First Chapter

What I Learned From Sam Walton

John Wiley & Sons

Chapter One

"Differentiate your products, provide great service and don't even think about trying to compete with Wal-Mart on price."

If it seems impossible to compete directly with big-box retailers like Wal-Mart on price, the unvarnished truth is, that it is! The combination of their buying power of big brands, private-label programs, off-shore manufacturing, distribution efficiencies, incredible technology, culture, expense structure, company-owned truck fleet, and low paying non-union jobs provide a vise-like grip on costs no competitor can match. By putting all of these competitive advantages together, Wal-Mart is able to roll back its prices to the lowest possible levels.

A 200-plus-billion-dollar company, which also focuses on squeezing a nickel, gains considerable leverage from its economies of scale and by doing so creates still another competitive advantage. By consciously and culturally focusing on cutting costs and slashing expenses, Wal-Mart is able to rain cost saving dollars to the bottom line. Whoever said that in business you can't save your way to prosperity never met the likes of Wal-Mart.

I can't think of any industry over my lifetime that has been so dominated by one company without the Federal Trade Commission's antitrust laws kicking in. I guess ifyou build a company from scratch and develop it primarily through internal expansion and new concept stores, rather than through acquisition, you avoid the Fed's involvement. It also doesn't hurt that Wal-Mart's overriding and advertised goal is to charge consumers as little as possible for their products. If consumers were complaining en masse the story would be different. The fact that competitors are the only ones who are upset about alleged unfair trade practices falls on deaf ears. There isn't a politician in his or her right mind who would risk upsetting the ranks of middle America, who most benefit from the low-priced product offerings of Wal-Mart. That's what the American free-enterprise system is all about, isn't it?

So retailers small and large need to suck it up and develop strategies to compete the best way they can. Inefficient retailers with high prices, who have taken their customers for granted, have learned some tough free-enterprise lessons of their own as Wal-Mart has crushed them with the powerful one-two punch of their "smiley-faced" customer service and great prices. Contrary to conventional wisdom and everything I've read, Wal-Mart's competitors still attempt to go toe-to-toe with the 800-pound gorilla on price. That's not the right strategy. The key to price competition with Wal-Mart is to attempt to avoid it altogether, if you possibly can.

Let me illustrate the power of Wal-Mart's low prices on consumers. Several years ago, one of the TV news exposé programs did a feature on Wal-Mart and sweatshops. I remember seeing David Glass, the CEO of Wal-Mart at the time, being bushwhacked by the interviewer concerning child labor in a third-world country. He was asked to watch a videotape of a child manufacturing a shirt while the camera zoomed in on his face capturing his reaction. At the end of the video, the news reporter handed David the actual shirt made by the child with one of Wal-Mart's labels in it and challenged him to explain Wal-Mart's stance on child labor. Cool as a cucumber, David explained that Wal-Mart had strict manufacturing guidelines against the use of child labor and the company did not knowingly work with manufacturers who employed children.

As a Wal-Mart home office employee at the time, I remember being worried about the potentially negative change of perception of customers as a result of this story. Wal-Mart was in the middle of its "Buy American" promotion at the time and this type of negative publicity could have had a devastating impact on sales. The story aired with customer reactions included. They asked customers what they thought about the use of child labor to manufacture products for American companies at a cheaper price. Customers responded that they were appalled children were working in manufacturing facilities overseas but they would not change their shopping patterns as a result of those concerns. They preferred to purchase cheaper, comparable quality items manufactured offshore, rather than purchasing the same quality goods manufactured in the USA, if this choice meant cheaper prices at the register.

I thought customers would vote with their feet following that story and they did. But interestingly enough, not the way I thought they would. Not only did sales not go down following the broadcast, they went up! More customers were attracted to Wal-Mart stores as a result of the free advertising provided by the news story. What consumers heard was that Wal-Mart has low prices. They did vote with their feet and their checkbooks. It seems low prices are more important to the consumer than a perceived child labor problem in a third-world country. Any concerns, on my part, about the negative impact of this story on company sales, was much ado about nothing.

I've worked directly for several public companies in my career. I don't believe there is another Fortune 1000 Company in America which would allow a nationally televised interview of their CEO without meticulous preparation and a copy of the interview questions in advance. David Glass did not rehearse and he was candid when confronted with the information for the first time. I'll never forget how David Glass conducted himself in that interview. He had to know what the interviewer was about to do and he had no fear.

David Glass had used an old-fashioned Wal-Mart strategy called telling the truth! I was told by Don Soderquist, the former COO, Wal-Mart never rehearses anything. They don't rehearse Saturday morning meetings, stockholder meetings, analyst calls, or press interviews. Although that's shocking in this day and age, I think that makes them better able to move more quickly than their competitors, who get bogged down in "posturing, positioning or spinning" stories to respond to questions from the media, customers, shareholders, or even their own employees. In his book entitled Leadership, Rudy Giullani said it best, "A leader who fails to act until every group has been heard from, every concern addressed, every lawsuit resolved, is a leader who's abdicating their responsibility." That's exactly what happens to many executives when they are faced with scrutiny by the media. By being refreshingly unrehearsed Wal-Mart is able to concentrate on "substance" rather than "form." It would appear our litigious American society has forced companies to choose their words carefully out of fear their own openness and honesty will be used against them in a court of law.

Wal-Mart's straightforward way of dealing with customers, employees and the news media is seldom seen in our society today. I have to say it is a refreshing approach and at least at Wal-Mart it works! Employees, customers, and the public in general really respond to open and honest communication! On the other hand, when you spin stories it's easy to get caught telling half truths. Who would have thought by being honest Wal-Mart would create a "new wave" and "cutting edge" concept in business called "telling the truth"!

We sell for less" is one of the guiding principles of Wal-Mart. This philosophy involves buying low and, in the end, providing customers with the lowest possible prices. The question at Wal-Mart isn't how much it can get for an individual product, but how little. They don't use sales gimmicks to draw customers into the store. With respect to product pricing, I heard one of the Wal-Mart executives say, "Our merchandise is on sale every day." Wal-Mart works diligently to find great deals and then to pass the savings on to their customers. Thanks to Sam Walton's Philosophies, Wal-Mart is a customer-focused store in which consumers can count on value for their hard-earned dollars. The goal is to never be undersold by a competitor.

In the article Wal-Mart, After Remaking Discount Retailing, Now Nation's Largest Grocery Chain, the authors talk about the radical changes occurring in the grocery business because of Wal-Mart:

The fight for the carts an d minds of customers is already having an impact. Shoppers in competitive markets are seeing prices fall as Wal-Mart pushes rivals to match its low costs. Among the tactics the chains are using: improving their inventory-tracking systems, doubling or tripling discount coupons, and boosting customer loyalty with discount-card plans. Grocery chains are feeling the pinch of low prices and are enacting strategies as best they can in order to try to survive. Wes Ball, the President of the Tennessee Grocers Association said grocers need to, "Be lean and mean and believe there is life after Wal-Mart."

Unlike K-Mart and other competitors, which put items on sale constantly, Wal-Mart lets its everyday low prices speak for themselves. Recently, its national advertising campaign has focused on its price rollback strategy-sending the consumer a clear message Wal-Mart is doing everything possible to keep prices low, always. It even has a low-price guarantee. To the consumer, the bottom line is the bottom line. Over 100 million customers a week prove that low prices are king by shopping at their local Wal-Mart stores. According to the Seifert Group at Barrett Associates, "Wal-Mart's prices are the lowest amongst all discount retailers, yet operating margin is the highest at around 6 percent, proving they are the lowest cost operator in retail." Compete with Wal-Mart on price? As my New York friends say, "Fughed about it!"

So if you can't compete on price, what is the answer? The key is to find a niche or what I call a "pocket" within your area of expertise, with products and services not offered by Wal-Mart. In a study called Small-Town Merchants are Not Using the Recommended Strategies to Compete Against National Discount Chains: A Prescriptive Versus Descriptive Study, the author discusses retail pricing strategies to use when big-box retailers come to town:

In the middle of this price war among national chains are smaller independent retailers. Typically unable to purchase in large quantities to receive lower prices like their larger competitors, ma-and-pa retailers have either learned to use other strategies to compete or gone out of business. For instance, to compete with Wal-Mart's low prices, small retailers have developed niche strategies by providing a broader assortment of merchandise within a given product category and better service. Wal-Mart may have the lowest average price on the few athletics shoes and clothing that it carries. A good sporting goods specialty store, however, might have a larger assortment than Wal-Mart and would be willing to special-order merchandise so that its customers could get exactly the shoes they're looking for."

Some companies are able to carve out a niche by providing unique products and services not offered by Wal-Mart. I spoke to John Musil who is the president and owner of 10 community-based independent pharmacies in Scottsdale, Phoenix, and Payson, Arizona. Musil, who is also the president of the Arizona Pharmacy Association, a state chapter of the National Community Pharmacists Association, has 17 pharmacists employed by his company, Apothecary Shops. Arizona is a chain-dominated pharmacy market and Dr. Musil has been able to compete successfully by developing a successful niche strategy.

Approximately 50 percent of his business is generated through specialized compounding of medications. His pharmacies routinely receive referrals from area Wal-Mart Pharmacies because they don't offer services which he provides. Musil's pharmacies specialize in infertility treatment, natural hormone consultations and pain management, with an emphasis on providing traditional personalized service to his "customers."

Musil talked about his views on customer service stating, "I don't have any customers, everybody who comes to me is a patient because they require my services as a health care professional. More and more independent pharmacies are realizing we serve a specific need in the community and people rely on us for expertise as health care professionals. Wal-Mart has customers, we have patients."

The idea behind Wal-Mart's pricing strategy is startlingly simple to understand. In Sam's autobiography, Made in America, he describes Wal-Mart's discount pricing philosophy, he said:

Here's the simple lesson we learned ... say I bought an item for 80 cents. I found that by pricing it at $1.00, I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater. Simple enough. But this is really the essence of discounting: by cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail than you would have by selling the item at the higher price. In retailer language, you can lower your markup but earn more because of the increased volume.

Sam Walton's discounting principle is that the less you are able to charge, the more you'll sell and in the end the more you'll earn. This is the "stack-it-high-and-let-it-fly" philosophy, which, at the time it was introduced, challenged the existing product-pricing and merchandising beliefs of retailers and wholesalers alike. Historically, product was sold with supply-and-demand philosophies at whatever price the market would bear. This pricing strategy alone has turned Wal-Mart into a destination store by creating the perception in the mind of the retail consumer of significant value. It is for this reason that millions of consumers flock to Wal-Mart every day. Pricing is one of Wal-Mart's many towering strengths and has to be considered its single most important competitive advantage.

Wal-Mart has three pricing strategies: Everyday low prices (EDLP), rollback, and special buy. Here is how Wal-Mart describes them on its corporate web site:

Every Day Low Price (EDLP). Because you work hard for every dollar, you deserve the lowest price we can offer every time you make a purchase. You deserve our Every Day Low Price. It's not a sale; it's a great price you can count on every day to make your dollar go further at Wal-Mart.

Rollback. This is our ongoing commitment to pass even more savings on to you by lowering our Every Day Low Prices whenever we can. When our costs get rolled back, it allows us to lower our prices for you. Just look for the Rollback smiley face throughout the store. You'll smile too.

Special Buy.

Continues...

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Excerpted from What I Learned From Sam Walton by Michael Bergdahl Excerpted by permission.
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