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12

Making the Customer Number One

“Sam Walton understands better than anyone else that no business can exist without customers. He lives by his credo, which is to make the customer the centerpiece of all his efforts. And in the process of serving Wal-Mart’s customers to perfection (not quite perfection, he would say), he also serves Wal-Mart’s associates, its share owners, its communities, and the rest of its stakeholders in an extraordinary fashion—almost without parallel in American business.”

—-ROBERTO C. GOIZUETA, chairman and CEO, the Coca-Cola Company

For my whole career in retail, I have stuck by one guiding principle. It’s a simple one, and I have repeated it over and over and over in this book until I’m sure you’re sick to death of it. But I’m going to say it again anyway: the secret of successful retailing is to give your customers what they want. And really, if you think about it from your point of view as a customer, you want everything: a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience. You love it when you visit a store that somehow exceeds your expectations, and you hate it when a store inconveniences you, or gives you a hard time, or just pretends you’re invisible.

I learned this lesson as a merchant in small towns, which is where I’ve spent my whole life. For those of you who’ve been around as long as I have, and who spent your early days in small towns too, it’s not hard to remember how different small-town life was in the first half of this century. Newport was a pretty prosperous little town with a fairly competitive retail environment, but it’s still a good example of how things worked back then. It was a cotton town, which meant that a lot of the folks who shopped there really lived outside of town on farms. Most of the men worked long hours in the fields, and most of the women worked at home. Very few women held jobs in those days, although a lot of them had worked during the war, and they were beginning to think about going back to work when they got their families pretty well underway.

The town itself had several small department stores, including, as I mentioned earlier, a Penney’s and for a while that little Eagle Store I opened up. It also had a couple of good variety stores—mine and John Dunham’s Sterling Store. There were drugstores, hardware stores, tire and auto stores—like Firestone and Western Auto—and little family grocery stores. In lots of little towns, you didn’t even have many one-stop groceries. You might have one shop that specialized in butchering meat, another that carried good fresh vegetables, and maybe another that would wring a chicken’s neck and dress it for you right there behind the counter while you waited.

Folks back then weren’t accustomed to all the variety and abundance of goods and services that we have available today. During the Depression, few of us had enough money to shop very often, and during World War II, everything—meat, butter, tires, shoes, gasoline, sugar—was rationed. But by the time I started out, the shortages were pretty much over, and the economy was growing. Compared to the Depression we had been used to, boom times had arrived.

In a farm-to-market town like Newport, the big shopping day was always Saturday. That’s when the whole family would drive to town and spend a few hours—maybe the whole day—walking around looking for what they needed in all the stores. Something had to attract them to a particular store, maybe a combination of things: the storekeeper’s personality, the freshness of the goods, the prices—an ice cream machine. We thrived in that competitive environment.

When we arrived in the much smaller town of Bentonville in 1950, we found almost no spirit of competition. A few retailers were scattered around the square, but each of them had sort of carved out their niche, and that was that. If a store didn’t have something the customer wanted, he or she would just have to drive to Rogers, or Springdale, or very possibly on into Fayetteville. Using some of the things we had learned in Newport, I’d have to say we changed that way of thinking right off and generally sparked up the atmosphere around town.

ALICE WALTON:

“Saturdays around the Bentonville square were really something special. Dad always had something going on out on the sidewalks or even in the streets, and there was always a crowd. That’s where Santa Claus would come, and that’s where we had all the parades. To me, as a kid, it seemed like we had a circus or a carnival going on almost every weekend. I loved Saturdays. I had my popcorn machine out on the sidewalk, and I was covered up in business. Everybody wanted some of that popcorn, and of course a lot of my customers would go on into the store. It was a great way to grow up.”

As you recall, Fayetteville was where we opened our second store after Bentonville. And it was also where we encountered our first discounter competition —Gibson’s. We knew from then on that the retail business was going to be changing in major ways for years to come, and we wanted to be part of it. We knew early on that variety stores weren’t going to be as big a factor in the future as they had been in the past, and we were heavily invested in them. The important thing to recognize, though, is that none of this was taking place in a vacuum. In the fifties and sixties, everything about America was changing rapidly.

All the kids who had grown up on farms and in small towns had come home from World War II or Korea and moved to the cities where all the jobs were. Except they weren’t really moving to the cities; they were moving to the suburbs and commuting into the cities to work. It seemed like every family had at least one car—and many had two—and the country had started building its interstate highway system, all of which changed a lot of the traditional ways Americans were accustomed to doing business.

The downtowns of big cities started to lose population and business to the suburbs, and the big downtown department stores had to follow their customers and build branch stores out in the suburban malls. Traditional diners and cafes suffered because of the new car-oriented chains like McDonald’s and Burger King, and the old city variety stores like Woolworth’s and McCrory’s just got smashed by Kmart and some of the other big discounters. The oil companies stuck service stations on practically every other corner, and pretty soon something called convenience stores—7-Elevens and such—came along and started filling up the other corners. It was when all this began that Bud and I had opened that Ben Franklin in the shopping center at Ruskin Heights, that big new subdivision community outside Kansas City.

For the most part up where we were—in the small towns of northwest Arkansas, Missouri, Oklahoma, and Kansas—you didn’t see much of the mall construction and fast food neon that you saw everywhere else. McDonald’s didn’t go into the small towns, and neither did Kmart. You saw the small-town commercial centers start to sort of shrivel up. A lot of our customer base had moved on, and the ones who remained behind weren’t stupid consumers. If they had something big to buy—say a riding lawnmower—they wouldn’t hesitate to drive fifty miles to get it if they thought they could save $100. Not only that, but with the introduction of TV and new postwar car models, being modern had become a big thing. Everybody wanted to feel up-to-date, and if they knew Kroger or somebody had a big new grocery store in Tulsa or somewhere they’d drive in there to shop it. When they saw that the prices were lower and the selection was better, they would go back again and again, until somebody brought a supermarket to their town.

It was this kind of strong customer demand in the small towns that made it possible for Wal-Mart to get started in the first place, that enabled our stores to thrive immediately, and that eventually made it possible to spread the idea pretty much all over the country. For many years, we lived entirely off the principle that customers in the country and in small towns are, just like their relatives who left the farm and moved to the city: they want a good deal as much as anybody. When we arrived in these little towns offering low prices every day, satisfaction guaranteed, and hours that were realistic for the way people wanted to shop, we passed right by that old variety store competition, with its 45 percent markups, limited selection, and limited hours.

Wal-Mart No. 18 is as good an example as there is of how it worked. That store opened in 1969, and it marked our return to Newport, Arkansas, nineteen years after we had basically been run out of town. By then, I was long over what had happened to us down there, and I didn’t have revenge in mind. It was a logical town for us to expand into, and I admit that it did feel mighty good to be back in business down there. I knew it was a town where we would do well. As it happened, we did extraordinarily well with our Newport Wal-Mart, and it wasn’t too long before the old Ben Franklin store I had run on Front Street had to close its doors. You can’t say we ran that guy—the landlord’s son—out of business. His customers were the ones who shut him down. They voted with their feet.

Quite a few smaller stores have gone out of business during the time of Wal-Mart’s growth. Some people have tried to turn it into this big controversy, sort of a “Save the Small-Town Merchants” deal, like they were whales or whooping cranes or something that has the right to be protected.

Of all the notions I’ve heard about Wal-Mart, none has ever baffled me more than this idea that we are somehow the enemy of small-town America. Nothing could be further from the truth: Wal-Mart has actually kept quite a number of small towns from becoming practically extinct by offering low prices and saving literally billions of dollars for the people who live there, as well as by creating hundreds of thousands of jobs in our stores.

I don’t have any trouble understanding why some merchant who’s having a hard time competing with us wouldn’t be too happy about our being there. What I haven’t been able to figure at all is these people who have decided we’re somehow responsible for the decline of the small town. My guess is that a lot of these critics are folks who grew up in small towns and then deserted them for the big cities decades ago. Now when they come home for a visit, it makes them sad that the old town square isn’t exactly like it was when they left it back in 1954. It’s almost like they want their hometown to be stuck in time, an old-fashioned place filled with old-fashioned people doing business the old-fashioned way. Somehow, small-town populations weren’t supposed to move out into their own suburbs, and they weren’t supposed to go out to the intersections of highways and build malls with lots of free parking. That’s just not the way some of these people remember their old towns. But folks who grew up in big cities feel the same way about what’s happened to their cities over the last forty or fifty years. A lot of the stores and the movie theaters and the restaurants that they remember loving as kids have boarded up and either gone out of business or moved to the suburbs too.

I think what happened to Wal-Mart in all this is that we got to be a certain size and became so well known as the small-town merchants that we became an easy target. Certain folks figured they could create a niche for themselves, a platform from which to express their views about small-town America, by zeroing in on us. The whole thing taught me a lesson about the way the national media seems to think. When you start out as an unknown quantity with just a dream and a commitment, you couldn’t buy a mention of your company in one of these publications. When you become moderately successful, they still ignore you unless something bad happens to you. Then, the more successful you become, the more suspicious they become of you. And if you ever become a large-scale success, it’s Katie bar the door. Suddenly, you make a very convenient villain because everybody seems to love shooting at who’s on top.

As an old-time small-town merchant, I can tell you that nobody has more love for the heyday of the smalltown retailing era than I do. That’s one of the reasons we chose to put our little Wal-Mart museum on the square in Bentonville. It’s in the old Walton’s Five and Dime building, and it tries to capture a little bit of the old dime store feel.

But I can also tell you this: if we had gotten smug about our early success, and said, “Well, we’re the best merchant in town,” and just kept doing everything exactly the way we were doing it, somebody else would have come along and given our customers what they wanted, and we would be out of business today. I don’t know who it would have been. Maybe Gibson’s or TG&Y would have pulled it off. But I suspect it would have been a combination of Kmart and Target, which, like McDonald’s, would have rolled out into the small towns once they began to saturate their big-city markets.

What happened was absolutely a necessary and inevitable evolution in retailing, as inevitable as the replacement of the buggy by the car and the disappearance of the buggy whip makers. The small stores were just destined to disappear, at least in the numbers they once existed, because the whole thing is driven by the customers, who are free to choose where to shop.

Don soderquist:

“We’ve never been very sympathetic to this whole small-town argument. What’s happened to the small-town merchant isn’t any different from what happened when supermarkets first appeared in the fifties. The whole point of retailing is to serve the customer. If you’re a merchant with no competition, you can charge high prices, open late, close early, and shut down on Wednesday and Saturday afternoons. You can do exactly what you’ve always done and probably be just fine. But when competition comes along, don’t expect your customers to stick with you for old times’ sake. There are plenty of ways to compete successfully with Wal-Mart or any other big retailer. The principle behind all those ways is pretty basic: you have to focus on something the customer wants, and then deliver it.”

I don’t want to be too critical of small-town merchants, but the truth is that a lot of these folks just weren’t doing a very good job of taking care of their customers before we, or somebody else, came in and offered something new. And they didn’t do a very good job of reacting to our arrival either. You know, there have been articles, and even one little book, written on how to compete with us. And I’ve got a few suggestions of my own.

Unless small merchants are already doing a great job, they’ll probably have to rethink their merchandising and advertising and promotional programs once a discounter arrives on the scene. They need to avoid coming at us head-on, and do their own thing better than we do ours. It doesn’t make any sense to try to underprice Wal-Mart on something like toothpaste. That’s not what the customer is looking to a small store for anyway. Most independents are best off, I think, doing what I prided myself on doing for so many years as a storekeeper: getting out on the floor and meeting every one of the customers. Let them know how much you appreciate them, and ring that cash register yourself. That little personal touch is so important for an independent merchant because no matter how hard Wal-Mart tries to duplicate it—and we try awfully hard —we can’t really do it.

I think in the case of variety stores, they have to completely reposition themselves, something like the way Don Soderquist did when he was president of Ben Franklin. He saw that there just wasn’t any future in competing with Wal-Mart and Kmart so he started converting a lot of their variety stores into craft stores. They offered a much bigger assortment of craft merchandise than any Wal-Mart could, and they held classes in things like pottery and flower arranging, services we could never think about providing. It worked. They stayed in business in the small towns and have been quite successful with many of those stores. The same thing can be done with fabrics: offer higher quality material and throw in some sewing classes. Or ladies’ apparel. I don’t care how many Wal-Marts come to town, there are always niches that we can’t reach—not that we won’t try. Just like everybody else, in order to survive, we need to keep changing the things we do. Now in the case of hardware stores, I don’t deny that we’ve been hard on some of them too, but if they’re in a decent location they shouldn’t have that much trouble with Wal-Mart. It’s the one kind of store for which I have the least sympathy because, frankly, a good smart hardware store operator can just beat us to death if he thinks about what he’s doing and commits to putting up a fight. If he gets his assortment right and makes sure his salespeople have excellent knowledge of the products and how to use them, and goes out of his way to take care of his customers, he can keep plenty of business away from us. We don’t have nearly the assortment of a hardware store—plumbing supplies and electrical equipment and specialty tools. And not all of our folks can explain how to fix a leaky faucet or rewire a lamp the way folks in a hardware store should be able to. Our paint customers don’t get waited on much either. They have to pick out their own paint and then walk around with it looking for the rest of the things they want. The same is true in sporting goods, where the customer can’t expect to get nearly the same kind of service from us as from a specialty store.

Don soderquist:

“I have personally competed with Wal-Mart, so I know it can be done. You develop a uniqueness, a niche, and then you capitalize on it. And let me tell you, not all small merchants in these little towns hate us. Some of them have learned to feed off us rather successfully.

“Shortly after we opened a Wal-Mart in Wheat Ridge, Colorado, I had a lady come up to me and say, Oh, I just want to thank you so much for coming here. This is the best thing that could have ever happened.’ I thanked her and asked her what she did there in town, and she said, ‘Well, I run a paint store right over here, just down in this mall.’

“She went on to say that the day our store opened turned out to be the biggest day she had ever had since her paint store opened. ‘You’re pulling all these people into our shopping center. And the neatest thing happened to me Saturday. A man came in looking for a particular kind of paint and said he knew we had it. He said he knew because he’d been in the Wal-Mart looking for it, and the paint department manager told him we had it and sent him on over. I thought that was wonderful.’”

Our guy sent the customer along to the paint store because it was the right thing to do. He was taking care of the customer. What makes me sad these days—and a little angry too—is that some of these stores are starting to shut down before we come to a town. They hear we’re coming, and they close up before we ever even get there. We get a bad rap for that, but to my mind somebody who’ll close his store just because he hears competition’s coming is somebody who must know he’s not doing much of a job, somebody who probably shouldn’t have been in the retail business to begin with.

For all the press about Wal-Mart being at odds with small towns, I am positive that we are most welcome in almost every community where we do business. That’s partly because of our economic contribution. But it’s also because we go out of our way to instill a sense of community involvement in our store management and associates so that they’ll be even better citizens. We know that some of our store managers do a better job at this than others, and it’s a constant effort to make everyone work on community involvement. We already have community scholarship programs and matching charity grant programs, but we’re working hard every day to improve the ways in which we give back to the communities we’re in. If we ever let our sense of being hometown merchants slip too far, we run the risk of damaging what we think is a unique relationship with our customers.

When we meet opposition to a prospective store site, we try to work with the opponents to see if we can reasonably satisfy them. Occasionally, we will change a proposed location, or make some concessions if they make sense to us. Today, though, we have almost adopted the position that if some community, for whatever reason, doesn’t want us in there, we aren’t interested in going in and creating a fuss. I encourage us to walk away from this kind of trouble because there are just too many other good towns out there who do want us. For every one that doesn’t, I’d say we have another two hundred begging us to come to their town. Wal-Mart wants to go where it’s wanted. I’ve always said that the simplest test of how right we are on this issue would be to go into any town where we’ve been for a couple of years and let everyone vote on whether they wanted us there or not. My Lord, they’d go crazy if we left. In fact, every now and then we do have to close up a store someplace because we just can’t make it profitable, and the outcry is something awful. It’s another part of the price you pay for success.

Small-town merchants, by the way, aren’t the only groups we’ve gotten into controversies with by sticking to our philosophy of putting the customer ahead of everything else. On the surface, the idea of serving the customer sounds so simple, so logical, and so obvious. But from the very beginning, the way we have practiced it has been so radical that it has frequently gotten us into trouble with what folks call “the system.” In the early days, the department stores put a lot of pressure on vendors to keep them from selling to discounters like us because they hated what we were doing: offering our customers prices much lower than theirs. In some states, the department stores used so-called “fair trade” laws to try and block discounters from doing business at all.

Our vendors resented us for prying the lowest prices out of them. And some manufacturers’ representatives—independent sales agents who generally work on commission to represent several different manufacturers—have complained about some of our practices. We don’t have any problem with the idea of paying a middleman a commission on a sale, if his services add value to the purchasing process by making it more efficient.

But from the days when I was hauling that little trailer over into Tennessee to buy panties and shirts and avoid paying Butler Brothers’ markup, our philosophy on this has always been simple: we are the agents for our customers. And to do the best job possible, we’ve got to become the most efficient deliverer of merchandise that we can. Sometimes that can best be accomplished by purchasing goods directly from the manufacturer. And other times, direct purchase simply doesn’t work. In those cases, we need to use middlemen to deal with smaller manufacturers and make the process more efficient. What we believe in strongly is our right to make that decision—whether to buy directly or from a rep—based on what it takes to best serve our customers.

This controversy is another case, I think, of a group of people believing for some reason that they’re just entitled to take a piece of the action, no matter how little they contribute to the transaction or what it means to the customer. The argument is as simple as the small-town merchant controversy. If American business is going to prevail, and be competitive, we’re going to have to get accustomed to the idea that business conditions change, and that survivors have to adapt to those changing conditions. Business is a competitive endeavor, and job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living.

To understand Wal-Mart’s point of view on middlemen, and our relationship with our vendors, you have to look back to our beginnings in the discount business. In the early days of the industry, most discounters were served entirely by middlemen, jobbers, or distributors who came in and said to those old promoters, “We’ll keep your shelves filled for 15 percent of the gross.” In other words, the price on every item included a 15 percent commission to the jobber for supplying the merchandise. That’s how the fast-buck promoters got into the business without even having to think much like merchants. They took what the jobbers gave them, added on the 15 percent, and still under-priced the department stores by a long shot.

But as I mentioned, we couldn’t find anybody who wanted to run their trucks sixty or seventy miles out of the way into these little towns where we were operating. We were totally ignored by the distributors and the jobbers. That’s not only how we came to build our own distribution system, it’s also how we got used to beating the heck out of everybody on prices. We had a time getting good merchandise for our stores back then, but our cost of acquiring the goods was rock bottom—because we sat out there with absolutely no help from distributors. And because we got used to doing everything on our own, we have always resented paying anyone just for the pleasure of doing business with him.

CLAUDE HARRIS:

“There’s a difference between being tough and being obnoxious. But every buyer has to be tough. That’s the job. I always told the buyers: ‘You’re not negotiating for Wal-Mart, you’re negotiating for your customer. And your customer deserves the best price you can get. Don’t ever feel sorry for a vendor. He knows what he can sell for, and we want his bottom price.’

“And that’s what we did, and what Wal-Mart still does. We would tell the vendors, ‘Don’t leave in any room for a kickback because we don’t do that here. And we don’t want your advertising program or your delivery program. Our truck will pick it up at your warehouse. Now what is your best price?’ And if they told me it’s a dollar, I would say, ‘Fine, I’ll consider it, but I’m going to go to your competitor, and if he says 90 cents, he’s going to get the business. So make sure a dollar is your best price.’ If that’s being hard-nosed, then we ought to be as hard-nosed as we can be. You have to be fair and upfront and honest, but you have to drive your bargain because you’re dealing for millions and millions of customers who expect the best price they can get. If you buy that thing for $1.25, you’ve just bought somebody else’s inefficiency.

“We used to get in some terrific fights. You have to be just as tough as they are. You can’t let them get by with anything because they are going to take care of themselves, and your job is to take care of the customer. I’d threaten Procter & Gamble with not carrying their merchandise, and they’d say, ‘Oh, you can’t get by without carrying our merchandise.’ And I’d say, ‘You watch me put it on a side counter, and I’ll put Colgate on the endcap at a penny less, and you just watch me.’ They got offended and went to Sam, and he said, ‘Whatever Claude says, that’s what it’s going to be.’ Well, now we have a real good relationship with Procter & Gamble. It’s a model that everybody talks about. But let me tell you, one reason for that is that they learned to respect us. They learned that they couldn’t bulldoze us like everybody else, and that when we said we were representing the customer, we were dead serious.”

In those days, of course, we desperately needed Procter & Gamble’s product, whereas they could have gotten along just fine without us. Today, we are their largest customer. But it really wasn’t until 1987 that we began to turn a basically adversarial vendor/retailer relationship into one that we like to think is the wave of the future: a win-win partnership between two big companies both trying to serve the same customer. Believe it or not, as big as we had become by then, I don’t believe Wal-Mart had ever been called on by a corporate officer of P&G. We just let our buyers slug it out with their salesmen and both sides lived with the results.

Then one day my close friend and longtime tennis buddy here in Bentonville, George Billingsley, called me up and asked me to join him on a canoe trip down the Spring River. He said he was bringing along an old friend named Lou Pritchett, who was a vice president with P&G at the time, and who wanted to meet me and talk about some things relating to our two companies. So I went along, and it turned out to be the most productive float trip I ever took with George.

LOU PRITCHETT:

“During that time on the river, we both decided that the entire relationship between vendor and retailer was at issue. Both focused on the end-user —the customer—but each did it independently of the other. No sharing of information, no planning together, no systems coordination. We were simply two giant entities going our separate ways, oblivious to the excess costs created by this obsolete system. We were communicating, in effect, by slipping notes under the door.

“As a result, we assembled the top ten officers of both companies in Bentonville for two days of soul-searching and thinking, and within three months we had created a P&G/Wal-Mart team to build a whole new kind of vendor-retailer relationship. We formed a partnership to conduct our business, with one of the most important outcomes being that we started sharing information by computer. P&G could monitor Wal-Mart’s sales and inventory data, and then use that information to make its own production and shipping plans with a great deal more efficiency. We broke new ground by using information technology to manage our business together, instead of just to audit it.”

Following the P&G/Wal-Mart partnership, many other companies began to view the supplier as an important partner. The partnership was also a model for many of our other vendor relationships. In our situation today, we are obsessed with quality as well as price, and, as big as we are, the only way we can possibly get that combination is to sit down with our vendors and work out the costs and margins and plan everything together. By doing that, we give the manufacturer the advantage of knowing what our needs are going to be a year out, or six months out, or even two years out. Then, as long as they are honest with us and try to lower their costs as much as they can and keep turning out a product that the customers want, we can stay with them. We both win, and most important, the customer wins too. The added efficiency of the whole process enables the manufacturer to reduce its costs, which allows us to lower our prices.

One thing we don’t ever want to do, though, is let all these complex strategic issues between us and other big companies—or these controversies like small-town merchants and middlemen—get in the way of our thinking like customers, which may be the most basic way in which we make the customer number one.

DAVID GLASS:

“I was in a store recently where a manager and an assistant manager were taking a department manager through her department. They were saying, ‘If you were a customer, how would you buy that item?’ She was cramped for space and had put this item out of reach of the average customer. And they kept going. ‘If you were a customer, what related items would you want to buy with this? And how would you find them?’

“I loved it. So many times we overcomplicate this business. You can take computer reports, velocity reports, any kind of reports you want to and go lay out your counters by computer. But if you simply think like a customer, you will do a better job of merchandise presentation and selection than any other way. It’s not always easy. To think like a customer, you have to think about details. Whoever said ‘retail is detail’ is absolutely 100 percent right. On the other hand it’s simple. If the customers are the bosses, all you have to do is please them.”

I couldn’t agree with David more. Everything we’ve done since we started Wal-Mart has been devoted to this idea that the customer is our boss. The controversies it has led us into have surprised me, but they’ve been easy to live with because we have never doubted our philosophy that the customer comes ahead of everything else.