Will Wal-Mart take over the world?

Most of the things you’ve heard about Sam Walton, America’s billionaire cotton-sock retailing baron, are true enough—as far as they go. He is rich and homespun and self-made and plain-spoken; he insists you call him Sam. He is a quail-hunting fanatic, and he drives a ten-year-old Ford pickup with cages in back for Leroy and Kate, successors to the late Ol’ Roy, his favorite bird dog—now enshrined on the label of Wal-Mart dog food. He is one of the world’s great stump speakers, putting all but the best evangelists to shame when it comes to delivering a message to his “associates,” the term he long ago substituted for “employees.” What hasn’t yet come through loudly or clearly enough from his lair in Bentonville, Arkansas, however, is just how serious a place this 70-year-old curiosity and his company are likely to hold in the history of American commerce.

No one can pinpoint exactly when an extraordinary company’s name, or image, passes from the lumpen mass of corporate entities into a league of its own, but for Wal-Mart Stores the time has come. Not too long ago, even its spectacular results earned it little notice other than for its chairman’s wealth. But last year—the first time Wal-Mart was big enough to qualify for Fortune‘s survey of America’s most admired corporations—it exploded onto the scene in a tie for ninth place out of more than 300 companies. This year it leapfrogged to No. 5, ranking first in all but one of eight categories among its retailing peers.

It’s about time Wal-Mart got some respect. The company’s average annual return to investors from 1977 through 1987 was 46%, far ahead of the next-closest company among Fortune‘s ten most admired, Herman Miller at a robust 27.4%. And the next time your broker calls, share this thought: A $1,000 investment in Wal-Mart’s 1970 initial public offering would be worth half a million dollars today. If he’s so smart, why didn’t he put you into that baby?

Before traveling to the foothills of the Ozarks to learn how all this happened, you should know a few more things about America’s most admired retailing company. In just a couple of years, Wal-Mart Stores will be the largest retailer in the U.S. The only companies in its way are K mart and the floundering giant, Sears, and the gap is closing fast. Wal-Mart’s 1,300 or so discount stores sell nearly $20 billion worth of goods a year—clothes, shoes, small appliances, cosmetics, and 50,000 other items. Even so, you may never have shopped in a Wal-Mart because the company is really just getting started. Early on, Sam Walton focused on the small-town markets ignored by national discounters, and though the company now operates Wal-Marts in such cities as Dallas, Houston, St. Louis, and Kansas City, its trade area still includes only 25 states.

This year, like last year, Wal-Mart will open 150 or so new stores. David Glass, the company’s 53-year-old chief executive who assumed all but the role of corporate inspirational leader from Chairman Sam last year, says there is no state he wouldn’t enter. So sooner or later there’s bound to be a Wal-Mart in your future. When you do step into your first one, don’t get rattled when someone—probably an elderly retiree type—approaches you with a big smile and welcomes you to the store. This is the “people greeter,” and every Wal-Mart has one because, well, it’s the friendly thing to do, and one of the hourly associates suggested it and the idea worked its way up through the system and Sam liked it.

If all this hospitality makes you think your company might like to sell something to Wal-Mart, a word of caution: Don’t expect a greeter, and don’t expect friendly. Plan on a tough trip over the river and through the woods and across the rock pile to a low-slung warehouse building in a town of 10,000 people. And even if you’re a big deal at your company and have an appointment, don’t be surprised if you’re kept waiting an hour or two in a lobby filled with 150 molded-plastic chairs and mounted giant fish caught by brother Bud Walton. Unless you like cafeteria food, eat before you come, because Wal-Mart won’t let you buy lunch or dinner or anything else for the buyer. And once you are ushered into one of the spartan little buyers’ rooms, expect a steely eye across the table and be prepared to cut your price. “They are very, very focused people, and they use their buying power more forcefully than anybody else in America,” says the marketing vice president of a major vendor. “All the normal mating rituals are verboten. Their highest priority is making sure everybody at all times in all cases knows who’s in charge, and it’s Wal-Mart. They talk softly, but they have piranha hearts, and if you aren’t totally prepared when you go in there, you’ll have your ass handed to you.”

Welcome to the house that Sam built, the militantly unglamorous, religiously cost-conscious mass merchandiser that has rewarded true believers and confounded skeptics by growing at a compound rate of over 40% a year for almost 20 years. Wal-Mart’s growth has slowed a bit recently, to a mere 30% a year. But it remains the darling of Wall Street analysts. “Wal-Mart is my highest recommendation,” says Walter Loeb of Morgan Stanley. “They’ll overtake K mart [1988 estimated sales: $27 billion] in three years.” For pure gush, listen to this First Boston report written by Margaret Gilliam. “Wal-Mart is the finest-managed company we have ever followed,” she says, predicting it will pass K mart in two years. “We think it is quite likely the finest-managed company in America, and we know of at least one investor … who thinks it is the finest-managed company in the world. We do not expect to find another Wal-Mart in our lifetime …”

Leave the Wall Street eggheads behind and come now to Bentonville, where it is a Friday morning just before Christmas. Some 100 of the company’s top managers—senior executives, divisional managers, regional managers—have flown back from visiting stores and are assembled for a weekly, no-holds-barred session with the sole agenda of moving merchandise. We are seated in folding chairs crowded around a big rectangle of tables, and most folks are clutching a thick printout that lists the inventory levels and rates of sale for key items that Wal-Mart stocks. The energy is high, for this is the play-off season of retailing. Conversation crackles; to be heard, one must speak out.

For three hours, the managers pore over the printout. One is concerned that Wal-Mart has priced children’s corduroy jeans at $3, while K mart is promoting them at two for $5; this is corrected. CEO Glass worries that a certain videogame isn’t moving in stores he has visited this week, and he wants orders cut off; the buyers have beaten him to it. Then a discussion ensues over knives, which the printout shows are heavily stocked in Wal-Mart’s distribution centers. Quickly, a senior manager orders a Christmas gift knife display. Glass sees that only 500,000 sets of cookware are stocked in the stores, while he thinks 600,000 can be sold. Get them out there.

Word on the knives and cookware will reach all store managers by Monday, probably by phone. In more urgent cases, an executive can broadcast the message on TV from Bentonville to all stores over the company’s six-channel satellite system, which also gathers store data for the master computer, handles credit card approval transmission in five seconds, and tracks the company’s complex distribution system. With the satellite, Glass says, “we can talk to every store at the same time as many times a day as we want, and we’ve dramatically reduced our phone costs. We train by satellite. But the biggest advantage is the sharing of merchandising information. A buyer can get on and say, ‘These are the new items in department 16. Here’s how you should display them.'”

The satellite is for efficiency and speed; management of this company is anything but remote control. Almost everyone at the meeting spends Monday through Thursday flying around to stores on one of Wal-Mart’s 11 planes—mostly turboprops—then returns to share findings in Friday and Saturday meetings. This is a practice with deep roots in tradition. Sam pilots his own plane, and at one time visited every store at least once a year—often with Ol’ Roy.

Nowhere is the technology of Wal-Mart more evident than at its 14 distribution centers, most within a day’s drive of the stores they serve. “Our distribution facilities are one of the keys to our success,” says Glass. “If we do anything better than other folks, that’s it. But the truth is, we were driven to a lot of this technology because the things we needed didn’t exist in small-town America.” In the early days of discounting, retailers paid distributors a cut, say 15%, to supply merchandise and stock shelves. But there were no distributors available to Wal-Mart in such places as Idabel, Oklahoma, or Van Buren, Arkansas, so it developed its own system, ordering directly from manufacturers and using its own fleet of trucks for delivery.

Consider 35-year-old Jimmy Wright’s job as general manager of the 1.2-million-square-foot Cullman, Alabama, distribution center. He oversees 1,042 associates, all working under one 28-acre roof. They load 150 outbound Wal-Mart trailers a day and unload 160. They deliver to each of the center’s 165 stores almost every day. Laser scanners route the goods along 11 miles of conveyor belts, which on a heavy day will handle 190,000 cases of goods. Says Wright: “The technology we use is standard—mechanized conveyors, bar coding, computerized inventory. A lot of companies use it. But no one runs it as hard as we do, and no one is as in touch with their business as we are.”

Wal-Mart executives chuckle a bit at the irony of all this technology tucked away in the Arkansas foothills. They enjoy the idea that outsiders think they’re a bunch of hillbillies and, upon arrival, discover a computer-communications complex worthy of the Defense Department. But while the company is near the leading edge in technology, its secret is more in deployment than hardware. As one Wal-Mart executive puts it, “Sam never did like computers. He thinks of them as overhead.” But he surrounded himself with controls-oriented people who recognized that technology was necessary to manage Wal-Mart’s explosive growth. One of those people was David Glass, the articulate but reserved company intellectual, who placed computers in all stores in the mid-1970s. Another was Don Soderquist, the 55-year-old vice chairman and chief operating officer, whose effervescent personality belies his background as a data-processing and distribution expert.

Every Wal-Mart associate—from Sam to David to Don to a cashier named Janet at the Wal-Mart on Highway 50 in Ocoee, Florida—will tell you that “better people” are what really make the difference at the company. How Sam Walton and his top managers have motivated 215,000 employees—many of them unskilled workers with starting pay of less than $5 an hour—to work as partners in the process is the most oft-told, least understood chapter of the Wal-Mart saga.

As well as anyone can remember, it all began in the late-1960s when Sam and his brother Bud’s private company had about 20 Wal-Marts. A union tried to organize two stores in Missouri, and Sam enlisted the help of labor lawyer John Tate, now an executive vice president of Wal-Mart. “I told him, ‘You can approach this one of two ways,'” Tate recalls. “‘Hold people down, and pay me or some other lawyer to make it work. Or devote time and attention to proving to people that you care.'” Sam chose the latter, and soon after held his first management seminar, entitled “We Care.”

Subsequently, everyone at Wal-Mart became an “associate.” “We,” “us,” and “our” became the operative words. Wal-Mart department heads, hourly associates who look after one or more of 30-some departments ranging from sporting goods to electronics, see figures that many companies never show general managers: costs, freight charges, profit margins. The company sets a profit goal for each store, and if the store exceeds it, then the hourly associates share part of the additional profit. To control losses from theft and damage—also known as shrinkage, the bugaboo of all big merchants—Sam instituted the shrinkage bonus in 1980. If a store holds shrinkage below the corporate goal, every associate in that store receives up to $200. Wal-Mart’s shrinkage is estimated to be just above 1%, vs. an industry average of 2%.

The company’s profit-sharing plan, to which Wal-Mart last year contributed 6.4% of an eligible employee’s wages, is invested principally in Wal-Mart stock. So, says David Glass, “it has made a lot of people a lot of money.” Glass earned $510,000 in fiscal 1988, modest for the chief executive of a company this size; his 874,000 shares of Wal-Mart stock, however, are worth $27 million. Truck drivers sipping coffee in company lounges don’t mind telling you they’ve built considerable net worth from stock they’ve bought beyond the plan. Some Wal-Mart store managers earn more than $100,000 a year in salary and bonuses, and some hourly associates retire with $150,000 in profit-sharing distributions. But, as Glass says, “there are no superstars at Wal-Mart.” He drives a Mercury station wagon and occupies a small, plain office equal in size to those of other senior officers. Sam’s office, with the same cheap paneling, is only slightly bigger, and all are about what you would expect to find at the regional depot of some truck line.

The partnership concept goes beyond monetary participation to open-door policies and grass-roots meetings designed, explains Soderquist, to say, “Hey, if you’ve got a problem, talk to somebody. Don’t talk about it in the lounge or the parking lot. Come to management.” Today at Wal-Mart all this seems so logical and reasonable and is so ingrained in the corporate culture that it is certain to continue long after Sam passes from the scene. “Sam may be the most outstanding talent and the best merchant that I’ve ever known,” says Glass. “But no one man runs a $20 billion company. It is our people that make the difference collectively.” But while a lot of people run Wal-Mart today, it all works because one man created it and pushed it, and it is to him that we must look to understand how this all came about.

Sam’s explanation is simplistic but to the point: “If people believe in themselves, it’s truly amazing what they can accomplish.” The Sam Walton story makes this point about as strongly as it can be made. The son of a Depression-era farm-mortgage banker, he grew up in the same four-state heartland where he is today (Arkansas, Missouri, Oklahoma, and Kansas all come together near Bentonville). He graduated from the University of Missouri in 1940 with an economics degree and hired on as a trainee at J.C. Penney. After World War II Army service, he opened a small Ben Franklin five-and-dime in Arkansas and eventually became the company’s largest franchisee.

Soderquist, the former president of Ben Franklin, recalls the first time he met Walton, when Sam came to the Chicago retailer with a proposition: “Sam said, ‘Hey, there’s some people putting some things on the street called discount stores, and I think they fit in rural markets as much as they do in the major metropolitan areas. I think you should franchise them, and I’ll be your guinea pig.'” Ben Franklin said no thanks, and the next day Soderquist went shopping at one of the early K marts, only to find this same guy from Arkansas interviewing stock clerks and taking notes in a spiral notebook. “I said, ‘Mr. Walton, what are you doing here?’ He said, ‘Don, it’s all part of the educational process. I’m just learning.’ He still does it today in their stores and ours,” Soderquist says. “The only difference is he uses a tape recorder.”

The conventional wisdom, which everybody told Sam over and over, was that a discount store could work only in an area with 50,000 or more people. But in 1962 Walton opened the first Wal-Mart in tiny Rogers, Arkansas, near Bentonville. Meanwhile, up in Missouri, David Glass, head of a successful drug retailing chain, heard about Sam and came to visit for the grand opening of the second Wal-Mart, in Harrison, Arkansas. “It was the worst retail store I had ever seen,” recalls Glass. “Sam had brought a couple of trucks of watermelons in and stacked them on the sidewalk. He had donkey rides out in the parking lot. It was 115 degrees, and the watermelons began to pop, and the donkeys began to do what donkeys do, and it all mixed together and ran all over the parking lot. And when you went inside the store, the mess just continued. He was a nice fellow, but I wrote him off. It was just terrible.”

So how—from there—did Sam Walton get to be America’s most admired retailer? The theory here is that he willed it through sheer force of a complex personality. As the donkey-watermelon episode illustrates, he is an old-fashioned promoter in the P.T. Barnum style. But he is more than that. He’s a little bit Jimmy Stewart, handsome with halting, “aw shucks” charm. He’s a little bit Billy Graham, with a charisma and a persuasiveness that heartland folks find hard to resist. And he’s more than a little bit Henry Ford, a business genius who sees how all parts of the economic puzzle relate to his business. Overlaying everything is a lot of the old yard rooster who is tough, loves a good fight, and protects his territory.

Says Glass: “The one thing I underestimated about Sam is that he has an overriding something in him that causes him to improve every day. That’s not difficult when you have something as bad as he had in Harrison, but sometimes you achieve success and say, ‘Boy, now I got it like I want it. Now I can lay back a little and enjoy it.’ Sam has never done that. As long as I have known him, he has never gotten to the point where he’s comfortable with who he is or how we’re doing.”

Sam, who remains chairman, has throttled back a bit since putting Glass in charge earlier this year. He spends less time around the office and in the stores. He shows no outward signs of a bout with leukemia, said to be in remission. He has four grown children by his wife of almost 46 years, Helen; one of them, Rob, 44, an attorney, is a vice chairman of Wal-Mart and, though involved in the affairs of the company, is apparently uninterested in directly managing it. Brother Bud (James L.) Walton, 67, has been instrumental in buying sites for Wal-Mart stores. Now a senior vice president and board member, he owns about $300 million of Wal-Mart stock. Sam’s immediate family has a 39% stake in the company, worth $6.8 billion.

Sam still comes to Saturday Morning Meeting, a whoop-it-up 7:30 A.M. sales pep rally for 300 managers, complete with Wal-Mart cheers, awards, and occasional appearances by such groups as the singing truck drivers. In November, with the Christmas season approaching, Wal-Mart associates across the country arrived at work to find Sam—wearing his ubiquitous mesh ball cap—waiting to “visit with” them by satellite on a subject he said he was “totally obsessed with”: aggressive hospitality to the customers. This isn’t just a sales pitch; it’s a self-improvement video that Dale Carnegie would have envied.

I solemnly promise and declare that every customer that comes within ten feet of me, I will smile, look them in the eye, and greet them, so help me Sam.

A pledge that Sam Walton asks associates to make

Sam rambles on about the hunting he’s been doing and demonstrates his bird dog whistle, then gets down to his idea. “I don’t think any other retail company in the world could do what I’m going to propose to you,” he says. “It’s simple. It won’t cost us anything. And I believe it would just work magic, absolute magic on our customers, and our sales would escalate, and I think we’d just shoot past our K mart friends in a year or two and probably Sears as well.” He proposes that whenever customers approach, the associates should look them in the eye, greet them, and ask to help. Sam understands that some associates are shy, but if they do what he suggests, “it would, I’m sure, help you become a leader, it would help your personality develop, you would become more outgoing, and in time you might become manager of that store, you might become a department manager, you might become a district manager, or whatever you choose to be in the company… It will do wonders for you.” He guarantees it.

Then, just to make sure, Sam asks the associates to raise their right hands and execute a pledge, keeping in mind that “a promise we make is a promise we keep.” The pledge: “From this day forward, I solemnly promise and declare that every customer that comes within ten feet of me, I will smile, look them in the eye, and greet them, so help me Sam.”

You city slicker CEOs laugh all you want. This is one of the keys to the magic formula. The same principles apply to Sam’s “Bring It Home to the USA” program to replace foreign goods in Wal-Mart with domestic goods. First, the program has created thousands of manufacturing jobs in the U.S. Second, it’s a great sales promotion. Finally, every worker in a Wal-Mart-created job becomes a loyal Wal-Mart shopper. “It’s the best thing that ever happened to Brinkley, Arkansas, and the best thing that ever happened to me,” says Farris Burroughs, an apparel manufacturer whose life changed one day in 1984 when Sam asked him to make 50,000 dozen flannel shirts. “We had a contract with Van Heusen for Penney’s and Sears,” he says, “and they were moving to China. We were struggling from season to season with 90 jobs. Today we’re making two million Wal-Mart shirts, we’ve got 275 employees, we’re adding 70 more next year, and everybody knows what they’re getting from the company for Christmas: $25 gift certificates to the Wal-Mart.”

Not everyone shares Burroughs’s love of Wal-Mart. Many small-town merchants have been trampled out of business by the company’s “Everyday Low Prices” philosophy. And manufacturers’ representatives have been largely shut out of the buying process at Wal-Mart. Some vendors find the company extremely difficult, and a high-ranking marketer for a big consumer goods firm calls Wal-Mart “the rudest account in America.” Bill Fields, Wal-Mart’s 39-year-old executive vice president of merchandise and sales, concedes, “We want to win at everything we do, and it has been ingrained in our buyers that we want to buy as well as possible.” With some major manufacturers, though—Procter & Gamble, Rubbermaid, General Electric—Wal-Mart is trying a nonadversarial approach in which it shares sales projection data through computer links, hoping the vendor can anticipate its needs.

Not everything Wal-Mart does works well. The company tried a do-it-yourself building supplies concept that failed, and executives admit they would like to sell a small discount-drug chain they own. Other experiments have been more successful. Sam’s Wholesale Clubs—102 low-margin, high-volume operations geared to small-business owners or anyone else who wants to buy in bulk—are profitable in a competitive market. Its three Hypermart USA stores—huge, five-acre “malls without walls”—are believed to be in the black despite the tremendous volume required. “We will continue to experiment with concepts that are compatible with our core businesses,” says Al Johnson, vice chairman in charge of special divisions.

In examining the phenomenon of this gargantuan retailing amoeba, three questions naturally arise: How does Wal-Mart keep growing? How can it continue to manage such growth? And what happens after Sam is gone?

“When we were doing $400 million,” says Glass, “people said to me, ‘Wait till you get to a billion. Things change. You can’t do it the way you’re doing it now.’ So we worked real hard to make sure nothing bad happened at a billion. Then they said $5 billion was the number where everything would fall apart, then $10 billion. Then they said, ‘Well, when you move into a new territory you’ll have trouble.’ So we do all these crazy things to make sure we can still communicate, regardless of our size.” Like McDonald’s, Wal-Mart has reduced the logistics of growth to a science. The strategy is basically to spread out and fill in. Wal-Mart opens a few stores in a new state or territory, then goes back and saturates that territory, working from a master book of potential sites. The real estate is largely self-financing because institutional investors snap up the stores in sale-leasebacks.

And what of Wal-Mart without Sam? “There’s no transition to make,” says Glass, “because the principles and the basic values he used in founding this company were so sound and so universally accepted.” As for the future, Glass says, “there’s more opportunity ahead of us than behind us. We’re good students of retailing and we’ve studied the mistakes that others have made. We’ll make our own mistakes, but we won’t repeat theirs. The only thing constant at Wal-Mart is change. We’ll be fine as long as we never lose our responsiveness to the customer.”

A brief, unannounced visit, then, to Wal-Mart store No. 942 in Ocoee, Florida, for our first discount store review. The parking lot is full; the K mart lot down the street is about half full. The shopping experience? Not much to it. The greeter hands us a “Wal-Mart Customer Appreciation Day” flyer that advertises events slightly reminiscent of watermelons and donkey rides. The floors are clean. The merchandise is crisply displayed. An “Everyday Low Prices” sign on the racks informs us that we can buy a Pioneer car stereo for $172.88; next to it is a K mart ad for the same stereo at $199.97. Similar comparisons appear throughout the store. Another sign says, “At Wal-Mart, our goal is: You’re Always Next in Line,” and indeed the checkout lines are painlessly short. Down the front aisle, we at last find the display at the heart of it all: “6 Pair Cotton Socks—$5.” A young man approaches, fixes us in the eye, and asks earnestly if he may somehow be of help. Who knows how far this boy could go?

Reporter Associates: Sarah Smith, David J. Morrow