Posted 7/2/2012 12:00 am
Updated 10 months ago
Sam Walton would be amazed at the growth of his Wal-Mart Stores Inc.
In the two decades since his death at the age of 74 in April 1992, the Bentonville retail chain has become a global retail Godzilla.
When Walton died, Wal-Mart operated 1,714 stores, 208 Sam’s Clubs and only six Supercenters. Wal-Mart’s international division was a blip with eight locations in Mexico and Puerto Rico. Those stores generated $43.8 billion in revenue and $1.6 billion in net income in 1992.
Now a run-up in oil prices is the only reason Exxon Mobil has displaced Wal-Mart at the top of the Fortune 500 list. Wal-Mart sold $447 billion worth of merchandise in the fiscal year that ended in January, and profited $15.7 billion on it. These days the company operates more than 4,400 stores in the United States and another 5,651 outlets in 26 countries.
But behind the big numbers are some trends that disturb retail analysts. Competitors such as Amazon, Apple and the category known as “dollar stores” have gained ground, especially in the United States, where Wal-Mart suffered through two years of same-store sales declines between 2010 and 2011 before managing the barest of increases in the fiscal year that ended in January. Same-store sales reflect sales at stores open at least a year and exclude gains from simply opening new stores.
Some put the blame on Wal-Mart’s management team, saying it has drifted away from Walton’s essential philosophy of offering the lowest price.
“Wal-Mart has lost the most important thing it had, and that’s price leadership,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York. “It’s the most precious asset they had, and they squandered it.”
Instead of focusing on low prices, Wal-Mart turned its attention to fashionable clothes and renovated stores, while practically shunning online sales. It even dropped the slogan “We Sell for Less.”
If Walton were alive today, “this never would have happened,” Davidowitz said. “There’s no way that Wal-Mart would have embarked on an insane assortment … remodeling, making the stores pretty. Sam understood the customer.”
Still, not all of Wal-Mart’s initiatives after Walton’s death backfired. It rolled out $4 generic prescription drugs in the fall of 2006 and in-store health clinics in 2007. Wal-Mart also promoted environmentally friendly products on its shelves while building more green stores.
And some things stayed the same at Wal-Mart, with or without Walton, including allegations that Wal-Mart saved money at the unfair expense of employees that have always been called “associates.”
Wal-Mart was only 5 years old when, in 1967, a federal court ruled that Walton had set up his first stores as separate corporations to avoid having to pay minimum wage under the Fair Labor Standards Act.
In 2001, a group of women sued Wal-Mart for allegedly discriminating in pay and promotions. In 2004, a federal judge ruled that the case could proceed as a class action, making it the largest civil rights lawsuit brought against a private employer in the U.S. with a potential for 1.6 million women in the class. Wal-Mart appealed the case to the U.S. Supreme Court, which in 2011 tossed the class-action portion of the complaint. Business groups cheered the decision.
Mr. Sam’s Philosophy
Wal-Mart succeeded because of Walton’s focus on keeping prices low. In fact, Walton wrote in his autobiography that he settled on the name Wal-Mart in 1962 because it had only seven letters, meaning signs would be cheaper to buy and repair than if the store’s name were longer.
Walton said in his autobiography that even after Wal-Mart generated billions in annual sales, people asked him why the company continued to pinch pennies.
“That’s simple: because we believe in the value of the dollar,” Walton said. “We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money. Every time Wal-Mart spends one dollar foolishly, it comes right out of our customers’ pockets. Every time we save them a dollar, that puts us one more step ahead of the competition — which is where we always plan to be.”
After Walton’s death, Wal-Mart hit its biggest growth spurt. Wal-Mart’s first CEO after Walton’s death was David Glass, who pushed forward with the international expansion that fueled the retailer’s growth.
Glass had been Wal-Mart’s longtime chief financial officer, and Walton had promoted him to president in 1984. Between 1992 and 1995, sales jumped 113.7 percent to $93.6 billion with profit of $2.7 billion.
But scrutiny of Wal-Mart’s business practices also intensified. Wal-Mart’s “Buy America” mantra came under inspection shortly after Walton’s death, and some communities began to resist the chain whose arrival often spelled the death of locally owned mom-and-pop retailers.
Even Walton’s brother, James L. “Bud” Walton, who co-founded Wal-Mart, criticized the company after Sam Walton’s death. Bud, who died in 1995, thought the company was moving away from Sam’s philosophy, especially between management and workers, according to Bob Ortega’s 1998 book, “In Sam We Trust.”
While Wal-Mart focused on inter-national growth, it missed the biggest shift in retail since the suburban mall: the rise of the Internet. Wal-Mart’s online adventures have been filled with a number of missteps.
It launched a basic website in 1996, but early Internet surfers largely ignored it. The company renovated the site in the fall of 1999 but then had trouble getting merchandise in the hands of customers by Christmas. Wal-Mart again tried a major overhaul of its website in 2000, but it too failed to gain sales momentum.
In the meantime, Amazon.com Inc.’s sales took off, soaring from $3.9 billion in 2002 to $19.2 billion in 2008. Amazon’s revenue stood at $48.1 billion with a profit of $10.8 billion in 2011, making it the largest online retailer. Amazon’s profit margin was an astounding 22.5 percent, compared with 3.5 percent for Wal-Mart. Wal-Mart doesn’t break out its online sales in its financial reports, but sales from Walmart.com were estimated at $4.9 billion in 2011, which was up nearly 20 percent from a year earlier, according to Internet Retailer, an online retail industry website.
Another eye-opening development came as a result of Wal-Mart putting its online attention on the back burner. In 2008, Apple’s online iTunes Store passed Wal-Mart to become the No. 1 music retailer in the United States, apparently the first time Wal-Mart led a category in sales and then lost it to another retailer.
One of the biggest miscalculations Wal-Mart’s management made occurred in 2007 when it scrapped its “Always Low Prices” slogan after more than 20 years and replaced it with “Save Money. Live Better.”
In 2008, Wal-Mart announced that customers would see fashionable clothes on the racks. But Wal-Mart has never been the store of choice for fashion trendsetters, and changing the merchandise mix doesn’t change that fact. For the fiscal year that ended Jan. 31, 2009, apparel accounted for 11 percent of U.S. store sales; a year later, it was down to 10 percent.
And in 2009, with the U.S. suffering through the worst economic recession in decades, Wal-Mart launched a project to renovate most of its U.S. stores. It planned to streamline its inventory to make the stores easier to shop, even going as far as removing “Action Alley,” where special promotions are placed on a wooden pallet in the middle of an aisle.
During other recessions, Wal-Mart’s revenue climbed because it was considered to be a low-price leader, said Britt Beemer, chairman of America’s Research Group of Summerville, S.C.
But during the Great Recession, the dollar stores — which are typically smaller and carry only a handful of items priced higher than $10 — experienced a surge in revenue. “There’s now a lower-price alternative out there called the dollar stores,” Beemer said.
Other analysts took notice that Wal-Mart was losing its customers.
J.P. Morgan analyst Charles Grom said in a February 2011 research report that Wal-Mart confused its core shoppers by shifting from one strategy to another.
“Over the past few years the company has shifted strategies from an upper-income focus to deep discounting and then back to” one focused on low prices, Grom said in his report.
He also said Wal-Mart was now at risk of losing its new customers along with the old ones as “Action Alley adds clutter back to the store making the shopping experience less appealing.”
Davidowitz said he thinks Wal-Mart’s management’s decisions damaged the company in the eye of the consumer.
“I don’t know how they let themselves go as far off track” from Walton’s low-price philosophy, he said. “I think that’s indicative of some really bad management.”
Back to Basics
In early 2011, Wal-Mart CEO Mike Duke announced a four-point plan to improve sales in Wal-Mart’s U.S. stores, which included returning to its focus having the lowest prices.
More than a year into the new strategy, it’s unclear if it will be successful, although U.S. same-store sales were up 0.2 percent for its fiscal year that ended in January. Wal-Mart no longer releases monthly sales figures.
Most of the company’s sales growth in the last fiscal year came from its international division, which jumped 15.2 percent to $125.9 billion for its fiscal year that ended in January.
“I think they have a lot of work to do,” Davidowitz said. “I think they lost a tremendous amount of what made them great.”