When Wal-Mart Comes to Town

Wal-Mart thrived by locating its stores in rural areas, where people were traditionally underserved by retailers. Thus they were willing to drive 30 miles not just to shop but to indulge, as well, in the postwar cornucopian experience of walking into a store the size of a hangar, stacked to the rafters with consumer goods.

Wal-Mart invested more heavily than its rivals did in technology to better manage its inventory and reduce operating expenses. It cut distributors out of the daisy chain and tied inventory -- via computer -- directly to manufacturers to further ratchet down costs. And finally, as the company grew very large in the 1980s, it exerted leverage against its vendors in pricing, production, and delivery. By then it was not uncommon for Wal-Mart to tell a Coca-Cola, a mere $13-billion company, to deliver on Sunday, or to suggest to a Procter & Gamble -- at $30 billion in sales -- that it should seriously consider siting its distribution centers adjacent to Wal-Mart's.

The company could do that because, incredibly, it had come to dwarf those Fortune 500 giants. In 1980 Wal-Mart had revenues of $1.6 billion. By 1991 the company had swollen to $33 billion, bringing Wal-Mart roughly equal to K mart in annual sales. By last year Wal-Mart had added another $22 billion in sales, while Sears and K mart saw revenues plateau. This year Wal-Mart will open another 150 discount stores, putting the total at roughly 2,050. It currently has 250 Sam's Clubs -- warehouse-type buying "clubs" -- and 35 Supercenters, which are 150,000-square-foot hybrid operations combining a traditional Wal-Mart store with a supermarket. In 1970 Wal-Mart went public, and 100 shares of its stock bought that year would have cost $1,650. Today that stake would be worth almost $3 million.

In a poll of 500 corporate executives taken last year, Wal-Mart was selected one of the three most admired U.S. corporations. But others view the company as a voracious force that has altered forever the pattern and tempo of commercial life in small-town America. As Wal-Mart rolled out its franchises, it sucked commerce off Main Streets, destroying traditional retailers that had served their communities for generations. But in the face of the abundance Wal-Mart produced in the form of more jobs, consumer savings, and expanded trade, the loss of Main Street life seemed an incidental price to pay.

The keenest student of Wal-Mart is Ken Stone, a professor of economics at Iowa State University who specializes in retail trade and rural development. About eight years ago Stone started hearing from small-town Iowa merchants whose downtowns were dying. He began gathering sales-tax data and concluded in 1988 that Iowa towns within a 20-mile radius of 14 Wal-Mart stores saw total retail sales decline by 25.4% after five years. Even towns outside that 20-mile radius felt Wal-Mart's pull. Their retail sales declined by 17.6% after five years. "I was amazed by the impact of Wal-Mart," says Stone.

Stone further found that the sales of small specialty stores decreased substantially. Eight years after Wal-Mart's entry into Iowa, department stores -- led, obviously, by Wal-Mart -- had added $334 million worth of revenues, amounting to a 20.2% gain in market share, while clothing, drug, jewelry, auto-parts, hardware, variety, and grocery stores had all lost market share ranging from 2% to 44%.

Wal-Mart's strategy relies on developing overwhelming critical mass. The chain often simultaneously opens stores of 90,000 square feet and up, eventually putting them so close together that they compete with one another. (Wal-Mart has 230 stores in Texas alone.) Wal-Mart's vice-president of corporate affairs, Don Shinkle, says that the number of stores the company has closed because they have not performed to expectation "can be counted on one hand." That does not include stores the company routinely closes -- only to move them to more strategically placed sites.

The more Stone observed this juggernaut, the more he realized that the only hope small merchants had was to niche around it. That meant improving customer service, tailoring selection to customer needs, and not competing directly with Wal-Mart's product lines. "There are a lot of voids and niches that can be filled by specialty retailers -- and that's the only hope," says Stone, "because Wal-Mart skims the cream. It has a distribution system that is the best in the world. Its costs are lower than anyone else's because it ties the manufacturer right into its stores."

Stone also notes that Wal-Mart management won't tolerate shrinkage -- loss, theft, and damage of inventory -- and adds that not keeping an eye on that is a way for Wal-Mart managers "to get fired real fast." Wal-Mart aims to keep shrinkage at around 1%, while other retailers typically settle for between 3% and 5%. Similarly, Wal-Mart, which relies on word-of-mouth promotion, spends .5% of sales on advertising, roughly one-quarter of what K mart and Sears each spend. By running leaner, Wal-Mart can charge less -- and make more. Last year Wal-Mart's gross margin was 22%, eight points below that of Sears, yet Wal-Mart's net profit margin was 4%, nearly double Sears's 2.2% in 1991. (Last year Sears took a onetime charge, resulting in a loss.)

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