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Wal-Mart When you think of the great blue-chip growth stocks of the past quarter-century, what names come to mind? Coke? General Electric? Merck? Well, guess what. Wal-Mart has crushed them all.
Since 1977, the stock has returned 35 % annually, turning a hypothetical $ 10, 000 investment into an astounding $ 6. 9 million (see the chart on the opposite page). Going forward, it figures to outstrip most of today's crop of silicon start-ups and dotcoms -- maybe all of them -- over the long term. (Neuborne, 1994). Wal-Mart isn't in a sexy industry, isn't run by a young, entrepreneurial millionaire and doesn't woo Generation X-ers with promises of stock options. It's simply a juggernaut, built on a combination of cutting-edge technology -- yes, it's a tech company -- smiley-face service and good old-fashioned business skill. Wal-Mart has figured out how to pile up billions of dollars in profit by selling staggering quantities of low-margin goods. Its $ 147 billion in sales for the latest 12 months are double the sales of competitors Sears and K Mart combined, while its $ 4. 9 billion profit in that period is nearly triple their total. (Thurow, 1996).
Relentless execution of its basic business model has helped Wal-Mart stock soar even while other retailers have been battered by fears of rising interest rates and declining consumer spending. At a recent $ 55, the shares are up 61 % for the past 12 months. That's a tough pace to maintain, particularly in the cutthroat retail arena, where profit margins are slim, competition is tough, Internet start-ups are encroaching on traditional retailers' turf and many of the country's legendary stores have hit the wall. Can the Wal-Mart juggernaut keep going? To answer that question, we spoke with Wal-Mart execs, Wall Street analysts, major shareholders, retail consultants, rivals and customers. We started in the small town of Bentonville, Ark. , where Wal-Mart runs its far-flung operations from a converted warehouse building on Walton Boulevard.
In a series of exclusive interviews, chairman Rob Walton (son of founder Sam), CEO David Glass and other top executives gave us a detailed picture of the company's strategy. They are planning growth on a mind-boggling scale for a company this big; their projections call for boosting both revenues and profits at least 15 % a year (excluding any potential acquisitions). To hit those numbers -- which would push sales past $ 200 billion in two years -- Wal-Mart is steamrolling ahead on three main fronts: the grocery business, foreign markets and the Internet. We " ll look at each in detail below. (Jane, 1995: 12).
Has Wal-Mart reached the point where it's just too big to keep growing rapidly? Perhaps. But the company's history is one of proving the naysayers wrong. "Our prospects are better today than at any point in our history, " contends Glass. "We can be anything that we want to be. Any limits are self-imposed, because we can do whatever we want. " (Jane, 1995: 12). If that sounds more like an inspirational spiel from Tony Robbins than a dispassionate assessment of business prospects, that's simply the Wal-Mart way. At the shareholder meeting last June, more than 20, 000 investors and employees descended on the local university's Bud Walton stadium for a morning of chatting and cheering ("Give me a W!
Give me an A! ... Who's No. 1? The customer!" ). "It's like a cult, " says Jerry Rascona, who runs the lawn-and-garden department in Wal-Mart's Middle Island, N. Y.
store and owns some 700 shares of WMT stock. "We believe; therefore, it will happen. " (Barlett, 1996). Wal-Mart remains imbued with the spirit of Sam Walton, who died in 1992. Photos of Mr. Sam line the walls of the corporate headquarters, and the hokey customs he initiated, like cookie-stacking contests and "people greeters" at the stores' entrances, endure. But don't let the folksiness fool you.
Like its founder, Wal-Mart is one big, tough, shrewd operator. It uses its size to wring the best deals from suppliers, and it carefully calibrates the price and placement of every item it sells, using reams of computer-generated data on the buying patterns of the 100 million people who come to its stores each week. (Discount Store News, 1994: 73 - 5). Indeed, Wal-Mart has shown how technology can revolutionize even the most mundane business. The backbone of the company's success is not the products or the stores but its 101 -terabyte computer system, which Wal-Mart says is the second largest in the world, surpassed only by the Pentagon's. By analyzing the constantly updated information, Wal-Mart executives and store managers can track customer behavior with startling precision -- and to great effect.
At Wal-Mart No. 0001 in Rogers, Ark. , store manager Mike Walker points a hand-held scanner at a package of Kraft American cheese singles on special for $ 1. 98. With the click of a button, the machine shows how many have been sold in the store that day and how many are in transit, in the warehouse and on order. Click again, and the handheld pulls up the price Wal-Mart paid for the cheese and tallies its profit margin. "We know everything about every item, " Walker says. "We can get more sales and make more money based on what we know. " (Stein, 1995: 3). What are the bestsellers in each store by total dollars? By profits?
By volume? Wal-Mart knows and can position its hottest items in the best locations for boosting sales. How well did a new product fare on its first day of introduction? Wal-Mart knows and can tweak the color or size or flavor of the product with the supplier immediately. Are golf balls flying out of one Florida store but languishing in another? Wal-Mart knows and can move the sluggish product to the place where it will sell, rather than having to mark it down. (Stein, 1995: 3).
What Wal-Mart is now learning to do with the data, however, goes beyond traditional inventory management. By looking into the shopping baskets of its customers, the chain is learning which items to stock near one another (bananas close to cereal, alarm clocks with suitcases). And by working closely with more than 7, 000 vendors who have access over the Internet to the company's data on all of their products, Wal-Mart can hammer out deals for special flavors and sizes and instantly nix products that don't sell in early tests. By constantly learning what works and what doesn't, in real time, Wal-Mart can shift gears faster than many small merchants, let alone other giants. The payoff from all this number crunching: Wal-Mart has sliced its inventory costs (because goods sit on the shelves for less time) and increased its sales per square foot (to $ 374, vs. $ 222 for K Mart). "They make a lot of mistakes, but they are smart and very quick to react, " says Paine Webber analyst Jeff Edelman. "That is what has enabled Wal-Mart to maintain that kind of momentum. " (Schmeltzer, 1997: 2 - 3).
If you don't think of Wal-Mart as a grocery store yet, you will soon. Across the country, Wal-Mart is creating enormous 200, 000 -square-foot "supercenter's" that offer all the usual items but also devote about a fifth of their floor space to groceries. Wal-Mart's foray into food will turn it into the country's No. 1 supermarket within five years, analysts predict, catapulting it ahead of Kroger and Safeway and pummeling many of the smaller chains. Why would Wal-Mart move into a field with even lower margins, fiercer competition and more vexing distribution difficulties than the discount business? For starters, filling America's shopping carts is a $ 450 -billion-a-year business, dwarfing the discount sector.
And Wal-Mart executives see it as a field where the company's unparalleled skill at pushing large volumes of cheap goods will give it an unbeatable edge. People shop for food twice as often as for hard goods, so food brings more shoppers to Wal-Mart's supercenter's, creating more potential buyers for the chain's higher-margin items, like books, CDs and computers. And tracking food purchases gives Wal-Mart information on its customers' ethnicity and demographics that it can't get any other way -- letting it fine-tune its merchandising efforts even further. "Everything we do is a driver of volume, " says Lee Scott, a 20 -year Wal-Mart veteran who was tapped as chief operating officer early this year and is expected to become the next CEO. "Additional customers let us lower the price, and lower prices draw additional customers. " (Neuborne, 1994). Moreover, Wal-Mart sees the food sector as ripe for conquest. It is extremely fragmented -- with the top two chains, Kroger and Safeway, accounting for just 12 % of sales last year -- and in the throes of consolidation, with many smaller players declaring bankruptcy. While many of the country's grocers are preoccupied with the problems of integrating acquisitions, says Barrett Ladd, a retailing consultant at Management Ventures, Wal-Mart is simply rolling out new stores. (Wal-Mart prefers not to buy existing chains, because it wants to sell food and its traditional merchandise under one roof. ) There are already 650 supercenter's, and next year alone, Wal-Mart figures on adding at least 160 new ones, mostly by knocking down the walls of existing discount stores to create space for food. (Barlett, 1996).
At the same time, Wal-Mart is testing a new concept called the Neighborhood Market in a handful of locations in Arkansas. Dubbed "small-marts, " these green-and-white stores are stocked with fresh fruits and vegetables, a drive-up pharmacy, a 24 -hour photo shop and a selection of classic Wal-Mart hard goods. While Wal-Mart is moving slowly on this concept, planning to open no more than 10 next year, the goal is to ring its superstores with these smaller offshoots -- keeping them close enough to be served by the same distribution centers -- to attract customers who may be in a hurry or want only a few items. (Thurow, 1996). But with nearly 3, 000 Wal-Marts and membership-only Sam's Clubs, isn't the nation already saturated? Won't building so many new stores simply shuffle customers from one Wal-Mart to another? "We " ve been willing to cannibalize our stores rather than going into a defensive mode where we insist each store has to make a certain amount of profit, " says COO Scott.
His reasoning rests on the simple advantages of size: He figures that the overall increase in market share and corporate profitability more than offsets the negatives of cannibalization. The strategy seems to be working. "Wal-Mart's domestic business has tremendous momentum and continues to gain market share from weaker competitors, " says Eileen Leary, retail analyst for State Street Research, a mutual fund firm with about 4 million Wal-Mart shares. Most of Wal-Mart's growth over the next few years will come in the United States, but eventually Wal-Mart will run out of room here. Naturally, it has looked abroad for new turf.
But it has made many costly mistakes since it first ventured out of the U. S. eight years ago with a store in Mexico City. Time after time it sold the...
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