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10 WAL-MART STORES This case was prepared by Charles W. L. Hill of the School of Business, University of Washington, Seattle.

CI0-1 INTRODUCTION In July 1962, Sam Walton opened his first Wal-Mart discount store in Rogers, a small Arkansas town with a population of 6,000. That same year, both Kmart and Target opened their first stores, although unlike Sam Walton, they focused on large metropolitan areas. By 2017, Wal-Mart had eclipsed its rivals to become the largest retailer in the world, with annual revenues of close to $490 billion. The company had 2.3 million employees and more than 11,700 stores in 28 countries including 5,350 in the United States that were served by more than 150 distribution centers. In the United States. Wal-Mart was bigger than the next four retailers combined. The company accounted for over 7% of all U.S. retail sales. More than 96% of the U.S. population lived within 20 miles of a Wal-Mart store. However, all was not well in Bentonville, WalMart’s Arkansas headquarters. While the company continued to perform well, the strong growth of an earlier era was no longer evident. Indeed, in 2015, annual revenues fell for the first time since the company went public in 1970. Not only was the core U.S. market saturated, Wal-Mart was also facing increasing competition from online retailers, particularly Amazon.com. As of 2017, Amazon was generating $120 billion in online sales, far more than Wal-Mart’s $16 billion. Moreover, Amazon’s 2017 acquisition of the Whole Foods chain signaled that it was going after the grocery business, a category that Wal-Mart

had dominated since first expanding into the area back in 1988. In the wake of its August 2017 takeover of Whole Foods, Amazon cut grocery prices by as much as 40% on some products. Store traffic surged by 25%.

CI0-2 EARLY HISTORY The Wal-Mart store in Rodgers was not Walton’s first retailing venture. That was a Ben Franklin variety store in Newport, Arkansas that Walton, an Arkansas native, took over in 1945 when he was just 27. Variety stores offered a selection of inexpensive items for household and personal use—a concept that had been pioneered by F. W. Woolworth in the late nineteenth century. By 1962, Walton was a well-established Ben Franklin franchisee running 15 variety stores in small towns across Arkansas and Kansas. It was a business where Walton had honed his skills, competing against other small-town variety stores. From the outset, Walton focused relentlessly on reducing prices, cutting costs, and making a living on slim margins. His philosophy was to sell items that people need every day just a little cheaper than everyone else, and to sell it at that low price all the time. He believed that if you offered everyday low prices, customers would to you. His experience in the variety store business had taught him the value of this approach. To make this strategy work, you had to control costs better than the next guy. ,

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Case 10 Wal-Mart Stores

Walton , tightly controlling . Moreover, while still a Ben Franklin franchisee, he had pushed the boundaries of what was possible in the retailing business. Walton was one of the first retailers in the country, and the first in the South to adopt a self-service format. Walton was fascinated by what other retailers were doing. He was known for visiting them and checking out their stores. He would walk into their headquarters, often unannounced, and ask to meet with senior managers. He would pepper them with questions, writing everything he saw and heard down on a yellow legal pad. When the discounting concept started to emerge in the mid-1950s in the Northeast he made a point of visiting those stores, befriending their management, and gathering as much information as he could. These visits convinced Walton that large-footprint, general merchandising discount stores would be the wave of the future. He believed that the wider range of products and better buying power of discount stores would ultimately put traditional small-town variety stores like his out of businesses. This led to the establishment of the first Wal-Mart store. Initially, Walton had wanted Ben Franklin to back his idea of building large discount stores in small towns. As he put it, “I was used to franchising, and I liked the mindset, I generally liked my experience with Ben Franklin, and I didn’t want to get involved in building a company with all that support apparatus.”1 Ben Franklin turned him down. They didn’t see the value in small towns. Walton’s experience as a Ben Franklin franchisee, however, had taught him that there was money to be made in small towns. The Rodgers store took two years to hit its stride, but by 1964 it was generating $1 million in annual revenues, three to five times what traditional variety stores made. This gave Walton the confidence to open two additional Wal-Marts in nearby towns, in Harrison and in Springdale. The Harrison Wal-Mart was a basic affair. It was just 12,000 square feet with an 8-foot ceiling, a concrete floor, and bare-boned, wooden plank fixtures. Walton called it ugly. David Glass, who would become CEO after Walton, said that it was the worst-looking retail store he had ever seen. But as Walton noted, “We were trying to find out if customers in a town of 6,000 people would come to our kind of barn and buy the same merchandise strictly because of price.”2

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By keeping costs as low as possible, Walton found he could keep prices 20% below those of nearby variety and specialty stores. He quickly discovered that his promise of everyday low prices attracted many customers. In Springdale, a town of close to 15,000, Walton was trying to learn something else—would a 35,000square-foot store work in a larger town? Here too, the answer was yes. The key was that these stores would draw in people from the surrounding small communities, who would drive an hour to the Wal-Mart to gain price discounts. Although similar discounts might be available at large suburban stores, those might be three hours’ drive or more away. These early Wal-Mart stores had longer opening hours that rival merchants, plenty of parking space, and they utilized the self-service concept. By the time Walton had three Wal-Mart’s up and running, he realized that the discounting formula was a success. The strategy that was emerging from these early experiences was to put a good-sized discount store into little, one-horse towns that everyone else was ignoring. While rivals like K-Mart wouldn’t go into a town smaller than 50,000, Walton believed that towns as small as 5,000 could support one of his stores when you considered the population of the surrounding area. As noted by Ferold Arend, Wal-Mart’s first vice president: The truth is, we were working with a great idea. It was really easy to develop discounting in those small communities before things got competitive. There wasn’t a lot of competition for us in the early days because nobody was discounting in the small communities.3 One of the problems of focusing on small towns, however, was that getting good deals from distributors and wholesalers was difficult. They would charge Wal-Mart for the extra cost of delivering to a smalltown store out in the sticks, something that irritated Walton, whose obsession with controlling expenses knew no bounds. To make matters worse, large, consumerproduct companies such as Procter & Gamble, Gillett, and Kodak would dictate how much they would sell to Wal-Mart, and at what price. In the early days, ordering merchandise was also decentralized to individual store managers, so there was no opportunity to realize economies of scale from bulk purchasing. Walton realized that this situation was untenable. The solution was to open the first Wal-Mart

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Case 10 Wal-Mart Stores

distribution center, close to the company’s headquarters in Bentonville, Arkansas. Buying was centralized in Bentonville to get discounts from bulk purchases. Suppliers would drop ship merchandise at the distribution centers. Then Wal-Mart would truck it out to the stores in the area to replenish inventory. A crossdocking system was developed in the distribution center to facilitate this process. It was at this point that Wal-Mart started to build its own trucking fleet to transport inventory. For the distribution system to work efficiently, Wal-Mart needed information to know what merchandise to order and when to replenish each store. This requirement drove Wal-Mart to become an early adopter of computer-controlled inventory systems. Walton himself realized the need for better information systems early on, and enrolled in an IBM school for retailers in 1966. Nevertheless, he was reluctant to spend the money on information technology and only relented in the 1970s after pressure from some of his managers. In retrospect, Walton acknowledged that Wal-Mart was forced to be ahead of the times in distribution and information systems because the stores were situated in small towns. During this period, Walton was also building a strong management team. In what would become a hallmark of Walton’s approach, he would spot talented managers at other retailers and try to persuade them to work for him. Walton could be tenacious. He would keep pursuing talented managers until they agreed to join the company. For example, David Glass, who would eventually succeed Walton as CEO, was pursued by Walton for a decade before he agreed to join Wal-Mart in 1976. Early recruits included Ferold Arend, the company’s first chief operating officer, Bob Thornton, who was bought on to open Wal-Mart’s first distribution center, and Ron Mayer, who joined in 1968 as VP for finance and distribution. All three had experience at other retailers. Mayer pushed Walton to invest in computer systems to improve distribution, and hired the first data processing managers. By the late 1960s, Walton had established the foundations for future growth. The Wal-Mart discounting concept had proved attractive; the strategy of focusing on small towns was already paying dividends; he had surrounded himself with a talented team of managers; and with the opening of its first distribution center; and the adoption of formal inventory control systems the company was well placed to replicate its

formula across America. At the same time the company was still small–Wal-Mart only had 18 stores in 1969 and sales of $9 million, whereas K-Mart had 250 stores and sales of $800 million (Kmart was owned by the well-established department store retailer Dayton Hudson). To grow, Walton needed capital. Up to this point, Walton had financed Wal-Mart’s growth from a mix of cash flow and debt. By 1969, the company was not generating enough cash to fund Walton’s growth ambitions and pay down the company’s debt. Walton believed that he needed to grow the company rapidly before rivals figured out his smalltown strategy. Initially he tried to raise more debt, but was turned down by several institutions who didn’t buy into his strategy, and was “fleeced” by those who were prepared to lend him more. Walton was getting tired of owing other people money. He decided to take the company public. On October 1, 1970, Wal-Mart had its initial public offering (IPO), selling 300,000 shares at $16.50 a share. After the IPO, the Walton family still held onto 61% of the stock. The IPO raised close to $5 million. This allowed Walton to pay down debt and fund the next stage of expansion.

CI0-3 BUILDING THE Wal-Mart’s growth strategy was very deliberate. While other discounters were leapfrogging from large city to large city, for decades Wal-Mart focused on its smalltown strategy. The company wanted stores to be within a day’s drive of distribution centers (about 350 miles) so that they could be restocked regularly. Regular replenishment reduced the need to store inventory in a dedicated space at the back of the store, which meant that more square footage could be devoted to selling merchandise, increasing sales per square foot. While rivals typically devoted 25% of their square footage to storing inventory, Wal-Mart kept this figure down to 10%. As Wal-Mart expanded its own trucking fleet, it also started to pick up merchandise from suppliers in the area, rather than have them drop goods off at the distribution centers. Trucks would replenish a store, then pick up goods from a supplier on the way back to the distribution centers so they had loads on

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Case 10 Wal-Mart Stores

the backhaul. When Wal-Mart took logistics costs off suppliers, it negotiated lower prices, and then passed on those cost savings on to its customers in the form of lower prices. Initially, Walton wanted stores to be situated close enough to each other so that they were within reach of management at Bentonville. Walton, a licensed pilot, would frequently fly his small plane from Bentonville to surrounding stores, often dropping in unannounced. As the company grew, he appointed regional vice presidents to oversee stores clustered in certain territories. Wal-Mart started to invest in a fleet of small aircraft. The regional vice presidents were based in Bentonville. They would fly out on Monday morning to visit stores in their territory, returning Thursday. Walton insisted that they return with at least one good idea to pay for the trip. As always, expenses were tightly controlled. When travelling, managers were expected to stay in cheap hotels, share rooms, and eat at budget restaurants. On buying trips to suppliers, managers were instructed to keep expenses below 1% of total purchases. As it expanded, Wal-Mart first saturated the area within a day’s drive of Bentonville. Once an area was saturated Wal-Mart would build another distribution center in an adjacent area, go as far as possible from that center and put in a store, and then fill in the territory around the distribution center. As Walton described it: We would fill in the map of that territory, state by state, country seat by county seat, until we had saturated that market area. We saturated northwest Arkansas. We saturated Oklahoma. We saturated Missouri … and so on.4 Wal-Mart never planned to enter cities. Instead, the company would build stores in a ring around cities, some way out, and wait for the growth to come to the stores. The strategy seemed to work. The saturation strategy had benefits beyond management control and distribution efficiencies. Walton never liked to spend much on advertising. The company found that when it went from small town to small town, filling in an area, word of mouth would get Wal-Mart’s everyday low pricing message out to customers, allowing it to reduce advertising expenses. Clustering stores also made it difficult for rivals to get traction in an area. For example, in the Springfield, Missouri area, Wal-Mart had 40 stores within 100 miles. When

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K-Mart finally entered the area with three stores, they had a hard time getting business. Walton himself would spend a good deal of time flying around an area scouting out possible store locations. From the air, he could get a good idea of traffic flows, see which towns were growing, and evaluate the location of competitors, if there were any. He had a major hand in picking the first 150 store locations before being forced by the growing complexity of managing Wal-Mart to delegate that task.

CI0-3a Developing Information Systems and Logistics Over time, one key to Wal-Mart’s expansion was the introduction of state-of- the-art information systems and logistics. Walton had been interested in the potential of computers as far back as the mid-1960s, but the real push came with the hiring of David Glass in 1976 as executive VP of finance. Glass convinced Walton to put mini computers in every store to track sales. These were linked to the distribution centers and to the headquarters at Bentonville. Glass was instrumental in persuading Walton to insist that suppliers place barcodes on every item so that they could be scanned at sale. Indeed, Wal-Mart was the first retailer to mandate that suppliers’ barcode every item. The company originally used phone lines to transmit data on sales, but as the volume of data grew the phone lines became congested. In the days before the development of the Internet and high-capacity, fiber-optic communications systems, this was a major bottleneck. To deal with this problem, Wal-Mart committed $24 million to build a communication system under which data would be uploaded via microwave dishes at every store to a satellite, which would then transmit the data to Bentonville and the distribution centers. Launched in 1983, the system was the first of its kind. The satellite system allowed Wal-Mart to dive deep into its operations, tracking the history and real-time sales for every single item at every single store. Glass also pushed for the development of highly automated distribution centers linked by computers and the satellite system to the stores and to suppliers. Wal-Mart’s first distribution center outside of Bentonville was built at Glass’ insistence. Goods are bought into distribution centers, scanned, placed on laser-guided conveyer belts, and then directed to the

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Case 10 Wal-Mart Stores

appropriate truck to deliver them to stores. By the early 1990s, Wal-Mart had 20 distribution centers around the nation. Wal-Mart was now directly replenishing about 85% of its in-store inventory from its own distribution centers, compared to only 50 to 65% for its rivals (today, there are over 150 distribution centers in the United States). The internalization of logistics allowed Wal-Mart to reduce to two days the gap between when stores placed a request for replenishment and when they received that inventory. This compared to a five-day gap for many competitors. By the early 1990s, Wal-Mart estimated that its logistics costs were running at about 3% of sales, compared to 4.5-5% of sales at rivals. As Wal-Mart added distribution centers, its trucking operation grew. Today, it operates the largest private trucking company in the United States. This consists of over 7,200 drivers, 6,000 trucks, 53,500 trailers, and 5,600 refrigerated trailers. As a vital link in the company’s logistics network, the trucking operations of Wal-M...