Finance

I recently finished reading “Made in America”, the bestseller autobiography of Sam Walton (1918–1992.) The book is very educational, insightful, and stimulating.

Walton, the iconic founder of Walmart and Sam’s Club, was arguably the most successful entrepreneur of his generation. From 1985 until his death, he was the richest man in the world. On the 2015 list of the world’s richest individuals, his descendants ranked at #8, #9, #11, and #12.

Despite his immense fortune, Walton lived a humble life right up until his death. He as an enthusiastic outdoorsman and lived in a modest home in Bentonville, Arkansas, for 33 years. On quail hunting trips, he slept in smelly, old beat-up trailers and ate peanut butter sandwiches for breakfast, lunch, and dinner. He even drove a red 1985 Ford pickup and famously said, “What am I supposed to haul my dogs around in, a Rolls-Royce?”

Cost and Price Control

One of the book’s key takeaways is to “control your expenses better than your competition.” Walton says that this focus on cost-efficiency contributed more to Walmart’s enormous success than did any other aspect of his business model:

This is where you can always find the competitive advantage. For twenty-five years running—long before Wal-Mart was known as the nation’s largest retailer—we’ve ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.

A Child of the Great Depression Takes to Retail

Walton was a child of the Great Depression. The poverty he experienced while growing up in a rural Missouri farming community taught him the value of money, hard work, and perseverance.

Walton learned the value of a dollar early from his parents, who financially struggled to raise their family. The two squabbled constantly, except on one topic. “One thing my mom and dad shared completely was their approach to money: they just didn’t spend it.”

Walton was just plain cheap. His devotion to bargain became Walmart’s underpinning. He lived by a simple formula: pile it high, sell it cheap. “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.” He refused to increase profit margins at the expense of price: “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.”

The Lasting Impact of Sam Walton

In 1962, Walton decided that the future of retailing lay in discounting. He studied his competitors and borrowed liberally. His strategy was to buy low, sell at a discount, and make up for low margins by moving vast amounts of inventory. Over the decades, Walmart has relentlessly squeezed as much value as possible from its supply chain and passed those savings on to consumers.

Walton’s passion to serve as the “agent” for consumers has changed retailing forever. It’s hard not to overestimate Walmart’s influence on local communities and economics. Walmart’s obsessive focus on low prices changed the way Americans shop. Its bargaining power, superlative size, and logistical efficiency not only dampened inflation, but also brought about productivity gains throughout retailing and manufacturing. Its dominance has attracted backlash from labor unions, anti-sweatshop campaigners, and anti-sprawl activists. Critics also blamed Walmart for contributing to the movement toward overseas production jobs, and for destroying small-town merchants.

However, Walmart’s business model has struggled overseas, especially with profitability in countries where it operates three fourths of its international stores.

Sam Walton’s Influence on Entrepreneurs

Walton inspired legions of other entrepreneurs who thrive on managing costs and prices to gain competitive advantage. Prominently,

• Dell’s Michael Dell kept costs low by using direct sales as his primary sales channel and orchestrating Dell’s supply chain with that of its suppliers.
• Ryanair’s Michael O’Leary used absurdly low fares to generate demand from fare-conscious travelers who would have otherwise used alternative means of transportation or would have not traveled at all. O’Leary’s operating costs (aircraft, equipment, personnel, customer service, airport access, and handling) are one of the lowest in the airline industry.
• Amazon’s Jeff Bezos used innovative sales-discounting methods and a strong emphasis on customer service to grab market share from traditional retailers. Without the burden of operating physical stores, Amazon’s efficiency has played a key role in the structural shift away from brick-and-mortar retail.

The “wheel of retailing” theory in corporate strategy posits that a lower-cost innovator eventually undercuts every dominant merchant. To combat the risk of cost-leadership from Amazon and other online retailers, Walmart has made major investments in e-commerce, even at the risk of cannibalizing its in-store sales.