Sam Walton left JC Penny and realized that people in rural America had to travel to shop in department stores. He changed all that.
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.
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Dave Young:
Welcome back to the Empire Builders Podcast, Dave Young here alongside Stephen Semple. And Stephen just told me the topic for today’s podcast, and it’s Walmart.
Stephen Semple:
That’s it. You’re so excited.
Dave Young:
Oh my gosh. We’re finally going to talk about Walmart.
Stephen Semple:
Walmart’s just one of those companies that they’ve been unbelievably successful, and I’m going to defend Walmart here, but they’re hard to love.
Dave Young:
They’re hard to love, but man, if you live in a small town, they’re hard to avoid too.
Stephen Semple:
Yes.
Dave Young:
And you got to hand it to Sam Walton.
Stephen Semple:
Yep.
Dave Young:
I’ve read his book. It is actually the one that was ghostwritten while he was dying in the hospital. And it’s a really good read and it’s got some great lessons, so I’m anxious to hear what you found out.
Stephen Semple:
It’s a great read. It has some fantastic lessons in it. I think there are a few things that Walmart as a corporation has started to deviate from those ideas that if they had kept closer to them, Walmart is a company that would be deeply loved. There’s a few things I think they’ve moved away from, but here’s one of the things that I’m going to say I admire about Walmart is that if we did not have a Walmart in the marketplace, I think it would be far easier for prices to increase for consumers on certain products, groceries, and things along that lines, Walmart being in there, to a degree, has managed to keep prices for certain commodities at a certain level because Walmart is dedicated to that, keeping prices down. And I think having somebody in that space is good. And this was stats from a couple of years ago was over 10,500 stores in 24 countries, that number surprised me. I didn’t realize it was 24 countries, and it was started in 1945 by a former JCPenney employee.
I didn’t realize that Sam Walton had worked for JCPenney, and the first thing he did when he left JCPenney is he bought a branch of Ben Franklin stores from the Butler brothers. So he started with those stores, and what Sam saw was retailers were putting a few large stores in big cities, but those big stores in big cities was inconvenient for rural shoppers. And what he decided to do was open a large department store in Rogers, Arkansas. Now, here’s the crazy thing is, this was a place with a population of 6,000 people. So one would go, “This is nuts. Why would you open a store in a town of that size?” So it’s 1962, and he opens basically the first Walmart.
And his primary focus was to sell products at low prices, higher volume sales, lower profit margin, and really do this crusading for the consumer. And the funny part is the name Walmart was derived from Fed Mart, which was, if we remember when we did the episode on Costco, was the first version of Costco that was done by Saul Price, was Fed Mart. And Walton has also stated he liked the idea of calling the chain Walmart because he really liked Saul’s name, Fed Mart. He even talks about how a lot of his really good ideas came from studying Saul. So it’s really, really interesting. But within its first five years, the company expanded to 18 stores in Arkansas and was 9 million in sales. So it really did this… Really, really, really, really successful doing this nutty idea, this nutty idea of putting large stores in small locations. It was years until Walmart had a location in a large urban area.
It took a long time before they did it. But here’s the thing that really made Walmart successful. And at the time, stores organized all their things by category. So it was like category, category, category, category, everything was put together by category. And what Sam Walton observed is there are certain items that are very price sensitive and certain items that are very popular. So he created what he called Action Alley, which is a big alley right behind the cash register, which has the highest traffic. And he would put trendy, seasonal, and discount items with large signage in this alleyway.
And what he found is it dramatically drove sales. It dramatically drove sales to the stage where people would come in and all of a sudden the amount that was in the shopping cart dramatically increased. Later as the company became more sophisticated, they got really good at managing cart. In other words, knowing that these are the two items that should be put together because these are the two items that are bought together, and they may not be of the same category. So that was a completely, completely innovative idea that Walmart brought to the table of retailing.
Dave Young:
Do you have an example of that? I’m thinking like hot dog buns and ketchup, or put the buns over near the hot dog somewhere. Don’t make me go down the bread aisle.
Stephen Semple:
Yes. It would be things a lot like romaine lettuce, croutons and Caesar salad dressing should all be put together.
Dave Young:
We’ve seen that in their stores, right?
Stephen Semple:
Yes.
Dave Young:
They’re good at it. And some of those items, they’ll be in multiple locations in the store. You’ll have the croutons and the dressing near the romaine because that’s got to be in the produce aisle, but you’ll also find those same things when you go down their regular aisle.
Stephen Semple:
Correct.
Dave Young:
So it’s a matter of not just having one location in the store for one item.
Stephen Semple:
Correct.
Dave Young:
Yeah.
Stephen Semple:
And there will be ones, because I know people who have worked with Walmart, and there’ll be ones that aren’t obvious. You won’t necessarily realize that boy, light bulbs and batteries go together. But it may be one of those ones that through their studying of the shopping cart that they go, “Oh, isn’t this really interesting? A really high percentage of people who buy light bulbs also buy batteries. Let’s put those two together to stimulate the purchase of one or the other.” A lot of people don’t realize Walmart has one of the largest computer systems on the planet.
Dave Young:
Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.
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Dave Young:
Let’s pick up our story where we left off. And trust me, you haven’t missed a thing.
Stephen Semple:
A lot of people don’t realize Walmart has one of the largest computer systems on the planet, how they study consumer behavior and shipping and things along that line. It’s really quite remarkable. Another innovation that Walmart did was this concept of cross docking where they try to keep actually as little as possible in the warehouse that literally trucks are coming in one side of the dock, stuff’s being unloaded from those trucks not even stored in the warehouse and loaded in trucks on the other side. So basically their inventory is either in a truck coming to the store or sitting in a store.
Dave Young:
They don’t even call them warehouses. They’re distribution centers.
Stephen Semple:
Yes. Yes.
Dave Young:
Someone very close to me worked at Walmart for a number of years. And so the truck is packed with specific size containers for each store.
Stephen Semple:
Yes.
Dave Young:
So wherever the truck’s coming from on its way to the distribution center, it’s already got the things that are going to a bunch of stores, but it’s not going to make the rounds to all those stores. At the distribution center, everything for the stores that that distribution center services comes off the trucks coming from the suppliers and then gets loaded onto the stores that are bound for the individual distribution center. So all the-
Stephen Semple:
Very sophisticated.
Dave Young:
It’s just a giant, logistical, sorting place.
Stephen Semple:
And here’s the thing, if you’re going to be low cost, if you’re going to be low cost, you can make a lot of money and you can be successful being low cost. But what it means is, everything in your business has got to support that. So you’ve got to be very efficient.
Dave Young:
And that’s the part of it that, as you said, that’s the part that people don’t see.
Stephen Semple:
Correct. Correct.
Dave Young:
And even to the point of you talk about their computer system, as the employees are stocking shelves, you wander around and you decide to take something out of your basket and put it in a place that it doesn’t belong, they need to find that out because as they go through and count things on the shelf or the computer knows that six of these have sold, that’s how many get reordered. And it happens automatically, and so it’s just this constant battle inside the store about making sure that things don’t get scattered or the computer’s going to just not… It won’t get reordered because it’s all still in the store.
Stephen Semple:
So there’s two other things I wanted to cover that I find interesting, actually three things. So one is Sam Walton was very big on, if it’s not on the shelf, you can’t sell it. And so they don’t let things go out of stock. They will run the risk of over ordering because if you run out, you can’t sell it. And I think a lot of retailers today don’t have that philosophy. They’re happy to sell out. And his whole thing is, don’t sell out because if it’s not on the shelf, you can’t sell it so it always has to be on the shelf and I think that’s really interesting. But the other one is he was very famous for asking the question, instead of how many more could we sell at this lower price? Instead of it being $10, it was $8. How many more could we sell? How many more do we think we could sell at that price? And really thinking about that as their methodology.
But this whole thing of this aisle and this whole thing of grouping products together, when you think about it, is also about eliminating friction for the customer. Because it would be really tempting as a retailer to say, “Well, it’s way better for me to get you to wander around my store. So if you buy romaine lettuce and Caesar salad dressing and croutons together, I should have them in three different sections because as you’re wandering, you might see something else,” which to a degree is true, but is inconvenient. When you put those things together, it’s actually a better shopping experience as well because I came in for these three things I’m not having to wander around everywhere to look for. Look, you are also doing a stimulating purchase because if the croutons are right there, you might go, “oh, right, I forgot. I also need croutons.” But it’s also a convenience for the consumer.
Dave Young:
Getting back to the notion of their approach to buying is always an interesting one to me as well. There’s a story I think in the book about the lawn mowers. Do you remember that one at the-
Stephen Semple:
No, I don’t remember that one.
Dave Young:
Early on in his development of the Walmart idea, and it might’ve been in one of those first stores, one of his competitors had a bunch of… Late in the summer season, this guy had ordered too many lawn mowers, and Sam Walton bought them all from him. He’s like, “Well, you can’t sell them. I’ll buy them.” So he bought them for a really low price and traditional retailer mind would go, “Okay, I’m going to buy them and I’m going to figure out how to sit on them till next season, and then I’ll sell them really low as spring starts to warm up,” and that’s not the way he thought. He thought, “Okay, I get them for this price. I’m going to line them all up on the edge of the road outside, even if I only make 10 bucks a piece on him, I’m not going to do the regular markup because it’s the end of summer, but I can make some money selling all of these.” and that’s what he did. And so when his buyers are at the shows and the presentations for buying things, the question isn’t how much can we make per item?
What’s our profit going to be by taking this widget that we buy for $5 and selling it for 10? It’s how many can we sell, not what is our margin going to be, because it’s all about the volume. And we have enough stores that if we sell a gazillion more of them than everybody else, even at a lower margin, we’re going to make more money in the long run because our turn is going to be bigger.
Stephen Semple:
They have a huge turn, and they’ve dedicated the way the stores are designed, the way the warehouse is designed, the way their systems is designed to be operationally unbelievably efficient at doing that. And so I’ve always said, there’s two places you can make money as a retailer, you can make money at the low end and you can make money at the high end. At the low end, you just have to dedicate yourself to being really operationally excellent, and Walmart is operationally excellent. They really are, and that’s why they’re able to do what it is that they do.
Dave Young:
I’m going to substitute the word efficient.
Stephen Semple:
Sure. Yeah.
Dave Young:
Because honestly, I don’t think it’s excellent that I have to ring up my order now and bag my own groceries, and there’s nobody… In the store that’s near me, and I don’t go very often, but there is nobody there that can ring you up and bag your stuff. It’s all, “No, you’re the Walmart employee now.”
Stephen Semple:
I’m just going to say-
Dave Young:
I’m sure it’s efficient.
Stephen Semple:
Well, I’m actually going to give you a different look on that. You’re going to see that in more and more retailers and it has nothing-
Dave Young:
Oh, yeah.
Stephen Semple:
But here’s where I’m going to tell you, it has nothing to do with whether or not it’s cheaper, it has to do with the fact that they can’t find people.
Speaker 6:
Sure.
Stephen Semple:
That’s the problem. That is ultimately the problem. We’re going to see more of that type of technology being used in restaurants and stores and things along that lines simply because of the shortage of people, which we’ve talked about in past demographic ones. Sam built a massive empire, and what we have to recognize is he did a couple of unbelievably crazy things where you would go, “You’re building a store of what size in a place of what population? You’re buying lawnmowers and you’re going to sell them into season? You are lumping these products together in this way?” All those things, which are now common practice, people would’ve thought they were nuts, and it was an innovative idea that built an empire.
Dave Young:
You can’t deny the innovation and the sheer determination, and you can’t deny the success. Right?
Stephen Semple:
No.
Dave Young:
You look at how many billionaires live in Bentonville, Arkansas that are related to Sam Walton.
Stephen Semple:
Yeah, that’s it.
Dave Young:
That tells the story right there.
Stephen Semple:
It sure does. All right. Thanks David.
Dave Young:
Thank you, Steven. Thanks for listening to the podcast. Please share us, Subscribe on your favorite podcast app and leave us a big fat juicy five-star rating and review at Apple Podcasts. And if you’d like to schedule your own ninety-minute Empire Building session, you can do it at empirebuildingprogram.com.
