“I cost us about $10 billion. I set out to buy 100 million shares, pre-split, at $23. We bought a little and it moved up a bit and I stopped buying.” – Warren Buffett on his error of omission in not loading up on Walmart
Every generation or so you come across an entrepreneur whose drive, vision and ambition make them achieve extraordinary heights. Sam Walton, who founded the retailing giant Walmart, is one of them. If you read his story is the book Made in America, you will marvel about how this seemingly ordinary, unassuming man could build such a massive empire. So respected was Walton, that when the Brazilian investor Jorge Lemann had wanted to learn best practices in retailing for one of his businesses – Lojas Americanas, he wrote to Walton who was happy to give him and his partners a tour, and become a close friend because of shared values and goals.
(1) Focus on maximizing value for the customer
“We believe in the value of the dollar. We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money. Every time Wal-Mart spends one dollar foolishly, it comes right out of our customers’ pockets. Every time we save them a dollar, that puts us one more step ahead of the competition—which is where we always plan to be”
Businesses like Wal-Mart rely on having the lowest price possible as a source of their competitive advantage. This means being lean and efficient in all aspects of their operations so that they can generate volumes and drive their competitors underground.
(2) Frugality and an Owner mindset
“I’m confident this attitude will last at least another generation—most of that Wal-Mart stock is staying right where it is. We don’t need the money. We don’t need to buy a yacht. And thank goodness we never thought we had to go out and buy anything like an island. We just don’t have those kinds of needs or ambitions, which wreck a lot of companies when they get along in
years. Some families sell their stock off a little at a time to live high, and then—boom—somebody takes them over, and it all goes down the drain. One of the real reasons I’m writing this book is so my grandchildren and great-grandchildren will read it years from now and know this: If you start any of that foolishness, I’ll come back and haunt you. So don’t even think about it”
You often see rich promoters of companies today who treat the company’s finances like a personal ATM, and live expansive and lavish lifestyles. Sam Walton on the other hand would refuse to fly first class, drove an old pickup truck and bought his own clothes at Wal-Mart rather than a fancy store. The executive offices were described to resemble something you would find in a truck terminal. However, the shareholders weren’t complaining, and an innate respect for the value of money was instilled into him while growing up during the hard times of the Great Depression in the 1930s, and that translated into his work ethic and business philosophy.
(3) Constantly earning and adapting
“Check everyone who is our competition. And don’t look for the bad. Look for the good. If you get one good idea, that’s one more than you went into the store with, and we must try to incorporate it into our company. We’re really not concerned with what they’re doing wrong, we’re concerned with what they’re doing right, and everyone is doing something right.”
I have noticed this almost obsession with learning and improving from others experience in many successful businessmen. Knowing when not to re-invent the wheel and take the best of what other people have figured out already is a tried and tested strategy. Walton was always seen carrying around a yellow legal pad (later a tape recorder as well), which he would use to jot down details while examining other stores nationally or even internationally, or when he was interviewing people. He had intuitively absorbed Phil Fisher’s idea of “scuttlebutt” long before it became a recognized strategy of researching businesses.
(4) Passion and Intense Focus
“There hasn’t been a day in my adult life when I haven’t spent some time thinking about merchandising. I suspect I have emphasized item merchandising and the importance of promoting items to a greater degree than most any other retail management person in this country. It has been an absolute passion of mine. It is what I enjoy doing as much as anything in the business.”
Sam Walton absolutely loved what he did, and he lived and breathed it, which is what made him exceptional at it. He was also willing to take a couple of simple ideas – deep discounting and promotions and execute them to perfection. He not only had the lowest prices but found ways to promote and sell any item that he chose to stock.
(5) Don’t pander to the whims of stock market analysts
“If we fail to live up to somebody’s hypothetical projection for what we should be doing, I don’t care. It may knock our stock back a little, but we’re in it for the long run. We couldn’t care
less about what is forecast or what the market says we ought to do. “
The stock market is almost obsessively focused with short term results, but forgets that a company declares a good result today because its leadership had the foresight to invest in advertising, branding and production in the past. Great companies have a long-term vision and plan / invest accordingly, even at the expense of depressing their short term earnings. They don’t care about giving guidance or meeting “street expectations”.
(6) Cultivate a sense of partnership and aligned incentives
“Profit sharing has pretty much been the carrot that’s kept Wal-Mart headed forward. Every associate of the company who has been with us at least a year, and who
works at least 1,000 hours a year, is eligible for it. Using a formula based on profit growth, we contribute a percentage of every eligible associate’s wages to his or her plan, which the associate
can take when they leave the company—either in cash or Wal-Mart stock”
One of the most powerful forces that affects human behaviour is the power of incentives, and it is exceedingly important for the incentives of all stakeholders to be aligned towards a common goal. Wal-mart fostered a sense of partnership that involved everyone benefiting from the company’s success, and the fact that over 80% of associates owned Wal-mart stock was a testament to this. Another great program was handing out bonuses for shrinkage reduction (unaccounted for inventory loss), which worked so well that Wal-mart’s shrinkage was half of the industry average.
It didn’t stop at just shared profits, a great deal of effort was made to motivate and communicate so that everyone felt like a trusted member of a greater whole, something Charlie Munger said of Berkshire also, describing it as a “seamless web of deserved trust”
The Wal-mart story is one that I would wholeheartedly recommend as mandatory reading for anyone interested in business and investing, and I think should be part of Business School curriculum. It is also something that eCommerce players could learn a thing or two from – how to be build a sustainable and consistently profitable deep discount model that doesn’t rely on burning through multiple rounds of VC funding.