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Wal-Mart

Wal around the world Dec 6th 2001 | BENTONVILLE, ARKANSAS From The Economist print edition

The world's largest retailer still thinks of itself as a small-town outfit. That

may be its greatest strength Get article background

THERE is no shortage of statistics describing

Wal-Mart's size. With $216 billion in sales, it has bypassed General Electric to become the world's second-largest company after

ExxonMobil. With 1.2m staff, it is the biggest private-sector employer in the world. It broadcasts more live television than any network. The computer controlling

its logistics is the world's most powerful after the Pentagon's. Six years ago it sold almost no food, yet today it is America's biggest grocery retailer.

To appreciate fully how big Wal-Mart is, however, you have to travel to its

headquarters in tiny Bentonville, Arkansas, a state where chickens outnumber people. A building the size of 24 football fields, carrying a giant Wal-Mart logo, looms out of the barren landscape. Yet this massive warehouse also offers a clue

that size is not the main reason for Wal-Mart's success. Under the logo, in equally large letters, it says: Our people make the difference.

Despite its size, the world's largest retailer has stuck to its small-town roots. Its founder,

Sam Walton, set up shop in a hamlet near Bentonville in 1962 because retailers such as Kmart and Sears dominated large towns. That decision shaped Wal-Mart's success.

Being founded in Bentonville was a coup, argues Richard Church, an analyst at Salomon Smith Barney. Lacking customers,

staff and suppliers, Walton had to do things differently. He offered incentives: profit-sharing for the staff, partnerships for suppliers. And customers got friendly service

and everyday low prices, which meant that Wal-Mart had to keep costs minimal.

Frugality came naturally to Walton, who was a country boy. He made executives sleep eight to a room on trips. Once America's

richest man, he drove an old pick-up truck and flew economy class. Every time Wal-Mart spends one dollar foolishly, he wrote,

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it comes out of our customers' pockets. A decade after his death, this is still ingrained in Wal-Mart's culture.

Thus, although its soaring market capitalisationnow $252 billionhas made millionaires of executives and hourly workers alike, there are no signs of opulence or ego at the company's austere headquarters. Lee Scott,

the chief executive, drives a VW Beetle and as recently as August shared a hotel room to save money. John Menzer, head of Wal-Mart International, sits in a tiny office on the

same floor as his staff. Executives take out their own rubbish, pay for their coffee and are told to bring back pens from conferences.

The company's small-town values drive its relationship with staff and suppliers. Despite its enormous workforce, there is a paternal feel to Wal-Mart. It is as if

everybody were still working for some strict, though ultimately benign, uncle. Employees are called associates. Most own shares and are on profit-share.

They also enjoy a large degree of autonomy. Ken Schroader, store manager at Wal-Mart's Supercenter in Siloam Springs, Arkansas, proudly demonstrates the scanners that tell his department managers precisely how well products are sellingsales

compared with last year, mark-ups, how much is in stock or in transit. Such details allow a department head to become a small shopkeeper, running his section like an independent store and moving stock faster (Wal-Mart shifts inventory twice as fast

as the industry average). Every humble store worker has the power to lower the price on any Wal-Mart product if he spots it cheaper elsewhere.

That sort of delegation is apparent outside the stores too. Michael Duke, head of logistics, uses his 6,000 truck drivers (most of whom own Wal-Mart shares) to keep tabs on inventory problems at stores. Involvement breeds loyalty: driver turnover

is only 5% a year, compared with an industry average of 125%. George Tracy, head of personnel at a Bentonville distribution centre, cracks down on whatever raises costs and rewards whatever lowers them.

This month, for instance, Laura Blumenstein, one of his workers, will get dinner for two and a parking spot near the entrance (this is Wal-Mart, after all) for logging

inventory fast and accurately. To raise flagging spirits, weird stuntssuch as pig-kissing contests and quasi-evangelical weekend get-togethersare laid on (see article). In America, at least, this works.

Suppliers are treated as part of the family, once they have proved their worth. Nervous newcomers are shown to the row, a long corridor of drab rooms, each

adorned with a notice explaining that Wal-Mart's buyers do not accept bribes. It is like a scene from a bazaar: sweaters spill out of suitcases and haggling over prices continues all day. Angel Burgos, from Puerto Rico, wants to sell computers to Wal-Mart: We were grapes, he sighs, but now we are raisins. They suck you dry.

Proven suppliers, though, feel differently. Through Wal-Mart's proprietary systems,

they are given full and free access to real-time data on how their products are selling, store by store. By sharing information that other retailers jealously guard, Wal-Mart allows suppliers to plan production runs earlier and so offer better prices.

Procter & Gamble's $6 billion-a-year business with Wal-Mart is so important that the maker of Crest toothpaste has a 150-strong Bentonville office dedicated to it. Andy Jett, a director there, says Europe's retailers are still blind to the competitive edge that partnering with suppliers gives Wal-Mart. Wal-Mart treats suppliers as

Employees are

told to bring back pens from

conferences

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an extension of its company. All retailers will eventually work this way, he predicts.

All this effort has produced sparkling results. In less than four decades, Wal-Mart has come to account for 60% of America's retail sales and 7-8% of total consumer spending (excluding cars and white goods). Its same-

store sales growth is running at five times the industry average and its pre-tax profits have grown by 15% a year over the past decade, to $9.3 billion in 2000. No other

global retailer comes close when measured by sales. Mr Scott says future growth will come from aggressive new store openings, plus a move into food and into such services as banking (though Wal-Mart's foray into

Internet retailing has not been entirely successful). Is there some reason we couldn't be three times this size? he asks. However, analysts worry about saturation in America and expect domestic profit growth to slow to 9% within five

yearsnot bad for a normal company, but disappointing for the supercharged Wal-Mart.

Wall Street is pinning its hopes instead on Wal-Mart's overseas efforts. Founded only a decade ago, the international division already accounts for 17% of sales and 11% of profits. Mr Menzer says that the operation will contribute a third of Wal-

Mart's profits growth within five years. Linda Kristiansen, an analyst at UBS Warburg, an investment bank, forecasts that profits outside America will grow by 21% a year on average until 2006. CSFB, another bank, puts the figure at 26%.

Are these predictions too bold? Wal-Mart is already the biggest retailer in Canada and Mexico. It bought itself the number three position in Britain with its 6.7 billion

($11 billion) acquisition of Asda in 1999, and it is now pushing into China. But its ventures in Argentina, Indonesia and Germany have been flops, accompanied by heavy losses. With a presence in nine countries, Wal-Mart is in fact less international than other aspiring global retailers such as France's Carrefour, which has stores in 31 countries.

Most of Wal-Mart's overseas problems were avoidable. In the 1990s it made the mistake of exporting its culture wholesale, rather than adapting to local markets. When it moved into Indonesia, it shipped in an entire warehouse on a barge. In

Germany, its biggest headache, Wal-Mart was ready neither for the entrenched position of such discounters as Aldi, nor for the inflexibility of suppliers and the strength of trade unions. It had little feel for German shoppers, who care more about price than having their bags packed, or German staff, who hid in the toilets to escape the morning Wal-Mart cheer.

We screwed up in Germany, admits Mr Menzer. Our biggest mistake was putting our name up before we had the service and low prices. People were disappointed. Mr Scott is blunter, blaming the cock-up on incompetent management. Just as well that Wal-Mart can afford such mistakes. Who else can lose $300m a year in Germany and barely notice? asks CSFB's Michael Exstein.

Wal-Mart is at least learning from its experience. Unlike its small, nervous steps into some foreign markets, the acquisition of Asda was bold, providing crucial expertise in selling food. Wal-Mart is also becoming more culturally astute, even importing good ideas from overseas into its domestic business. And things are

looking up in Germany. Employees like being asked what they think and shoppers, used to surly staff and dingy stores, are slowly warming to service with a smile.

No other global

retailer comes close when

measured by sales

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But Wal-Mart's biggest problem is its lack of human

capital, says Coleman Peterson, head of personnel. The group has been at pains to replace expatriates with locals, and every overseas country team except China's is now

led by a non-American. Yet it is expanding faster than it can train people internally, and has lost high-quality local managers to rivals.

This leads to another problem: that the international division still lacks scale. To exploit savings from sourcing

globally, Wal-Mart needs to make more acquisitions. Buying Carrefour would be the boldest move. However, Wal-Mart is more likely to buy the hypermarket businesses of Germany's Metro, worth $4 billion. The two sides talked last year, and insiders say that Metro, controlled by three families, is ready to sell. Buying even part of

Metro, which controls a third of Germany's retail space, would bring Wal-Mart huge clout with European suppliers, and also some more experienced European managers.

But Wal-Mart has another problem: its image. In America, its giant stores are symbols of big retail, blamed for the destruction of entire communities. To avoid

future growth being constrained by political barriers, Wal-Mart may have to raise its head from Bentonville and worry more about how it is perceived. Unpopularity is hard for Wal-Mart executives to understand. After all, everyday low prices have

been good for consumers. And a recent study by McKinsey, a consultancy, credited efficiencies in retailing (mainly Wal-Mart's) for more of America's recent productivity spurt than technology investment.

Ultimately, few doubt that Wal-Mart has both the patience and the resources to stay on top. Never underestimate them, advises Richard Hyman of Verdict, a

consultancy. They foster an image as country hicks. It makes the kill more of a surprise. Certainly, Wal-Mart has made mistakes, but it has also got more things right than its rivals, who mistake its small-town simplicity for naivety at their peril. As Mr Scott puts it: Just because we are simple, doesn't mean we are unintelligent.

Wal-Mart's

biggest problem is its lack of

human capital

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Wal-Mart's weekly meeting

Saturday morning fever Dec 6th 2001 | BENTONVILLE From The Economist print edition

Wake up, workers, it's time to cheer Get article background

WHO'S number one? The customer. Always! The slogan roars from 500 throats.

At 7:30 on a Saturday morning, while most Americans are just regaining consciousness, the top executives of the world's largest

retailer crowd into a packed auditorium at its Bentonville headquarters. Most are in jeans, some have brought breakfast, many their kids. Welcome to Wal-Mart's weekly Saturday

morning meeting, part evangelical revival, part Oscars, part Broadway show.

After the introductory cheerin which the crowd roars the word Wal-Mart letter by letter (twisting their hips for the hyphen in the middle)come service awards. An employee (associate in the corporate lingo) steps up. Starting as a cashier 30

years ago, she has accumulated a seven-figure sum from her profit-share. The audience cheers againmost are in the scheme. David Glass, a former chief executive, gets a ribbing for 25 years' service, complete with a fat-lady-o-gram

who covers him with kisses. Next, four of America's best-known football players, including Joe Montana, come forward to deafening applause to push a new quarterback-of-the-century promotion with Kraft Foods.

But nobody forgets the serious reason for these meetings. Lee Scott, Wal-Mart's current boss, makes all his divisional managers go through their weekly sales

figures. Those with shortfalls stand up and explain why. The room claps when the numbers are good. Convert that he is, Mr Scott even gently chides his wife for not standing up during one cheer.

After dry presentations from product buyers about Christmas lights, there is more fun. Employees' children skip up in rock-and-roll garb for a medley of Christmas

songs. That, though, is a prelude to the real message. We have a short, difficult run to [December] 25th, concludes Mr Scott, but by keeping motivated we are going to feel pretty darned good about it on December 26th. He swoops on a

nearby employee to lead the final Wal-Mart cheer. After more than two hours, everybody files out, exhausted. Soon after dawn next Saturday, they will all be back

AP

True believers