Discounting Dynamo

By John Huey

No one better personified the vitality of the American Dream in the second half of the 20th century than Sam Walton. A scrappy, sharp-eyed bantam rooster of a boy, Walton grew up in the Depression dust bowl of Oklahoma and Missouri, where he showed early signs of powerful ambition: Eagle Scout at an improbably young age and quarterback of the Missouri state-champion high school football team. He earned money to help his struggling family by throwing newspapers and selling milk from the cow. After graduating from the University of Missouri, he served in the Army during World War II. Then, like millions of others, he returned home in 1945 to earn a living and raise a family in an uncertain peacetime economy.

Over the decades that followed, the way America worked and lived changed profoundly, and Walton found himself at the center of much of that change. He possessed a gift for anticipating where things were headed, and he probably understood the implications of the social and demographic currents that were sweeping the country--especially outside its cities--better than anyone else in business. That acumen hastened his rise from humble proprietor of a variety store in the little Delta cotton town of Newport, Ark., to largest retailer in the world and richest man in America.

When Walton died in 1992, with a family net worth approaching $25 billion, he left behind a broad and important legacy in American business as well as a corporate monument. Wal-Mart stores is the No. 4 company in the FORTUNE 500, with annual sales of close to $120 billion, ranking behind only General Motors, Ford and Exxon.

At the risk of oversimplifying a rather complex business phenomenon, it can be said that the easiest way to grasp the essence of what Sam Walton meant to America is to read his ad slogan emblazoned on all those Wal-Mart trucks you see barreling down highways around the country: WE SELL FOR LESS, ALWAYS. Walton did not invent discount retailing, just as Henry Ford didn't invent the automobile. But just as Ford and his cars revolutionized America and its industrial model, Walton's extraordinary pursuit of discounting revolutionized the country and its service economy. Walton didn't merely alter the way much of America shopped; he changed the philosophy of much of American business, instigating the shift of power from manufacturer to consumer that has become prevalent in industry after industry.

Though it's hard to believe today, discount retailing was a controversial concept when it began to gain ground in the '50s at stores such as Ann & Hope, which opened in a reclaimed mill in Cumberland, R.I. Traditional retailers hated it, and so did manufacturers; it threatened their control of the marketplace. Most states had restrictions on the practice.

When the business began to emerge in the early '60s, Walton was a fairly rich merchant in his 40s, operating some 15 variety stores spread mostly around Arkansas, Missouri and Oklahoma. They were traditional small-town stores with relatively high price markups.

Walton was an active student of retailing--all family vacations included store visits--so by the time a barber named Herb Gibson from Berryville, Ark., began opening discount stores outside towns where Sam ran variety stores, Walton saw what was coming. On July 2, 1962, at the age of 44, he opened his first Wal-Mart store, in Rogers, Ark. That same year, S.S. Kresge launched K Mart, F.W. Woolworth started Woolco and Dayton Hudson began its Target chain. Discounting had hit America in a big way. At that time, Walton was too far off the beaten path to attract the attention of competitors or suppliers, much less Wall Street.

Once committed to discounting, Walton began a crusade that lasted the rest of his life: to drive costs out of the merchandising system wherever they lay--in the stores, in the manufacturers' profit margins and with the middleman--all in the service of driving prices down, down, down.

Using that formula, which cut his margins to the bone, it was imperative that Wal-Mart grow sales at a relentless pace. It did, of course, and Walton hit the road to open stores wherever he saw opportunity. He would buzz towns in his low-flying airplane studying the lay of the land. When he had triangulated the proper intersection between a few small towns, he would touch down, buy a piece of farmland at that intersection and order up another Wal-Mart store, which his troops could roll out like a rug.

As the chain began to take off, Walton made major adjustments to manage the growth--again always seeming to see ahead. As early as 1966, when he had 20 stores, he attended an IBM school in upstate New York. His goal: to hire the smartest guy in the class to come down to Bentonville, Ark., and computerize his operations. He realized that he could not grow at the pace he desired without computerizing merchandise controls. He was right, of course, and Wal-Mart went on to become the icon of just-in-time inventory control and sophisticated logistics--the ultimate user of information as a competitive advantage. Today Wal-Mart's computer database is second only to the Pentagon's in capacity, and though he is rarely remembered that way, Walton may have been the first true information-age CEO.

To his great delight, Walton spent much of his career largely unnoticed by the public or the press. In fact, hardly anyone had ever heard of him when, in 1985, Forbes magazine determined that his 39% ownership of Wal-Mart's stock made him the richest man in America. After that, the first wave of attention focused on Walton as populist retailer: his preference for pickup trucks over limos and for the company of bird dogs over that of investment bankers. His extraordinary charisma had motivated hundreds of thousands of employees to believe in what Wal-Mart could accomplish, and many of them had ridden the company's stock to wealth. It was the American Dream.

As Wal-Mart's influence grew, however, and passed that of competitors K Mart and Sears, Walton began to be villainized by some, especially beleaguered small-town merchants. They rallied a nostalgic national press, which--from its perch in Manhattan--waxed eloquent on the lost graces of small-town America, blaming that loss squarely on Sam Walton.

Walton viewed all these arguments as utter foolishness. He had been a small-town merchant. And he had seen the future. He had chosen to eat rather than be eaten. And anyway, he believed that small-town merchants could compete--if they would make major changes to adapt. As it turned out, of course, the consumer voted heavily with Walton. He gave America what it really wanted--low prices every day.

There is no argument offered here that Sam Walton didn't clutter the landscape of the American countryside or that he didn't force a lot of people to change the way they made a living. But he merely hastened such changes. The forces of progress he represented were inevitable. His empowering management techniques were copied by businesses far beyond his own industry; his harnessing of information technology to cut costs quickly traveled upstream to all kinds of companies; and his pioneering retailing concepts paved the way for a new breed of "category killer" retailer--the Home Depots, Barnes & Nobles and Blockbusters of the world. This wave of low-overhead, low-inventory selling continues to accelerate. The Internet, in fact, is its latest iteration. One can only wonder what a young cyber Sam would set out to accomplish if he were just getting started.

John Huey, managing editor of FORTUNE, co-wrote Sam Walton: Made in America