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Business Case Study: Walmart - The Billion $ Empire

Walmart - The success story of Samuel Moore Walton and How did it become the most powerful business Empire worth $559 Billion.

My PM Interview

Nov 22, 2021

This is the story of a man who went from being an ordinary salesman to becoming the retail billionaire of America. Today his family is worth $215 billion. The iconic businessman is none other than Mr. Samuel Moore Walton and the company he started is known today as the retail giant Walmart.

Today, Americans spend $46 million dollars at Walmart every single hour for 24 hours a day, 365 days a year. Walmart employs about 2.2 million people and in 2021 alone Walmart has generated a profit of $1.5 million dollars every single hour!

What was so special about Sam Walton that he was able to build such a gigantic business empire?

This story dates back to America in the late 1940s when World War II had just ended. Just like any other post-war situation, the economy was bad and the Walton family, like many other people, struggled to make ends meet in the recovering economy. Walton worked multiple jobs throughout his teenage years and early 20s to pay for school and college. He sold newspapers, worked in retail stores, and waited tables, and given the nature of his job, he got the opportunity to interact with a lot of people from diverse backgrounds.

Through those conversations, Walton was able to understand the operations of several businesses in the market. While working at a retail store, he took the initiative to study the rest of the competition although it wasn’t a part of this job. This ability of his to go the extra mile helped him understand the retail market, and when he gained enough confidence, he borrowed some money from his father-in-law along with his own savings and took up a franchise of a retail chain called Ben Franklin.

His retail journey begins from here. A franchise model like Ben Franklin came with a lot of restrictions although he had the liberty to use the brand name. He had to buy 80% of the products from Ben Franklin, otherwise, he wouldn’t get a rebate. He also had to spend a specific amount of funds on advertising and even hire a certain amount of people. All of this gave him only 6-7% profit and a revenue of only $72,000/ year. Whereas, his competitor was generating a revenue of $150,000/ year. This inspired him to visit every single store nearby and he spent hours at his competitors’ stores studying their marketing strategies.

During this tedious process of examining his competition and studying the retail market, Sam Walton learned 3 very important things that helped him become one of the richest men in America.

1. POWER OF DISCOUNTING

The first thing he learned was the power of something called discounting. Discounting is a technique of selling products at a lower margin in order to maximize the sales volume. For example, if 100 t-shirts are sold for $3 each with a profit of $1, then the total profit is about $100. Now, using the discounting method the same t-shirts are sold at $2.5 each with a profit of $0.5 per piece. But the volume of sales of the t-shirts had increased to 200 due to its low cost. Although both these methods had the same $100 profit, the discounting method had some incredible benefits.

The first benefit was that discounting resulted in more volume in sales. This meant more people brought products at the store and hence, increased the footfall (more visitors). Secondly, the inventory moved in a flash. If you’re a retailer who can quickly sell your current t-shirts, you can get new t-shirt designs in stock which would again attract more customers. Faster inventory = new stock. And lastly, more bargaining power with sellers. You as a retailer could get a better bargaining power with the sellers if your inventory moved faster. For example, if the other retailers buy 10,000 units, you could buy 20,000 units because of your accelerated sales volume. Using the bigger purchase order, you could ask the seller to reduce the price by 10% which could give you 10% extra profit even with the best prices.

For a small store, that’s only a 10% increase in the margin along with a discount for customers. But when Walmart scaled up using the same principle, it became powerful enough to dominate the sellers. For example, in the present day, a wholesaler sells 20,000 units to a normal retailer for $5 with a $2 profit. Walmart will place an order for 2 million units and ask the seller to sell it at $3.5. And it being a huge purchase order, it gives the wholesaler more profit so they usually agree.

Now, when the normal retailer prices per unit at $7, Walmart puts a price tag of only $4.9. This means the selling price of Walmart is lesser than the cost price of the normal retailer, making it impossible for the normal retailer to compete with Walmart. Hence, Walmart gains a healthy profit of $1.4/unit and generates millions of dollars in profit without competition.

Initially, Sam Walton could apply discounting to only 20% of the goods due to the franchise restrictions. But later, when he opened his first Walmart store, this aggressive pricing strategy of discounting accelerated the growth of Walmart and made them millions of dollars in profit. This is the first reason why Samuel Walton became incredibly successful and that is the power of discounting.

2. MARKET RESEARCH

The second attribute that made Walton successful was market research. He visited almost every single retail store he could find in America and studied their marketing strategies. During this process, he observed that every successful retailer, knowingly or unknowingly, had an aspect that attracted more people to their store.

For example, Walton noticed that a store had an ice cream dispenser that attracted a lot of kids. This resulted in the parents wanting to specifically shop at their store as their children would be preoccupied and would make their work easier. He observed that a few stores applied a technique called the loss leader principle, wherein they sold basic commodities at an extremely low margin so that they could attract shoppers into making a visit.

For example, if the price of toothpaste was $1, some stores sold it at 50 cents/ $0.50. This gave them two benefits that very few people actually understood. Firstly, by looking at the low cost of the toothpaste, customers assumed that the store had the best prices for the rest of the products also. And secondly, since they made a visit to the store, customers would buy other products like cereals, clothes or DVDs which were all high margin products. The store might have lost 50 cents on the toothpaste, but on the rest of the bill, it made $10-$20.

Sam Walton carefully observed every one of these elements from the stores he visited and tried to incorporate them in his store. Some ideas worked and some did not, but the one sure thing was that Sam Walton knew about every single retail idea floating around in the market. He would often meet with the heads of the other discount chains and introduce himself as a small retailer looking for advice on the retail business. The heads of these retail stores answered more questions than they were supposed to as they did not view Walton as a threat. And with each passing conversation, Sam Walton walked away with a better understanding of the market. This impeccable market research always kept Walmart at the forefront of the retail revolution. Due to this Walmart was always able to find the best sellers, the cheapest products,and the best technology. Most importantly with each new store, they knew exactly which products would work and which wouldn’t and knew what their competitors’ strengths and weaknesses were.

3. TEAM MANAGEMENT

Considering the rapid growth of Walmart, wherein they were opening hundreds of stores every single year, how did Sam Walton manage to keep track of the market? This is where the third aspect of his success comes into place, that is Sam Walton’s team management. Walton followed three very powerful principles that helped him in nurturing the managers of Walmart into extraordinary leaders. These three principles were:

SAFETY
COLLABORATION
SHARED OWNERSHIP

First of all, all managers of Walmart owned a percentage of their retail store which gave them a sense of belonging and inspired them to work harder to turn their store into the best one in town.

Secondly, Walton created a culture wherein the entire team would gather every Saturday morning to talk about the issues they faced or a problem that needed to be solved in that particular store. And no matter how small or big the problem was, Walton, insisted on solving the problem together as a team.

Last and most importantly, most retailers had strict rules about the implementation of ideas by a store manager and what they can or cannot do. Whereas, Sam Walton gave his store managers the freedom to experiment with different products and marketing strategies so that they can maintain a continued understanding of the market. Even failed ideas were not reprimanded and the managers were encouraged to implement new ideas after introspection. Sam Walton implemented this as he believed that rigid protocol would stifle innovation. And in order to keep pace with the fast-developing retail industry, it was important that everybody kept experimenting

to acquire a deeper understanding of the market. This resulted in the store managers coming up with game-changing ideas for new store designs and better seller suggestions.

One such manager, Phil Green was so inspired to experiment that he bought the largest ever display of Tide, and bought 3500 giant boxes of Tide to compete with another retail giant called Kmart. The stock that he purchased was so large in the quantity that it occupied an entire section even after being stacked all the way up to the roof. Now, most people would get fired for making such a big and risky purchase decision, but this was not the case at Walmart. Phil sold out all those boxes within a week and Walmart became the new favorite in town as compared to Kmart.

This was the revolutionary culture that Sam Walton cultivated in Walmart that turned his managers into ambassadors of the business and risk-taking owners. This eventually turned Walmart into one of the most powerful companies in the US with 2.2 million employees and a revenue of $559 billion today.

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