Wal-Mart: From Zero to 11,453 (Part I)

“…most everything I’ve done I’ve copied from somebody else.” —Sam Walton, Made in America: My Story

A Retail Fairy Tale

Sam Walton’s Made in America: My Story is a great read, and definitely a book to read for everyone with an interest in business, a book to read for business owners as well as investors. So if you haven’t already read this book, add it to your reading list.

The Walmart journey began in Arkansas from where it expanded to become a massive enterprise. In 1972 Walmart was listed on the New York Stock Exchange (WMT). That year Walmart had 51 stores and sales of $78 million.

As of today and looking at fiscal year 2015 Walmart generated revenues of $486 billions from its 11,453 stores, operating income of $27 billion, equal to an operating margin of 5.6 %, profit before tax of $25 billion. Diluted earnings per share from continuing operations and book value per share was $5.1 and $24.1 respectively. Dividends paid out to shareholders during fiscal year 2015 amounted to $1.90 per share.

To get some perspective of Wal-Mart’s track record I have put together some key data to be able to track operations over time.

WMT

With these impressive operating data in mind (from annual reports) showing Walmart’s growth from 1970 to 2015, we’ll leave the numbers for now and move on to the book that this post was supposed to be all about.

Learning to Value a Dollar and Starting on a Dime

In Made in America: My Story Sam Walton shares his view on Walmart, from its beginning and how it all started out, the ups and downs and also his thoughts on, among other things, business strategy and operational efficiency.

Following are a few quotes that i especially appreciated and marked when I read chapter one Learning to Value a Dollar and chapter two Starting on a Dime (underlinings added by me). 

Pricing Strategy: Profit Margin, Asset Turnover and Return on Capital

I’ll never forget one of Harry’s deals, one of the best items I ever had and an early lesson in pricing. It first got me thinking in the direction of what eventually became the foundation of Wal-Mart’s philosophy. 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 buy

ing 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.

Bud Walton on Expense Management

That Newport store was really the beginning of where Wal-Mart is today. We did everything. We would wash windows, sweep floors, trim windows. We did all the stockroom work, checked the freight in. Everything it took to run a store. We had to keep expenses to a minimum. That is where it started, years ago. Our money was made by controlling expenses.

That, and Sam always being ingenious. He never stopped trying to do something different.

Lease Agreements: The Importance of an Option to Renew

Every crazy thing we tried hadn’t turned out as well as the ice cream machine, of course, but we hadn’t made any mistakes we couldn’t correct quickly, none so big that they threatened the business. Except, it turned out, for one little legal error we made right at the beginning. In all my excitement at becoming Sam Walton, merchant, I had neglected to include a clause in my lease which gave me an option to renew after the first five years.

And our success, it turned out, had attracted a lot of attention. My landlord, the department store owner, was so impressed with our Ben Franklin’s success that he decided not to renew our lease—at any price—knowing full well that we had nowhere else in town to move the store. He did offer to buy the franchise, fixtures, and inventory at a fair price; he wanted to give the store to his son. I had no alternative but to give it up. But I sold the Eagle Store lease to Sterling—so that John Dunham, my worthy competitor and mentor, could finally have that expansion he’d wanted.

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

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 don’t know if that experience changed me or not. I know I read my leases a lot more carefully after that, and maybe I became a little more wary of just how tough the world can be. Also, it may have been about then that I began encouraging our oldest boy—six-year-old Rob—to become a lawyer. But 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.

Wal-Mart: Annual Report, 1972

For Walmart, 1972 was the first year as a publicly traded company. Click image below to read the 1972 annual report.

Learn More About Walmart and its History

If you want to know more about the history of Walmart, check out the following sources:

Advertisement

Jeff Bezo’s Reading List

“Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market alow you to put there.” —Nassim Nicholas Taleb, The Black Swan

Read, Read, Read, Read and Hope to Have a Few Insights

Below, a few book tips taken from the appendix Jeff’s Reading List as published in The Everything Store: Jeff Bezos and the Age of Amazon. 

Emphasis added by my. Also, book covers added by me and they’re not included in the book as referenced above.

Appendix: Jeff’s Reading List

Books have nurtured Amazon since its creation and shaped its culture and strategy. Here are a dozen books widely read by executives and employees that are integral to understanding the company.

BB1

The Remains of the Day, by Kazuo Ishiguro (1989).

Jeff Bezos’s favorite novel, about a butler who wistfully recalls his career in service during wartime Great Britain. Bezos has said he learns more from novels than nonfiction.

Sam Walton: Made in America, by Sam Walton with John Huey (1992).

In his autobiography, Walmart’s founder expounds on the principles of discount retailing and discusses his core values of frugality and a bias for action—a willingness to try a lot of things and make many mistakes. Bezos included both in Amazon’s corporate values.

Memos from the Chairman, by Alan Greenberg (1996).

A collection of memos to employees by the chairman of the now- defunct investment bank Bear Stearns. In his memos, Greenberg is constantly restating the bank’s core values, especially modesty and frugality. His repetition of wisdom from a fictional philosopher presages Amazon’s annual recycling of its original 1997 letter to shareholders.

The Mythical Man-Month, by Frederick P. Brooks Jr. (1975).

An influential computer scientist makes the counterintuitive argument that small groups of engineers are more effective than larger ones at handling complex software projects. The book lays out the theory behind Amazon’s two-pizza teams.

BB2

Built to Last: Successful Habits of Visionary Companies, by Jim Collins and Jerry I. Porras (1994).

The famous management book about why certain companies succeed over time. A core ideology guides these firms, and only those employees who embrace the central mission flourish; others are “expunged like a virus” from the companies.

Good to Great: Why Some Companies Make the Leap… and Others Don’t, by Jim Collins (2001).

Collins briefed Amazon executives on his seminal management book before its publication. Companies must confront the brutal facts of their business, find out what they are uniquely good at, and master their flywheel, in which each part of the business reinforces and accelerates the other parts.

Creation: Life and How to Make It, by Steve Grand (2001).

A video-game designer argues that intelligent systems can be created from the bottom up if one devises a set of primitive building blocks. The book was influential in the creation of Amazon Web Services, or AWS, the service that popularized the notion of the cloud.

The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business, by Clayton M. Christensen (1997).

An enormously influential business book whose principles Amazon acted on and that facilitated the creation of the Kindle and AWS. Some companies are reluctant to embrace disruptive technology because it might alienate customers and undermine their core businesses, but Christensen argues that ignoring potential disruption is even costlier.

BB3

The Goal: A Process of Ongoing Improvement, by Eliyahu M. Goldratt and Jeff Cox (1984).

An exposition of the science of manufacturing written in the guise of the novel, the book encourages companies to identify the biggest constraints in their operations and then structure their organizations to get the most out of those constraints. The Goal was a bible for Jeff Wilke and the team that fixed Amazon’s fulfillment network.

Lean Thinking: Banish Waste and Create Wealth in Your Corporation, by James P. Womack and Daniel T. Jones (1996).

The production philosophy pioneered by Toyota calls for a focus on those activities that create value for the customer and the systematic eradication of everything else.

Data-Driven Marketing: The 15 Metrics Everyone in Marketing Should Know, by Mark Jeffery (2010).

A guide to using data to measure everything from customer satisfaction to the effectiveness of marketing. Amazon employees must support all assertions with data, and if the data has a weakness, they must point it out or their colleagues will do it for them.

The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb (2007).

The scholar argues that people are wired to see patterns in chaos while remaining blind to unpredictable events, with massive consequences. Experimentation and empiricism trumps the easy and obvious narrative.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Sam Walton: Made in America

“I’ve played to my strengths and relied on others to make up for my weaknesses.” —Sam Walton
MIAMSSW1

I just finished reading another great book. Sam Walton: Made in America was really hard to stop reading, so it didn’t last long.

I thought I’d share a few great quotes.

Sam on the essence of pricing in discount retailing

“I’ll never forget one of Harry’s deals, one of the best items I ever had and an early lesson in pricing. It first got me thinking in the direction of what eventually became the foundation of Wal-Mart’s philosophy. 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 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 you 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 retail language, you can lower your markup but earn more because of the increased volume.” (p. 32-33)

Bud Walton, the brother of Sam Walton, about the beginning of Wal-Mart and controlling expenses

“That Newport store [a franchise Ben Franklin five-and-dime in Newport, Arkansas, opened for business on September 1, 1945] was really the beginning of where Wal-Mart is today. We did everything. We would wash windows, sweep floors, trim windows. We did all the stockroom work, checked the freight in. Everything it took to run a store. We had to keep expenses to a minimum. That is where it started, years ago. Our money was made by controlling expenses. That, and Sam always trying to be ingenious. He never stopped trying to do something different.” (p. 36)

Taking the best from others

“Most everything I’ve done I’ve copied from somebody else.” (p. 47)

 David Glass, former President and Chief Executive Officer of Wal-Mart

“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.” (p. 50)

Low prices through low expenses

“So while we may not have had any competition for discounting in those little towns, we weren’t strangers to competition. We were always looking at Gibson’s and any other regionals that might decide to come our way, and we knew what to do when they did: keep our prices as low as possible by keeping our costs as low as possible.” (p. 152)

Payroll in retail businesses

“…no matter how you slice it in the retail business, payroll is one of the most important parts of overhead, and overhead is one of the most crucial things you have to fight to maintain your profit margin. Back then, though, I was so obsessed with turning in a profit margin of 6 percent or higher that I ignored some of the basic needs of our people, and I feel bad about it.” (p. 163)

Loyal customers means repeat business

“Satisfied, loyal, repeat customers are at the heart of Wal-Mart’s spectacular profit margins…” (p. 164)

Shrinkage

“As you may know, shrinkage, or unaccounted-for inventory loss—theft, in other words—is one of the biggest enemies of profitability in the retail business. […] This is sort of competitive information, but I can tell you that our shrinkage percentage is about half the industry average.” (p. 172)

The secret

“The secret of successful retailing is to give your customers what they want.” (p. 221)

Meeting competitors head-on

“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.” (p. 242)

Competitive advantages in distribution

“I would go as 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.” (p. 263)

Saturday morning meeting

“So when we sit down at our Saturday morning meeting to talk about our business, we like to spend time focusing on a single store, and how that store is doing against a single competitor in that particular market. We talk about what that store is doing right, and we look at what it’s doing wrong.” (p. 281)

Paychecks to American managements

“But if American management is going to say to their workers that we’re all in this together, they’re going to have to stop this foolishness of paying themselves $3 million and $4 million bonuses every year and riding around everywhere in limos and corporate jets like they’re so much better than everybody else.” (p. 325)