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Monday, June 14, 1999 Published at 09:40 GMT 10:40 UK


Business: The Company File

The secret of Wal-Mart's success

The customer is king as "people greeters' welcome you at Wal-Mart

The world's largest retailer, Wal-Mart, is moving into Europe, and the UK is its second target after Germany. BBC News Online's Tim Weber looks at the secrets behind the company's success.

The figures make the owners of corner shops and small retail chains shudder: Wal-Mart operates 3,601 stores, employs more than 910,000 people world-wide, sales amounted last year to $137.6bn (£85.7bn) - equivalent to a tenth of Britain's total economic output.


Patrick O'Connell: The largest retailer in the world began life as a single store in Arkansas
The company serves about 90 million customers every week and has stores in the United States, Puerto Rico, Canada, China, Mexico, Brazil, Germany, Argentina and South Korea.

Where Wal-Mart treads, competitors tremble.

UK supermarkets will face tough times, but consumers are bound to reap the benefits.

Expansion

Wal-Mart is the grand-daddy of all discount chains.

Its huge US stores, twice the size of the largest European hypermarket, sell everything from food to clothing to sporting goods to hardware.


Richard Quest delves into the secret of Wal-Mart's success
Operating from cheap out-of-town warehouse sites, Wal-Mart's discount prices have trounced the competition.

After the death of founder Sam Walton in 1992, the company briefly seemed to have lost its way. But under the guidance of new chief executive and chairman David Glass it soon re-invented itself.


[ image: Wal-Mart offers a one-stop shopping experience, from groceries and clothing to hardware and work-out equipment]
Wal-Mart offers a one-stop shopping experience, from groceries and clothing to hardware and work-out equipment
Wal-Mart is now stronger than ever. Sales are rising again - up 17% last year. Strong consumer spending in the United States has helped the company's fortunes.

But the main driving force of future revenues will be Wal-Mart's programme of relentless international expansion.

In Europe the company has only entered the German market so far, buying 21 Wertkauf stores a year ago and adding 74 Interspar shops last autumn.

Bob Martin, president of Wal-Mart's international operations, says he wants to serve "a good deal of Europe". And one of his vice-presidents, Carlos Criado-Perez, adds: "We are looking for any open door that could open in Europe."

Wal-Mart wants to set up shop in cyberspace as well. Mr Martin believes the Internet is "at the threshold" of taking off and he wants his company to be "a dominant player".

The secret of Sam's success

Wal-Mart is a relatively young company, founded 37 years ago by Sam Walton.


[ image: Sam Walton, self-made man and an American legend]
Sam Walton, self-made man and an American legend
He set up his first Wal-Mart discount-store in Rogers, Arkansas. Piling it high and selling it cheap was not a new idea. The winner was the location - serving the small-town market.

Growth was initially slow. When the company offered its shares on the stock market in 1970, there were just 18 stores with sales of $44m.

Ten years later, it had grown to an operation with 276 stores and sales of $1.2bn.

Two key developments made the success possible:

  • Distribution:
    Wal-Mart set up highly automated distribution centres, cutting down on delivery time and costs.
  • Inventory flow:
    The company's computerised inventory systems gave managers real-time information on their stocks, speeding up the re-ordering of goods.
Today this may be best practice. In the 1970s it was revolutionary.

The power of associates

Wal-Mart has other strengths as well. It can buy cheaply in bulk to undercut its rivals. The company commands a huge database, giving it unrivalled information on shopping habits, customer preferences and consumer trends.


[ image: A Wal-Mart associate in action, boosting the price of her shares]
A Wal-Mart associate in action, boosting the price of her shares
Under the "ten-foot rule", any member of staff within ten feet of a customer must offer them assistance.

Its labour relations are exceptional. Workers are not plain employees but "associates", eligible for a share of the profits and stock options in the company.

This has created a famously loyal and highly competitive workforce. The "associates" are encouraged to manage their own areas. Every sales clerk knows how much their department sells, what its inventory and expenses are - and how much profit it makes.

Wal-Mart's revival, though, has been boosted by going for size. Since 1988 the company has begun to convert key stores to "Wal-Mart Supercenters", retail giants with at least 200,000 square feet (18,500 square metres) of floor space.

And there is another economy of scale: Wal-Mart can afford to lose money when it enters new markets. Losses that would wipe out some competitors are mere pinpricks for the company with headquarters in Bentonville, Arkansas.

Family fortunes

When Sam Walton died in 1992, at the age of 74, he was the richest man in America, his 38% holding in the company worth more than $20bn.

Any investor who bought $1,000 dollars worth of shares in 1970, when the company was floated, would now sit on a one million dollar pile.

But it's not only the Walton family and its 'associates' that have made good.

Consumers are better off as well. The Wal-Mart success has driven down prices relentlessly.

Germany is a prime example. Since the company entered the market one year ago, competitors have systematically lowered prices.

So what about the UK? Supermarket chains here are currently under investigation over allegations of price-fixing, and consumers could hope for a price 'windfall' now that the US retailer is entering the market.

Critics of the company, though, point to the side-effects of the Wal-Mart success.

Where the company sets up shop, local businesses die. Across the USA commercial centres in towns have faded as small shops could not compete.

This 'success' may not be transferable to the US, though.

Wal-Mart's strength is the size of its out-of-town superstores. In the UK green fields are scarce and expensive, and planning permissions are difficult to come by.

But Wal-Mart may have the answer. The retailer is currently developing a new store format - relatively small shops based in town centres.

This could be just the right size to please European consumers - and create a mortal challenge to established supermarkets on the continent and in the UK.



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