Amended Walmart case reading (by Brian Silverman):

1. The first 4 ½ pages of the “Inexorable Rise of Walmart” case

2. Then these 2 ½ pages
3. Finally, pages 9-11 of the “Inexorable” case, starting from “McMillon continued to invest in
online retailing….”

The Growth of Walmart

In the mid-1980s, about 1/3 of Walmart stores were located in areas that were not served by any of its
competitors. However, the company’s geographic growth resulted in increased competition with other
major retailers. By 1993, 55% of Walmart stores faced direct competition from Kmart stores, and 23%
from Target, whereas 82% of Kmart stores and 85% of Target stores faced competition from Walmart.
By the late 1990s, Walmart had stores in all 50 U.S. states, and the company had set its eyes on
international expansion.

Sam’s Legacy

Sam Walton died in 1992 at the age of 74. In his time at the firm, he instilled in his employees
(“associates”) the idea that Walmart had its own way of doing things, and tried to make life at the
company unpredictable, interesting, and fun. He even danced the hula on Wall Street in a grass skirt
after losing a bet to David Glass, who had predicted that the company’s pretax profit would be more
than 8% in 1993.

There was one aspect of Walmart culture that bothered Walton from the time Walmart became really
successful. “We’ve had lots of millionaires in our ranks, and it just drives me crazy when they flaunt it.
Every now and then somebody will do something particularly showy, and I don’t hesitate to rant and
rave about it at the Saturday morning meeting. I don’t think that big mansions and flashy cars are what
the Walmart culture is supposed to be about – serving the customer.”

Merchandising

Walmart merchandise was tailored to individual markets and stores. Information systems made this
possible. The local store manager, using inventory and sales data, chose which products to display
based on customer preferences, and allocated shelf space for a product category according to the
demand at his or her tore. Walmart’s promotional strategy of “everyday-low-prices” meant that
Walmart had few promotions. While other major competitors typically ran 50 to 100 advertised circulars
annually to build traffic, Walmart offered 13 circulars per year. In 1993, Walmart’s advertising expense
was 1.5% of sales, vs. 2.1% for direct competitors.

Walmart was very competitive in terms of prices, and gave its store managers substantially more
latitude in setting prices than did “centrally priced” chains. Store managers priced products to meet
local market conditions. A study in the mid-1980s found that when Walmart and Kmart were located
next to each other, Walmart’s prices were roughly 1% lower, and when Walmart, Kmart, and Target
were separated by 4-6 miles, Walmart’s average prices were 10% and 7% lower, respectively. In remote
locations, where Walmart had no direct competition from large discounters, its prices were 6% higher
than when next to a Kmart.
Store Operations

Walmart leased 70% of its stores and owned the rest. Walmart’s rental expense was 3% of sales,
compared to an average 3.3% for direct competitors. Sales per square foot were $300, compared with
$210 at Target and $150 at Kmart. A Walmart store devoted 10% of its square footage to inventory, vs.
an industry average of 25%. Stores typically had 36 departments offering a wide variety of merchandise
– apparel, shoes, housewares, automotive accessories, sporting goods, cameras, toys, pharmaceuticals,
health and beauty, and garden equipment.

In the 1980s, Walmart spent over $1 billion on IT systems, including a satellite communications network
and computers, to tie all of its stores, warehouses, and logistics systems together. The system, more
advanced than that of competitors, allowed sales data to be collected and analyzed daily, and enabled
managers to learn immediately what merchandise was moving unexpectedly slowly or quickly. Over
time, Walmart shared this system with key suppliers, allowing automatic replenishing of Walmart DCs
and stores by the suppliers.

Distribution

Each store received an average of five full or partial truckloads a week, and because Walmart stores
were grouped together, trucks could resupply several on a single trip. By running full truckloads,
Walmart reduced its logistics cost to 3.4% of sales compared to 3.7% for its main rivals. Returned
merchandise was carried back to the distribution center for consolidation. A typical distribution center
spanned one million square feet and was operated 24 hours/day. It was highly automated and could
serve 150 stores within an average radius of 200 miles.

Vendor relationships

Walmart was a no-nonsense negotiator. When vendors visited the company’s HQ in Bentonville, they
were not shown to buyers’ offices, but into one of about 40 interviewing rooms equipped with only a
table and four chairs. The company centralized its buying at the head office, with no single supplier
accounting for more than 2.5% of purchases. In Walmart’s early days, a powerful supplier, such as
Procter & Gamble (P&G) would dictate how much it would sell and at what price. But over time, as
Walmart grew, its relationships with some suppliers evolved into partnerships, a key element of which
was sharing information electronically to improve both partners’ performance. P&G was one of the first
manufacturers to link up with Walmart by computer, dedicating a team of 70 based in Bentonville to
manage its products for Walmart. By 1993, Walmart had become P&G’s largest customer, doing about
$3B in business annually, or about 10% of P&G’s total revenue.

Human resource management

Wages at Walmart were broadly competitive with (although sometimes below) wages at other retailers.
Managers and supervisors were compensated on a salaried basis, with incentive compensation based on
store profits. Other store personnel were paid an hourly wage with incentive bonuses awarded on the
basis of the company’s productivity, profitability, and the degree to which their store kept “shrinkage”
(theft) below a fixed threshold. Walmart’s rate of shrinkage was 1.7% of sales, compared to a 2%
industry average. 30% of its staff worked parttime. After one year of employment, fulltime associates
received some profit sharing, which the associate could take in either cash or Walmart stock. Given the
increase in stock price, associates earning modest wages could realize substantial wealth from this plan,
e.g. a Walmart truck driver for 20 years who sold his stock for more than $700K in the late 1990s.
Overall, payroll at Walmart was 10.1% of sales, compared to 11% industry average.

Management

The Walmart management team mostly consisted of executives who had started working for the
company after high school or college. Fifteen regional vice presidents operating from Bentonville
managed their stores by spending about 200 days/year visiting them, renting compact cars and staying
in discount hotels. The fact that Walmart did not operate regional offices was though to save the
company about 2% of sales each year.

Walmart held a weekly merchandise meeting on Friday morning, to talk about how individual items are
selling in individual stores. “We all get in there and we shout at each other and argue, but the rule is that
we resolve issues before we leave.” The next morning at 7am., Walmart’s entire management team and
general office associates, along with friends and relatives, assembled in the auditorium for the Saturday
meeting, which combined informal entertainment with no-nonsense business for the purpose of sharing
information and rallying the troops. On Monday morning, decisions were implemented in the stores,
and the process began again.