How Wal-Mart Works


Wal-Mart Supercenter. See more corporation pictures.
Image © 2006 Walmartfacts.com

Wal-Mart is more than just the world's largest retailer. It is an economic force, a cultural phenomenon and a lightning rod for controversy. It all started with a simple philosophy from founder Sam Walton: Offer shoppers lower prices than they get anywhere else. That basic strategy has shaped Wal-Mart's culture and driven the company's growth.

Now that Wal-Mart is so huge, it has unprecedented power to shape labor markets globally and change the way entire industries operate. In this article, you will learn the key reasons that Wal-Mart has been able to keep its prices low -- cutting-edge technology, a frugal corporate culture and a push to make suppliers sell merchandise at cheaper and cheaper prices. We'll also take a look at the scope of Wal-Mart's impact on the economy and the controversies surrounding Wal-Mart, as well as the future of the company.

Advertisement

Sam Walton described Wal-Mart's beginnings in his autobiography.
Sam Walton described Wal-Mart's beginnings in his autobiography.
Image courtesy Amazon

First, let's start with a little history. Sam Walton opened his first five-and-dime in 1950. His vision was to keep prices as low as possible. Even if his margins weren't as fat as competitors, he figured he could make up for that in volume. He was right.

In the early 1960s, Walton opened his first Wal-Mart in Rogers, Arkansas. The company continued to grow, going public in 1970 and adding more stores every year. In 1990, Wal-Mart surpassed key rival Kmart in size. Two years later, it surpassed Sears.

Walton continued to drive an old pickup truck and share budget-hotel rooms with colleagues on business trips, even after Wal-Mart made him very rich. He demanded that his employees also keep expenses to a bare minimum -- a mentality that is still at the heart of Wal-Mart culture more than a decade after Walton's death. The company has continued to grow rapidly after his death in 1992 and now operates four retail divisions -- Wal-Mart Supercenters, Wal-Mart discount stores, Neighborhood Market stores and Sam's Club warehouses.

A Wal-Mart Neighborhood Market
A Wal-Mart Neighborhood Market
Image © 2006 Walmartfacts.com

To get a sense of just how big Wal-Mart is today, consider these facts:

  • Wal-Mart employs 1.6 million people. To give you an idea of just how many people that is, Idaho, the 39th most populous state, is home to 1.4 million people.
  • Wal-Mart had sales of $312.43 billion in its most recent fiscal year, which ended January 31, 2006. By comparison, the second-largest retailer in the country, Home Depot, posted sales of $81.5 billion.
  • Wal-Mart has 6,200 retail outlets. In contrast, Home Depot has 2,040.

What made Wal-Mart so big, powerful and successful? Let's look at some of its strategies, including its sophisticated use of technology, its corporate culture of watching every expense, and above all else, its mission to keep prices low.

Wal-Mart Strategy

Let's start with technology. Wal-Mart pushed the retail industry to establish the universal bar code, which forced manufacturers to adopt common labeling. The bar allowed retailers to generate all kinds of information -- creating a subtle shift of power from manufacturers to retailers. Wal-Mart became especially good at exploiting the information behind the bar code and is considered a pioneer in developing sophisticated technology to track its inventory and cut the fat out of its supply chain.

A universal bar code
A universal bar code

Recently, Wal-Mart became the first major retailer to demand manufacturers use radio frequency identification technology (RFID). The technology uses radio frequencies to transmit data stored on small tags attached to pallets or individual products. RFID tags hold significantly more data than bar codes. During the first eight months of 2005, Wal-Mart experienced a 16 percent drop in out-of-stock merchandise at its RFID-equipped stores, according to a University of Arkansas study (as reported in Fortune Small Business magazine).

Wal-Mart's headquarters in Bentonville, AR
Wal-Mart's headquarters in Bentonville, AR
Image © 2006 Walmartfacts.com

The frugal culture, established by Walton, also plays into Wal-Mart's success. The company has been criticized for the relatively meager wages and health care plans that it offers to rank-and-file employees. It has also been accused of demanding that hourly workers put in overtime without pay. Store managers often work more than 70 hours per week. They are are expected to pinch pennies wherever they can, even on things like the heating and cooling of the stores. In the winter, stores are kept at 70 degrees Fahrenheit, and in the summer, they stay at 73.

This culture is also present at the company's headquarters. Wal-Mart is headquartered in Bentonville, Arkansas, instead of an expensive city like New York. The building is drab and dull. You won't catch executives in limousines and you won't see them dragging into work at 9:30 a.m. Executives fly coach and often share hotel rooms with colleagues. They work long hours, typically arriving at work before 6:30 a.m. and working half-days on Saturdays.

­

­The central goal of Wal-Mart is to keep retail prices low -- and the company has been very successful at this. Experts estimate that Wal-Mart saves shoppers at least 15 percent on a typical cart of groceries. Everything -- including the technology and corporate culture -- feeds into that ultimate goal of delivering the lowest prices possible. Wal-Mart also pushes its suppliers, some say relentlessly, to cut prices. In "The Wal-Mart Effect," author Charles Fishman discusses how the price of a four-pack of GE light bulbs decreased from $2.19 to 88 cents during a five-year period.

In a 2003 Los Angeles Times article (part of a Pulitzer Prize-winning series about Wal-Mart, tells of a Wal-Mart buyer named Celia Clancy, who was in charge of clothing and demanded that each supplier either lower the price or increase the quality every year on every item. This philosophy is known as "plus one."

Next, we'll look at Wal-Mart's power and the controversy surrounding it.

Power and Controversy

Sometimes Wal-Mart alters the standard store design to fit into a community, such as with this discount store in Baldwin Park, CA.
Sometimes Wal-Mart alters the standard store design to fit into a community, such as with this discount store in Baldwin Park, CA.
Image © 2006 Walmartfacts.com

Because of Wal-Mart's massive size, it wields incredible power. It has driven smaller retailers out of business; forced manufacturers to be more efficient, often leading these suppliers to move manufacturing jobs overseas; and changed the way that even large and established industries do business.

There is plenty of anecdotal evidence that a new Wal-Mart in town spells doom for local pharmacies, grocery stores, sporting goods stores, et cetera. Economist Emek Basker, Ph.D., attempted to quantify the impact. Her study found that in a typical United States county, when a Wal-Mart opens, three other retailers close within two years and four close within five years. While the Wal-Mart might employ 300 people, another 250 people working in retail lose their jobs within five years in that county.

Advertisement

Suppliers are also heavily impacted by Wal-Mart. Gary Gereffi, a Duke professor who studies global supply chains, put it this way in a PBS interview:

Wal-Mart has life or death decisions over (almost) all the consumer goods industries that exist in the United States, because it is the number-one supplier-retailer of most of our consumer goods -- not just clothes, shoes, toys, but home appliances, electronic products, sporting goods, bicycles, groceries, food.
A Wal-Mart distribution center
A Wal-Mart distribution center
Image © 2006 Walmartfacts.com

The stories of how Wal-Mart pushes manufacturers into selling the same product at lower and lower prices are legendary. One example is Lakewood Engineering & Manufacturing Co. in Chicago, a fan manufacturer. In the early 1990s, a 20-inch box fan costs $20. Wal-Mart pushed the manufacturer to lower the price, and Lakewood responded by automating the production process, which meant layoffs. Lakewood also badgered it own suppliers to knock down the prices of parts. Then, in 2000, Lakewood opened a factory in China, where workers earn 25 cents an hour. By 2003, the price on the fan in a Wal-Mart store had dropped to about $10.

So what is the deal with Wal-Mart and outsourcing? You may have heard that Wal-Mart sends manufacturing jobs overseas, but also remember that Wal-Mart once touted a "Buy America" campaign. Here's how the discrepancy sorts out.

In 1985, Walton launched a "Bring it Home to the USA" program, offering to pay suppliers as much as 5 percent more for products made in the United States. However, that philosophy quietly faded in the 1990s, as Wal-Mart joined other retailers in a quest to find the cheapest sources of production around the world. In 1995, Wal-Mart said that 6 percent of its total merchandise was imported. A decade later, experts estimated that Wal-Mart imported about 60 percent of its merchandise.

Wal-Mart's impact extends beyond just small suppliers. It also affects how even major, established companies like Coca-Cola and Pepsico do business. At Wal-Mart's request, Coke and its largest bottler Coca-Cola Enterprises announced that they are changing the way they deliver PowerAde in the United States, altering a basic distribution method for drinks that has been in place for more than a century. Coke also now allows Wal-Mart in on the research-and-development process. In 2005, Coke planned to launch one new diet cola called Coke Zero. At Wal-Mart's request, it changed the name to Diet Coke with Splenda and launched a separate product called Coke Zero. This kind of retailer involvement was unheard of at Coke a decade ago. Pepsi also came up with a line of diet drinks, called Slice One, to initially be sold exclusively in Wal-Mart.

The Controversy

Wal-Mart is a polarizing force. The controversies have involved a broad rage of topics from Wal-Mart selling guns, to the company's environmental policies, to the kind of health care Wal-Mart offers employees, to outsourcing of jobs. In this section, we will explore two of the biggest areas of controversies -- labor practices at the company and Wal-Mart's impact on the American economy.

Wal-Mart has come under fire on a number of labor issues. There may be a dark side to the frugal culture. At the end of 2005, the company faced dozens of lawsuits across the country for allegedly not paying workers overtime. Women have also accused Wal-Mart of discrimination, and employees have said that it squashes efforts to unionize and doesn't provide decent healthcare.

Ambassador Andrew Young with Lawrence Jackson, executive vice president of Wal-Mart's people division, Lee Scott, president and CEO of Wal-Mart Stores, Inc.
Ambassador Andrew Young with Lawrence Jackson, executive vice president of Wal-Mart's people division, Lee Scott, president and CEO of Wal-Mart Stores, Inc.
Image © 2006 Walmartfacts.com

Not everyone is down on Wal-Mart. Andrew Young, a former United Nations ambassador and former mayor of Atlanta, heads up a group backed by Wal-Mart that is supposed to spread a positive message about the company. "You need to look at who's complaining about Wal-Mart," Young told USA Today in March 2006. "If it's not 100 million people shopping there every week and it's not 8,000 people competing for 500 jobs [at a new Atlanta store], who is it? They're complaining because they're wrong and they don't understand that ending poverty means generating wealth and not just fighting to redistribute the existing wealth."

There is heated debate about whether Wal-Mart is good for the American economy, and well-respected economists come down firmly on both sides of this debate. Some experts say it is good for the economy because it keeps prices low, both at its stores and at other retailers. Other experts argue that Wal-Mart is bad for the economy because it drives competing retailers out of business and forces manufacturers to move jobs overseas to keep expenses down.

Wal-Mart's annual income shows no signs of slowing down.
Wal-Mart's annual income shows no signs of slowing down.

Critics say that Wal-Mart can only push prices so low, and that the company may have already reached that threshold. They also say that the country is saturated with Wal-Mart stores. Ninety percent of the U.S. population already lives within 15 miles of a Wal-Mart, according to "The Wal-Mart Effect."

Also, Wal-Mart's growth in same-stores sales has slowed considerably in recent years. Same-store sales, a key measure in the retail industry, measure the sales versus the year before in stores open at least one year.

Target, while much smaller, is currently growing its same-store sales more than Wal-Mart. Target doesn't just compete on price. Instead, it sells style as well as a good price. Sales at Wal-Mart stores open for at least one year grew, on average, 3.6 percent a month in fiscal year 2005, compared with a 5.8 percent gain for Target, according to the International Council of Shopping Centers(as reported in the New York Times).

Wal-Mart Supercenter in China
Wal-Mart Supercenter in China
Image © 2006 Walmartfacts.com

Some experts disagree that Wal-Mart has peaked, arguing that Wal-Mart can always enter new retail segments. After all, it didn't sell groceries originally and now that is a huge part of the company's business. Wal-Mart also has plenty of growth opportunity in the international market.

For more information on Wal-Mart and related topics, check out the links on the next page.

Related HowStuffWorks Articles

More Great Links

Sources

  • Barbaro, Michael. "Wal-Mart Tries to Find Its Customer." New York Times, February 2, 2006.
  • Basker, Emek. "Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion." University of Michigan, 2004.
  • Cleeland, Nancy and Abigail Goldman. "An Empire Built on Bargains Remakes the Working World." Los Angeles Times, November 23, 2003.
  • Cleeland, Nancy and Abigail Goldman. "Grocery Unions Battle to Stop Invasion of the Giant Stores." Los Angeles Times, November 25, 2003.
  • Cleeland, Nancy, et al. "Scouring the Globe to Give Shoppers an $8.63 Polo Shirt." Los Angeles Times, November 24, 2003.
  • Cleeland, Nancy. "Seams Start to Unravel." Los Angeles Times, November 24, 2003.
  • Copeland, Larry. "Wal-Mart's Hired Advocate Takes Flak." USA Today, March 16, 2006.
  • Fishman, Charles. "The Wal-Mart Effect." Penguin Press, 2006.ISBN 1594200769.
  • Goldman, Abigail. "Proud to Be at the Top." Los Angeles Times, November 23, 2003.
  • Home Depot Web Site http://www.homedepot.com
  • Iritani, Evelyn and Nancy Cleeland. "Audit Stance Generates Controversy." Los Angeles Times, November 24, 2003.
  • "Is Wal-Mart Good for America?" PBS Frontline, November 16, 2004. http://www.pbs.org/wgbh/pages/frontline/shows/walmart/view/
  • Wal-MartWeb Site http://www.walmart.com
  • Wal-Mart Watch Web Site http://www.walmartwatch.com
  • Warner, Melanie. "When Wal-Mart Shops for Groceries, it Gets Whatever it Wants." New York Times, March 6, 2006.
  • "Wireless Grapes; Seeking new sales to Wal-Mart, a produce supplier goes high tech," Fortune Small Buisness, March 6, 2006. http://money.cnn.com/magazines/fortune/fortune_archive/2006/03/06/8370666/index.htm