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Wal-Mart: Sam Walton's ideas reshaped retailing industry.

WHEN PHILLIPS PETROleum of Bartlesville, Okla., that state's largest publicly traded company, was acquired by Conoco Oil in November 2001, Conoco Chairman Archie Dunham explained that the merged companies would need to be headquartered in Conoco's hometown of Houston.

"You can't be a great global company and operate out of a small town anywhere in America," Dunham told the Associated Press. "It has nothing to do with Oklahoma."

At least one corporate executive found that statement amusing. On a copy of the AP story, H. Lee Scott, president and CEO of Wal-Mart Stores Inc. wrote the following note to Oklahoma Gov. Frank Keating:

"We hope to be a great global company someday, but hate to think we will have to move from Bentonville!"

A few weeks later, Wal-Mart would announce annual revenue of $217.8 billion and claim the title of the largest company in the world. Beloved, despised, feared and admired, Wal-Mart is a global force with its epicenter at Bentonville, Ark.

Whether the Wal-Mart phenomenon could have developed anywhere else is an unanswerable question. But the reason why it happened--and continues happening--in a town that still has only about 20,000 residents (barely half the size of Bartlesville) is simple: Back in 1950, Sam Walton thought Bentonville would be a good place to raise a family and operate a business.

Within 40 years, Walton's business plan had reshaped the retail landscape. In the fiscal year that ended Jan. 30, Wal-Mart's revenue worldwide had grown to $256 billion with no end in sight. Wal-Mart has taken northwest Arkansas along for the economic ride, bringing Benton and Washington counties recognition as the most vibrant local economy in the country.

The economic boom hasn't been enough to lift all of Arkansas out of poverty, but "imagine how much poorer we'd be without them," said Jeff Collins, director of the Center for Business and Economic Research at the University of Arkansas at Fayetteville.

Early Times

The seeds of Wal-Mart were planted in the Ben Franklin variety store chain. Oklahoma-born and Missouri-raised Walton opened a Ben Franklin franchise store at Newport in 1945. It quickly became the No. 1 Ben Franklin franchise in a six-state region, racking up $250,000 in sales.

When his lease was up in 1950, it had become so successful that his landlord, P.K. Holmes, thought running a retail store must be a piece of cake. Holmes refused to renew Walton's lease and intended to run the store himself.

According to Vance Trimble's biography, "Sam Walton: Founder of Wal-Mart," a trip to an attorney persuaded Walton that there was nothing he could do to save his Newport business.

Attorney Fred Pickens Jr. described Walton's reaction: After clenching and unclenching his fists, Walton stood up and said, "I'm not whipped. I found Newport, and I found the store. I can find another good town and another Ben Franklin. Just wait and see."

It didn't take long. Sam and his wife wanted to stay in northwest Arkansas because it was close to her family and the area offered excellent quail hunting, one of Walton's passions, according to the book "Wal-Mart: A History of Sam Walton's Retail Phenomenon" by Sandra S. Vance and Roy V. Scott.

In 1950, he bought Harrison's Variety Store in Bentonville and changed the name to Walton's 5 & 10. It was another Ben Franklin franchise.

Walton's 5 & 10 was a success, and Walton moved onto his next project. On July 2, 1962, Walton opened a 16,000-SF store--the first to he called Wal-Mart--in Rogers. Right out of the gate, Wal-Mart was a hit with customers because of Walton's devotion to keeping prices down.

"Walton would not compromise on his commitment to offer customers prices lower than those of his competitors, whose stores he and his managers visited incessantly," Vance and Scott wrote.

Wal-Mart's markup was never more than 30 percent.

Clarence Leis, the second manager of the first Wal-Mart, described Walton's method for keeping his prices low in Vance and Scott's book: "Merchandise would come in and we would just lay it down on the floor and get out the invoice. Sam wouldn't let us hedge on a price at all. Say the list price was $1.98, but we had only paid 50 cents. Initially, I would say, 'Well, it's originally $1.98, so why don't we sell it for $1.25?' And he'd say, 'Now we paid 50 cents for it. Mark it up 30 percent, and that's it. No matter what you pay for it, if we get a great deal, pass it on to the customer.'"

The low-price policy has been so consistent and so well communicated that Wal-Mart has been able to forego much of the advertising expense that eats into other retailers' profits. But low prices weren't Walton's only retailing innovation.

Wal-Mart also targets households in the under-$35,000 income bracket, a huge demographic that most companies overlooked, said Ken Stone, a former a professor of economics at Iowa State University who specialized in retail trade.

Wal-Mart has "really done a good job of meeting (its customers') wants and needs," he said.

One of those basic needs, even--or maybe especially--for Wal-Mart's target demographic, is low-priced groceries. And it was the unveiling in March 1988 of the first Wal-Mart Supercenter at Washington, Mo.--the last major innovation overseen by Walton himself before his death in 1992--that thrust Wal-Mart into the stratosphere of revenue.

The Supercenter concept merged a traditional Wal-Mart discount store with a full-line supermarket under one roof.

"No one was more aware of the awesome potential of a Wal-Mart with food than Sam Walton, who stated at the grand opening of the first Supercenter, 'This is a Wal-Mart, but then again it's not a Wal-Mart, and it may be our future,'" Vance and Scott wrote.

By the end of 2004, there will be more Supercenters than traditional Wal-Mart stores, according to a report by trade journal Retail Forward. By 2007, Wal-Mart will have 2,258 Supercenters, nearly double the amount that existed in 2002, and Supercenters will outnumber the old discount stores by two to one, Retail Forward predicted.

"It is unlikely that any other U.S. food retailer will catch up to Wal-Mart--even through a mega-merger," the trade journal said.

Retail Forward also projects five-year sales growth at Supercenters of 143 percent, from $101 billion in 2002 to $245 billion in 2007: "Wal-Mart is now the top grocer in the nation. And there is still room to grow its share of shoppers' grocery dollar."

Cost Efficiency

And despite its folksy image and rural roots, Wal-Mart has embraced the cost-efficiencies of technology.

In an interview, Scott, the author, said one of the keys to Wal-Mart's success is its distribution system, which is "dramatically better than that of their competitors."

Wal-Mart set up their distribution centers in strategic areas and then expanded their stores from there so shelves could be restocked quickly.

Wal-Mart was one of the early users of bar-code scanning checkout counters in the 1980s. And last year, Wal-Mart announced that it would pioneer the practical use of radio frequency identification, or RFID, a sort of super bar-code that actually transmits information on radio waves.

Wal-Mart told its top 100 vendors that it wanted RFID tags on pallets delivered to its company's distribution centers by 2005. Wal-Mart is expected to spend tens of millions of dollars installing equipment to make the system work on the belief that many more millions of dollars will be saved in the long run.

"RFID has the potential to completely revolutionize retail and immensely improve the customer experience--everything from inventory management to shrinkage to consumer satisfaction could improve with the use of RFID technology," said National Retail Association spokeswoman Ellen Tolley.

Headquarters

By the end of the 1960s, it was time for Walton to build a company headquarters. He decided to stay in Bentonville.

When asked why he didn't move, according to Vance and Scott's book, Walton replied, "Move from Bentonville? That would be the last thing we [would] do unless they run us out. The best thing we ever did was to hide back there in the hills and eventually build a company that makes folks want to find us. They get there sometimes with a lot of trepidation and problems, but we like where we are. It's because of the work ethic, because of the chemistry of the people up there and the support we get. We're much better off than if we had gone to Chicago."

By late 1969, the 72,000-SF headquarters was finished and, like everything else tied to the company, it was done with the bottom line in mind. Nothing fancy--not even carpeting, which Walton thought was a waste of money.

Collins, the UA economist, described the typical reaction by first-time visitors to the nondescript headquarters of the world's largest company: "You say, 'Wow,' because this can't be it."

And everyone pays for his own coffee at the headquarters, Collins said.

"That's a different way of doing business ... It's taking the ethic of 'we're in business to make our shareholders money,' and they're taking it to the nth degree," he said. "In everything (they) do, you ask the question, 'Is this what our shareholders would want us to do?'"

But even shareholder value has been secondary to the corporation's overwhelming dedication to gaining market share by charging the lowest possible prices. According to the company's 2003 annual report, "Our job is to see how little we can charge for a product, not how much."

Growth

In the last 10 years, Wal-Mart has seen incredible growth: $55.5 billion in revenue in 1993 to $2.56 billion in 2003, an increase of 360 percent.

Stone, the Iowa professor, said Wal-Mart is likely to continue growing.

"They're an energetic group, and I'm sure if there's an opportunity, they will seize it," he said.

Wal-Mart announced plans for what it termed "aggressive" growth in fiscal 2004, which began Feb. 1. It plans to open 50-55 new discount stores, 90 new Supercenters and 25-30 Neighborhood Markets. The Sam's Club division will open 15-20 new warehouse stores, and Wal-Mart International plans to open 100-110 units in existing markets.

It will also add three new regional distribution centers for general merchandise and two food distribution centers totaling more than 5 million SF.

Even at its unprecedented size, Wal-Mart executives believe it is possible to maintain double-digit growth. "If we focus on one store at a time, it's possible to achieve this goal," the annual report said.

"Our growth comes from thinking like a small company, not like a large one," Tom Coughlin, president and CEO of Wal-Mart Stores Division and Sam's Club USA, said in the annual report.

"We will take care of the little things for our customers, the way a small company would."

Wal-Mart in Arkansas

Wal-Mart has changed retailing all over the world in the same way its presence has changed northwest Arkansas.

When Ed Clifford, president and CEO of the Bentonville/Bella Vista Chamber of Commerce, arrived in 1984, Bentonville didn't have a working traffic light.

Now, there are a full-service airport (technically at Highfill) and 311,000 people in one of the fastest growing metropolitan areas in the country.

Clifford attributes northwest Arkansas' growth to Wal-Mart; its impact, he said, has been incalculable. On average, a hotel opens in the region once a month and a new restaurant opens once a week.

In Arkansas, Wal-Mart currently has 32 discount stores, six small grocery stores called Neighborhood Markets, 47 Supercenters, four Sam's Clubs and 11 distribution centers. It employs nearly 44,000 Arkansans; it is by far the largest private employer in the state and lags behind the state government by only a few thousand.

It is also a major charitable donor in a state recognized as one of the most generous in the country. Wal-Mart and its employees in the state raised and donated nearly $14.2 million for a number of charities in Arkansas last year.

Early investors in Sam Walton's vision have made fortunes, and Wal-Mart executives are handsomely paid (if not handsomely officed). But the vast majority of its employees earn modest hourly wages, and the corporation's anti-union strategies and limited benefits packages have earned the company legions of detractors.

Even with all of the wealth Wal-Mart has brought the state, Arkansas is still a poor state. In 2002, Arkansas' per capita income was $23,500--the second lowest in the country, an accustomed position.

"The fact that this powerful corporation is Arkansas-owned hasn't made Arkansas substantially wealthier as compared to other states," said Patrick Williams, an assistant professor of history at the University of Arkansas.

If Wal-Mart ever pulled out of northwest Arkansas, though, it would be an economic disaster, Collins said. Just a spin around Bentonville drives home the difference between old and new northwest Arkansas.

"As you look around at the growing retail and the new housing developments and the size of the homes being built ... you can say, 'OK, I can see Wal-Mart being located around all this,'" Collins said. "But then the flip side, you drive by some places that you don't realize that some people live in them until you see the satellite dish and a car parked in front."

Collins said it's not strange that Wal-Mart started out in Arkansas, considering its target market. "I think what's amazing is they stayed," he said.

1997

* National Home Centers of Springdale announced plans to close four retail stores and scale back its retail operations drastically in light of stiff competition from national chain.

* After four years of stagnation, Wal-Mart Stores Inc. stock took off. It opened 1997 at $22.75 a share and finished the year at about $40 a share in what would be the start of a major run on Wall Street.

* Longtime U.S. Sen. Dale Bumpers announced he would not seek re-election in 1998.

* The recall of 25 million pounds of beef--the largest of its kind in U.S. history--resulting from an E. coli bacteria scare at a Hudson Foods plant proved fatal to the Rogers food giant The result was a $680 million sale to Tyson Foods of Springdale.

* Unable to substantially expand its presence in Arkansas, especially the northwest Arkansas area, Colombia/HCA sold Columbia Doctors Hospital in Little Rock to St. Vincent Health System and withdrew from the market.

* Harvest Foods Inc. of Little Rock, the largest Arkansas-based grocery chain, filed for bankruptcy for a third time and sold its assets.

* Little Rock was chosen as the site of the William J. Clinton Presidential Library.

* The passage of the Telecommunications Reform Act in 1996 led to a wave of radio industry consolidation in 1997, and Arkansas' airwaves were no exception.

* Pinnacle Bank of Little Rock, Alliance Bank of Hot Springs, River Valley Bank of Russellville, First Community Bank of Batesville. The Capital Bank of Little Rock and Community First Bank of Harrison opened shop in 1997. By 2004, the first three had been sold.

* Federal and state law enforcement agencies descended on at least 11 locations around the state in a coordinated investigation of official corruption related to state child support enforcement contracts. The primary suspect: state Sen. Nick Wilson, D-Pocahontas.

* The sudden separation of longtime Arkansas accounting icon H.G. "Jack" Frost Jr. and philanthropist Bernice Jones evolved into remarkable allegations of fraud centered about her multimillion-dollar trust funds.

* Johnny Allison, the Conway manufactured-home magnate and bank entrepreneur, escaped unharmed after being kidnapped by an escaped convict, James Avery Slack. Allison believed he was targeted because of his friendship with investment adviser Alex Lieblong of Conway, whose wife Jo Ann had been kidnapped by Slack in 1,993.

* Tyson Foods Inc. ended the year by pleading guilty to giving illegal gifts to former U.S. Agriculture Secretary Mike Espy and agreed to pay $6 million in fines and investigate expenses. Archie Schaffer III. Tyson's director of media, public and governmental affairs, decided to light similar charges.
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Title Annotation:20 Arkansas Icons
Comment:Wal-Mart: Sam Walton's ideas reshaped retailing industry.(20 Arkansas Icons)
Author:Friedman, Mark
Publication:Arkansas Business
Geographic Code:1U7AR
Date:Mar 15, 2004
Words:2663
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