As told in this book, the success of Wal-Mart was driven by three tailwinds. The first was a focus on small towns and suburbs, which prospered during the second half of the twentieth century. The second was deep discounting, which was made possible by innovations in logistics and offshore manufacturing. The third was information technology.
When locating stores primarily in small towns and suburbs, each manager was incentivized to serve their local market:
That is not something we can simply do in some general way. It isn’t something we can command from the executive offices because we want it to happen. We have to do it store by store, department by department, customer by customer, associate by associate. For example, we’ve got one store in Panama City, Florida, and another only five miles away in Panama City Beach, but actually they’re worlds apart when it comes to their merchandise mix and their customer base. They’re entirely different kinds of stores. One is built for tourists going to the beach, and the other is more like the normal Wal-Mart, built for folks who live in town. That’s why we try our best to put a merchant in charge of each store, and to develop other merchants as the heads of each department in those stores. If the merchandise mix is really going to be right, it has to be managed by the merchandisers there on the scene. (p. 246)
The discounting strategy began as a way to draw people into the store, but eventually spread to every item in the inventory:
The basic discounter’s idea was to attract customers into the store by pricing these items—toothpaste, mouthwash, headache remedies, soap, shampoo—right down at cost. Those were what the early discounters called your “image” items…. Everything else in the store was priced low too, but it had a 30 percent margin. (p. 61)
This later led to the “wholesale clubs” (Sam’s and Costco):
It was the early eighties, and we’d been in the discount business for around twenty years. Only the efficient operators were still in business, because prices, and margins, had been falling steadily the whole time. Suddenly, we noticed a whole new class of sub-discounter undercutting our prices, wholesalers with very low overhead who were selling at margins way below the 22 percent in the discount business — 5 to 7 percent. (p. 227)
Wal-Mart also benefited from scale, information technology, and paying attention to data:
From the time David Glass came on board in 1976, he’s been pushing me to invest and invest and invest in that system, and thank goodness he managed to be so persuasive. At the same time, he and Jack Shewmaker were also pushing hard for heavy investment in more and more, better and better computer systems, so that we could track sales and merchandise and inventories across the company—especially instore transactions. When Jack became our president and chief operating officer in 1978, he worked really hard at getting me to invest in bar coding and SKU item control, which is a computerized stockkeeping unit inventory system. Jack also was heavily involved in the creation of our satellite system, which turned out to be another one of our tremendous competitive advantages. (p. 237)
Communicating with warehouses and stores via satellite began as a skunkworks project, but paid huge dividends:
Glenn Habern was our data processing manager, and he and I had this dream of an interactive communications system on which you could communicate back and forth between all the stores and the distribution centers and the general office. Glenn came up with the idea of using the satellite, and I said, “Let’s pursue it without asking anybody.”
The satellite turned out to be absolutely necessary because, once we had those scanners in the stores, we had all this data pouring into Bentonville over phone lines. Those lines have a limited capacity, so as we added more and more stores, we had a real logjam of stuff coming in from the field. As you know, I like my numbers as quickly as I can get them. The quicker we get that information, the quicker we can act on it. The system has been a great tool for us, and our technical people have done a terrific job of figuring out how to use it to our best advantage…. We’ve spent almost $700 million building up the current computer and satellite systems we have. I’m told it’s the largest civilian data base of its kind in the world—even bigger than AT&T’s.
Many of these same insights influenced Jeff Bezos, who studied both Wal-Mart and Costco closely. That story is told in more detail in The Everything Store.