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01/2012009 TUE 14:45 PA.1 502 569 1270 ProQuest 1 XanEdu Wa1"Mart Stores, Inc. In Forbes magazine's annual ranking of the richest Americans, the heirs of Sam Walton, the founder of Wal'Mart Stores, h.,held spots five through nine in 1993 with 9.5 billion each. Sam Walton, who died in April 1992, had built Wal*Mart into a phenomenal succ~,with a 20-par avenge return on equity of 3376, and compound average sale growth of 35%. At the end of 1993, WalSMart had a market value of $57.5 billion, and its sales pcr square foot were nearly ROO, compard with the industry average of $210. It was widely believed that WalDMart had revolutionized many aspedv of retailing, and it was wcll known for its heavy investment in information technology. David Class and Don Soderquist faced the Merge of following in Sam Walton's footsteps. Glass and SoderquLt, CEO and COO, had been running thc company since February 1988, when Walton, retaining tlic chairmanship, turned the job of CEO over to Glass. Their record spoke for itself-the company went from sales of $16 billion in 1987 to $67 billion in 1993, with earnings nearly quadrupling from $628 million to $23 billion. At the beginning of 1994, the company operated 1,953 Wal*Mart stores (mduding 68 supercenters), 419 warehouse clubs (Sam's Clubs), 81 warehouse outlcts (Bud's), and four hypermarkets. During 1994 WaleMart plmed to open 110 new WalDMxt stores, including 5 suprcenters, and 20 Sam's Clubs, and to expand or relocate approximately 70 of the older Wal*Mart stores (6of which would bc made into supercenters), and 5 Sam's Clubs. Salcs were forecast to reach $84 billion in 1994, and capital expenditures were expected to total $3.2 billion. Exhibit I summarizes WalDMart'sfinallcia1 pcrformancc 1983-1 993. Exhibit 2 maps WaleMart's storc network. The main issue Glass and Soderquist faced was how to swtain the company's phenomenal perfomlance. Headlines in the press had begun to express somc doubk "Growth King Running Into Roadblocks," "Can WalDMart Keep Growing at Breakneck Speed?" and "Wal*MartJs Uneasy Throne." h April 1993, the company confirmed in a meeting with analysts that 1993 growth in comparable store sales would be in tl~c7%-8% range, the first time it had fallcn undcr 10% sincc 1985. Sellers lined up so quickly that the New York Stock Exd~angetemporarily halted trading in the stock. From early March through the md of April 1993, the stock price fell 22% to 2G5/#. destcoying nearly $17 billion in markct valuc. With supercenters and international expansion targeted as the prime growth vehicles, Glass and Soderquist had their work cut out for theni. This caw was prcprcd by Research Acuciate Shamn Tnlcy undcr Ik supervision of Profmrs mhcnP. nndlry and Fanlwj Ghrm.awnt. ImS am arr drwlopd solely JS IhC basis for claw disms$im. Cam m nol intcndcd to scrvc as mdomls, 601- nf primary dst?, or iUu9bat11nwof eff&ivt? O? in&Yive lMMgmrnt It in hadin prt on thr caw "WaI-Mart Stor-' l#munt *atinn%* 0-1115 No. .W7fllS) wdllnl by Profesor Ghemnwnt. Copynsht O 1994 Prcsidcnt and Fellows of Hnrv~dCoUege. To ordu ooplcs or 9-1 pm&ion lo reproduce mteriak, call 143XW-76%. writc 1,Iarvxci Oasincs School hblishing, :,ton, MA 02163, or go to http://~.hl~phr~~nrd~eduNo pml of chis publicntim may lw rrprduccd, ntond in a rrh-iernl sptem, u.4 in a sprrgdshmt, or hansmittcd in any form or by sny mrans-dmir, rncchsnical, photwopyins recordin& nr othmwkewithout thr ~rmision~f 1,lawordUusims School. 01/20/2009 TIE 14:46 FAX 502 569 1270 ProQuest / XanEdu Wal'Mart Stores, Inc. Discourit Retding Discount stores emerged in the United States in the mid-1950.; on the heels of supermarkets, which sold food at unprecedentedly low margins. Discount stores extend& this approach to general merchandise by charging gross margins 10"'-15% lower than those of conventional department stores. To compensate, discount stores cut costs to the bone: fixtures were distincdy unluxurious, in-store selling was limited, and ancillary scrviccs, such as delivery, and credit, were scarce. Thc discouiitcrs' timing was just right, as consumers had become increasingly better informed since World War Ll. Supermarkets had educated them about self-service, many cakegorics of general mcrchandisc had maturcd, and TV liad intcnsificd advertising by manufacturers. Govement standards had also bolstered consumers' self-confidence, and many wcrc rcady to try cheaper, self- scrvicc rctailcrs, cxccpt for products tlmt were big-ticket item, technologically complex, or "psychologically sigruticant." Discount retailing burgeoned as a result, and many players entered the industry at the local, regional, or national leveIs. Sales grew at a compound annual rate of 25% from $2 billion in 3960 to $19 billion in 1970. During the 1970s, tlic industry continued to grow at an annual rate of 9%, with the number of new stores increasing 5% mually; during the 1980s it grcw at a rate of 7%, but the numbcr of storcs incrcascd by only 1%; and during the 1990~~it grew 11.2%, with the nurnber of stDres increasing by nearly 2%. This trend toward fewer new store openings was attributed to a more cautious approach to expaiwion by discounters, who placed increasing emphasis on the refurbishment of existing stores. Ln 1993, discount industry sales wcrc $124 billion, and analysts predicted that thcy would increase about 5% annually over the next five year;. Of the top 10 discounters operating in 1962-the year Wal*Mart opened for business-not one remained in 1993. Several large diseomt chcains,such as King's, Korvcttc's, Mammoth Mart, W.T. Grant, Two Guys, Wodco, and Zayre, failed over the years or were acquired by survivors. As a resdt, the industry kame more concentrat& whereas in 1986 the top 5 discounters had accounted for 62% of industry sales, in 1993 they accounted for 7l%, and discount store companie that operated 50 or more stores accmted for 82%. Exhibit 3 shows the top discountcrs in 1993. Wal*MartfsDiscount Stores Histo y of Growth Providing value was a part of the Wal*Mart culture from the time Sam Wdton opened his first Ben Franklin franchise store in 1945. During the 1950s, tlic numbcr of Walton-owned Ben Franklin franchises increased to 15. In 1962, after his idea for opening stores in small towns was turned down by the knkanklin organization, S;un and his brother Bud opcncd thc first 'Wal*Mart Discount City store," with Sam putting up 95% of thc dollars himself.' For years, while he was building WalLMartu,Walton continued to run his Den Franklin stores, gradually phasing them out by 1976. When Wal*Mart was incorporated on October 31, 1969, thcrc were 18 Wal+Mart stores, and 15 &n Franklins. By 1970, Walton had steadily expanded his chain to 30 discount stores in rural Arkansas, Missouri, and Oklahoma. Howwer, with continued rapid growth in the rural south and midwest, Two othcr Iiiv ~IUIEC~dw~;ot thcir skrt in 1962; Kn~rtarrl Target. 01/20/2009 TUE 144 FA1 502 569 1270 ProQuest / XanEdu Wal*Naff Stom, Lc. the cost of goods sold-host three-quarters of discounting revenues-nnklcd. As Walton put it, "Hcrc wc wcrc in the boondock, so we didn't have distributors falling over themselves to serve us like competitors in larger towns. Our only alternative was to build our own warehouse so we could buy in volume at attractive prices and storc thc mcrchandjse."2 Since warchouxs cost $5 million or more each, Walton took the company public in 1972 and raised $3.3 million. Thcrc wcrc two kcy aspects to Walton's plan for growing WalSMart. The first was locating stores in isolated rural areas and small towns, usually with populations of 5,000 to 25,000. Hc put it this way: "Our key strategy was to put good-s5zed stores into little one-horse towns which everybody else was ignoring."3 Walton was convinced that discounting auld work in small towns: "Tf wc offered prices as good or kttcr than stores in citics that wcrc four hours away by car," he said, "pcoplc would shop at home.Ic4 The second element of Walton's plan was the pattern of expansion. As David Glass explained, 'We are always pushing from the inside out. Wc never jump and then backfill."s Tn the mid-1980s. about onc-third of Wal*Mart stores were located in areas that were not saved by any of its competitor;. However, the company's geographic growth resultcd in increased compctition with other major retailers. By 1993, 55% of Wal*Mart stores faced direct competition from hartstores, and 23% from Target, wlicrcas 82% of Kmart storcs and 8.5% of Target stores faced compctition from Wal*Mart6 Wal*Mart penetrated the West Coast and northeastern states, and by early 1994, operated in 47 states, with stores planned for Vermont,. Hawaii, and Alaska. Exhibit 4 compares Wal*Martls performance with that of its competitors. Sam's L~gacy When Sim Walton died in April of 1992 at the age of 74 after a long fight with canccr, his memorial service was broadcast to evcry storc over thc company's satellite system. Walton had a philosophy that drove everything in the busintfss; he believed in the value of the dollar and was obsessed with keeping prices bellow wcrybody dsc's. On buying trips, his rule of thumb was that trip expenses should not exceed 1% of the purchases, which meant sharing hotel rooms and walking inskcad of taking taxis.