, and floats.  Most of us grew up with it, and we’ve found that it can be even more fun when you’re an adult who usually spends all your time working.  We love all kinds of contests, and we hold them all the time for everything from poetry to singing to beautiful babies.  We like theme days, where everyone in the store dresses up in costume.

Wal-Mart turned its annual meeting for shareholders into a fun, two-day event.

One potential problem for nearly all large companies is resistance to change.  Walton writes:

So I’ve made it my own personal mission to ensure that constant change is a vital part of the Wal-Mart culture itself… In fact, I think one of the greatest strengths of Wal-Mart’s ingrained culture is its ability to drop everything and turn on a dime.

Ongoing education is also important.  Associates can go to the Wal-Mart Institute at the University of Arkansas.  Or they can, with the company’s help, earn college degrees.

 

MAKING THE CUSTOMER NUMBER ONE

(Photo by Feelfree777)

For my whole career in retailing, I have stuck with one guiding principle… the secret of successful retailing is to give your customers what they want.  And really, if you think about it from your point of view as a customer, you want everything: a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience.

Walton defends Wal-Mart:

Of all the notions I’ve heard about Wal-Mart, none has ever baffled me more than this idea that we are somehow the enemy of small-town America.  Nothing could be further from the truth: Wal-Mart has actually kept quite a number of small towns from becoming practically extinct by offering low prices and saving literally billions of dollars for the people who live there, as well as by creating hundreds of thousands of jobs in our stores.

Beyond its direct economic impact – customers vote with their feet and have saved huge amounts of money – Wal-Mart is committed to creating a sense of community in its managers and associates.  Community involvement is important.

In the early days of Wal-Mart, department stores put pressure on Wal-Mart.  The department stores didn’t like the fact that many of their customers were switching to Wal-Mart simply because Wal-Mart’s prices were much lower.  The department stores even tried to use “fair trade” laws to block discounters from doing business.

Furthermore, Wal-Mart’s vendors weren’t all happy about Wal-Mart’s determination to get the lowest possible prices from them.  Walton spells out his company’s reasoning:

…we are the agents for our customers.  And to do the best job possible, we’ve got to become the most efficient deliverer of merchandise that we can.  Sometimes that can best be accomplished by purchasing goods directly form the manufacturer.  And other times, direct purchase simply doesn’t work.  In those cases, we need to use middlemen to deal with smaller manufacturers and make the process more efficient.  What we believe in strongly is our right to make that decision – whether to buy directly or from a rep – based on what it takes to best serve our customers.

 

MEETING THE COMPETITION

Walton:

…We decided that instead of avoiding our competitors, or waiting for them to come to us, we would meet them head-on.  It was one of the smartest strategic decisions we ever made… Our competitors have honed and sharpened us to an edge we wouldn’t have without them.

(Photo by Nataliia Shcherbyna)

Bud Walton:

Competition is very definitely what made Wal-Mart – from the very beginning.  There’s not an individual in these whole United States who has been in more retail stores – all types of retail stores, too, not just discount stores – than Sam Walton.  Make that all over the world.  He’s been in stores in Australia and South America, Europe and Asia and South Africa.  His mind is just so inquisitive when it comes to this business.  And there may not be anything he enjoys more than going into a competitor’s store trying to learn something from it.

At a regional meeting of discounters, competitors went through Wal-Mart’s stores and offered their critiques.  Wal-Mart executives were surprised at how many things they weren’t doing well.  But they listened carefully and made adjustments accordingly.  Those adjustments were crucial in preparing Wal-Mart to begin competing more broadly with Kmart.  (Kmart had 1,000 stores while Wal-Mart only had 150 at that time.)

Many discounters were driven out of business in the mid-1970s when the economy weakened.  Wal-Mart began to buy struggling retailers.  In 1981, Wal-Mart had almost no stores east of the Mississippi.  But Kuhn’s Big K stores – with 112 locations – was faltering.  Wal-Mart had a difficult time deciding what to do, but they finally acquired Kuhn’s.  After working through some problems related to the acquisition, Wal-Mart was now in a position to keep growing amazingly fast.  Walton:

We exploded from that point on, almost always opening 100 new stores a year, and more than 150 in some years…

I don’t know how the folks around executive offices see me, and I know they get frustrated with the way I make everybody go back and forth on so many issues that come up.  But I see myself as being a little more inclined than most of them are to take chances.  On something like the Kuhn’s decision, I try to play a “what-if” game with the numbers – but it’s generally my gut that makes the final decision.

 

EXPANDING THE CIRCLES

…one of the main reasons we’ve been able to roll this company out nationally was all the pressure put on me by guys like David Glass and, earlier, Jack Shewmaker and Ron Mayer, to invest so heavily in technology.  Yes, I argued and resisted, but I eventually signed the checks.  And we have been able to move way out front of the industry in both communications and distribution… I would go so far as to say, in fact, that the efficiencies and economies of scale we realize from our distribution system give us one of our greatest competitive advantages.

Many people have contributed over the years, but David Glass has to get the lion’s share of the credit for where we are today in distribution.  David had a vision for automated distribution centers – linked by computer both to our stores and to our suppliers – and he set about building such a system, beginning in 1978 at Searcy, Arkansas.

Wal-Mart’s warehouses reached a point where they could directly replenish nearly 85 percent of inventory compared to 50 to 65 percent for competitors.  When in-store merchants place computer orders, the orders arrive at the store in about two days.  Most competitors had to wait five or more days for their orders to arrive.

Wal-Mart has a private fleet of trucks.  Walton would regularly meet in the drivers’ break room at 4 a.m. with a bunch of doughnuts.  He would ask them all sorts of questions about the stores.  Most truck drivers were very candid, which gave Walton another way to gain store-level intelligence.

(Wal-Mart distribution center, Photo by Redwood8)

Walton describes a distribution center:

Start with a building of around 1.1 million square feet, which is about as much floor space as twenty-three football fields, sitting out somewhere on some 150 acres.  Fill it high to the roof with every kind of merchandise you can imagine, from toothpaste to TV’s, toilet paper to toys, bicycles to barbecue grills.  Everything in it is bar-coded, and a computer tracks the location and movement of every case of merchandise, while it’s stored and when it’s shipped out.  Some six hundred to eight hundred associates staff the place, which runs around the clock, twenty-four hours a day.  On one side of the building is a shipping dock with loading doors for around thirty trucks at a time – usually full.  On the other side is the receiving dock, which may have as many as 135 doors for unloading merchandise.

These goods move in and out of the warehouse on some 8 1/2 miles of laser-guided conveyor belts, which means that the lasers read the bar codes on the cases and then direct them to whatever truck is filling the order placed by one of the stores it’s servicing that night… When the thing is running full speed, it’s just a blur of boxes and crates flying down those belts, red lasers flashing everywhere, directing this box to that truck, or that box to this truck.  Out in the parking lot, whole packs of Wal-Mart trucks rumble in and out all day.

 

THINKING SMALL

Walton on thinking small:

…the bigger Wal-Mart gets, the more essential it is that we think small.  Because that’s exactly how we have become a huge corporation – by not acting like one… If we ever forget that looking a customer in the eye, and greeting him or her, and asking politely if we can be of help is just as important in every Wal-Mart today as it was in that little Ben Franklin in Newport, then we just ought to go into a different business because we’ll never survive in this one.

In a giant, centrally driven company, there’s no place for creativity, no room for the maverick merchant, no need for the entrepreneur or the promoter.

Walton shares six principles for how to think small:

  • Think One Store at a Time
  • Communicate, Communicate, Communicate
  • Keep Your Ear to the Ground
  • Push Responsibility – and Authority – Down
  • Force Ideas to Bubble Up
  • Stay Lean, Fight Bureaucracy

Think One Store at a Time

The focus always has to be on lowering prices, improving service, and making things better for customers who shop in the stores.  Similarly, getting the right merchandising mix requires merchandisers at the store level, who deal with customers face to face, day in and day out.

When managers meet at the end of the week, the discussion of sales is at the individual store level.  No other large retailer does that.

Communicate, Communicate, Communicate

Walton says:

If you had to boil down the Wal-Mart system to one single idea, it would probably be communication, because it is one of the real keys to our success.

[…]

That’s why we’ve spent hundreds of millions of dollars on computers and satellites – to spread all the little details around the company as fast as possible.

Sometimes Walton would get a message to everyone by doing a TV recording.  One time, he had all the associates pledge to follow “the ten-foot rule.”  If you come within 10 feet of a customer, look her in the eye, greet her, and ask her if you can help her.  Walton told all the associates that, if they did this, not only would it be better for customers, but the associates themselves would become better leaders in the process.

Keep Your Ear to the Ground

Both district managers and regional managers are expected to travel around to individual stores, just as Walton himself used to do all the time.  Valuable intelligence is always available using this approach.

As with any retailer, there’s always a head-to-head confrontation between operations and merchandising.  At Wal-Mart, there are some enormous arguments.  But they have a rule never to leave an item hanging in the weekly meeting.  They always make a decision.  Sometimes it’s wrong and gets corrected ASAP.  But once the decision is made, everyone is on board as long as the decision stands.

Push Responsibility – and Authority – Down

As much as possible, every level of manager is given responsibility and authority – and is rewarded with equity.  Many Wal-Mart managers who never went to college end up performing very well.

Force Ideas to Bubble Up

This goes with pushing responsibility down.  Any associate can have a good idea about how to improve something.  It’s happened countless times at Wal-Mart.

Stay Lean, Fight Bureaucracy

Bureaucracy builds up naturally unless the culture is to eliminate or limit bureaucracy as much as possible.  Walton is committed to not letting egos get out of control because, in his view, much bureaucracy is the result of some empire builder’s ego.

 

RUNNING A SUCCESSFUL COMPANY: TEN RULES THAT WORKED FOR ME

  • RULE 1: COMMIT to your business.  Believe in it more than anybody else.  I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work.
  • RULE 2: SHARE your profits with all your associates, and treat them as partners.  In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations.
  • RULE 3: MOTIVATE your partners.  Money and ownership alone aren’t enough.  Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners.  Set high goals, encourage competition, and then keep score.  If things get stale, cross-polinate; have managers switch jobs with one another to stay challenged… Don’t become too predictable.
  • RULE 4: COMMUNICATE everything you possibly can to your partners.  The more they know, the more they’ll understand.  The more they understand, the more they’ll care.
  • RULE 5: APPRECIATE everything your associates do for the business… all of us like to be told how much somebody appreciates what we do for them.
  • RULE 6: CELEBRATE your successes.  Find some humor in your failures.  Don’t take yourself so seriously.  Loosen up, and everybody around you will loosen up.  Have fun.  Show enthusiasm – always.
  • RULE 7: LISTEN to everyone in your company.  And figure out ways to get them talking.  The folks on the front lines – the ones who actually talk to the customer – are the only ones who really know what’s going on out there.
  • RULE 8: EXCEED your customers’ expectations.  If you do, they’ll come back over and over.  Give them what they want – and a little more.  Let them know you appreciate them.  Make good on all your mistakes, and don’t make excuses – apologize.  Stand behind everything you do.
  • RULE 9: CONTROL your expenses better than your competition.  This is where you can always find the competitive advantage.
  • RULE 10: SWIM upstream.  Go the other way.  Ignore the conventional wisdom.  If everybody else is doing it one way, there’s a good chance you can find your niche by going in exactly the opposite direction.  But be prepared for a lot of folks to wave you down and tell you you’re headed the wrong way.

 

BOOLE MICROCAP FUND

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If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

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