Walton received early confirmation that he had a winning formula: It soon became clear that customer loyalty to a given retailer was mostly fiction. Customers would shop almost anywhere if the prices were lower.
An amusing episode at the time of the opening of the second Wal-Mart store confirmed the wisdom of Walton's new approach. Wal-Mart was opening a store in Harrison, Arkansas, not far from the local (and relatively "upscale") Sterling store. In those days, store openings were big events. Kids got free donkey rides, and patrons were offered free watermelon in the parking lot. But this particular store opening was a disaster almost from the start. The scorching heat had two unexpected consequences: exploding watermelons and what might euphemistically be called "excitable" donkeys. As a result, the parking lot turned into a slippery, smelly mess, which made its way into the store on customers' shoes.
Nevertheless, shoppers came, browsed, and purchased. They bypassed the tonier store up the street, ignored the mess on the floor, and bought. Walton knew then that low prices were the key to his business. Even though he made many mistakes in those first years, Walton felt that his vision kept the company on the right track:
What we were obsessed with was keeping our prices below everybody else's. ... We managed to sell our merchandise as low as we possibly could, and that kept us right side up for the first ten years—that and consistently improving our sales in these smaller markets by building up our relationship with the customers. The idea was simple: when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed.
Walton's obsession with low prices helped fuel the company's incredible growth and helped him to leapfrog his competitors. This was a good thing, because despite Walton's zest for learning, in Wal-Mart's early years the company was very much a David up against many Goliaths. Five years after starting Wal-Mart, for example, Walton had only five stores, each bringing in less than $10 million in revenues annually. In sharp contrast, Kmart had 250 stores with total sales of $800 million.
But Walton had patience, and he had the courage of his convictions. He believed that he could win in the long run because many discounters never fully committed to the discounting model, which calls for low prices across the board:
It's amazing that our competitors didn't catch on to us quicker and try to stop us. ... What happened was that they really didn't commit to discounting. They held on to their old variety store concepts too long. They were so accustomed to getting their 45 percent markup, they never let go. With our low costs, our low expense structures, and our low prices, we were ending an era in the heartland. We shut the door on variety thinking.
Some retailers, such as Sears, failed to acknowledge that Wal-Mart was one of their key competitors. The result was good for Wal-Mart and bad for Sears. Walton knew that stores that had near-monopolies in their geographic area—even discount stores—tended to charge what they thought the market would bear. This almost always meant that their goods cost more than the equivalent products at the local Wal-Mart. The result was predictable. By 1980, Wal-Mart had more than 275 stores doing over $1 billion in sales. By 1990, Wal-Mart had over 1500 stores, and sales had topped $26 billion. The formula, rigorously applied, was magic.
Here are several take-aways from the Walton model that may work in your business:
ONCE YOU HAVE THE "FORMULA" FOR YOUR INDUSTRY, WORK ON IMPROVING IT. Walton knew that having the lowest prices was the key to winning the discounting game. Once he had established that, he set out to improve on that model with an increasingly sophisticated store-location strategy (discussed in the next section), better merchandising tactics, and ever-lower prices (by buying in incredible bulk, eliminating middlemen, and working closely with suppliers to get every possible price break).
STAY FAITHFUL TO THE VISION. Walton knew that the key to the company's future was never to break with the company's guiding principle: low prices. Even if there was no other discount store within 100 miles, he made sure that every Wal-Mart stayed true to the vision. This helped him to maintain his customer base even after new competitors entered his "neighborhood."