Thursday, July 24, 2008

Wal-Mart Expands the "Magic Circle"


If Sam Walton harbored dreams of empire during Wal-Mart’s early years, he did a good job of keeping it to himself. That’s not to say he wasn’t interested in growth – he most certainly was, as is clearly evidenced throughout his autobiography. In Wal-Mart’s first decade and beyond though, the company flew under the radar, expanding slowly within the area that Walton called the “magic circle” – northern Arkansas, southern Missouri, southeastern Kansas and eastern Oklahoma. A typical retailer with a home base in northwest Arkansas could have reasonably been expected to try to plant their flag in Kansas City or St. Louis soon after their first flush of success, but Walton did not and wouldn’t for many years. In 1967, five years after the company’s founding, there were 18 Wal-Marts. By comparison Kmart, another retailer celebrating the five-year mark that year, had 250 stores.

Walton was much more interested in “growing internally”, saturating existing markets to create dominance. New markets were added incrementally, and only in areas that adjoined existing ones, to maximize efficiency. An early sign that this strategy was paying off came in the mid-70’s, as Kmart began to open stores within Wal-Mart’s market area. Until around 1974, Kmart rarely entered cities with a population below 50,000. At that point, they introduced a smaller store format and began to roll it out in various parts of the country. When Kmart entered such Wal-Mart strongholds as Springfield, Missouri and Hot Springs, Arkansas, Wal-Mart creamed them. It was a sign of things to come, on a much larger scale, in the coming decades.

Most importantly, Walton sought to improve the stores. As mentioned in the previous post, he relentlessly pursued competitive intelligence, trying to learn from the good and bad things chains across the country were doing. Conversely, he spent a great deal of time in the Wal-Mart stores, quizzing employees in his friendly but pointed manner, digging deeper if he sensed there was a problem. Walton practiced “management by walking around” long before Tom Peters and Robert Waterman made the phrase famous in the bestselling book “In Search of Excellence”.
At the close of 1970, Wal-Mart had 38 stores and $44 million in sales. Up to this point, a great deal of the financing had come from Sam Walton’s own family, leaving him $2 million in debt by that time. Reluctant to take on the scrutiny and hassles of going public, but weighed down by the heavy debt load and the realization that a stock offering was the only feasible way to keep expanding the company, Walton took the company public in October, 1970. In the space of one day, Sam was out of debt and would never have to personally contribute another dime to Wal-Mart’s expansion. The stock sold out immediately, and of course a major expansion ramp-up was to come. By 1974, Louisiana, Tennessee, Kentucky and Mississippi had received their first Wal-Mart stores.
Then Sam, age 56 at the time, did something that is not well-remembered today and in retrospect seems more than a little surprising. In November 1974, he resigned as Chairman and Chief Executive Officer of Wal-Mart and turned the reins of the company over to a younger man.

The new Wal-Mart chief was 40-year old Ron Mayer, a former Duckwall-ALCO executive who more recently was a Wal-Mart vice president, instrumental in setting up the first version of Wal-Mart’s vaunted computer infrastructure. Walton moved over into a new position, chairman of the executive committee, an oversight position in most companies. He even gave up his office to Mr. Mayer, moving down the hall and out of the way. Had things remained as they were, Sam would have had plenty of time to perfect his tennis game and bird hunting skills, and Wal-Mart would have probably become a decent-size regional player, and probably an eventual acquisition candidate for the likes of Kmart or Target, no offense to Mayer intended.

The vigorous Walton, try as he might, learned quickly that standing on the sidelines was not something he could do. In June 1976, Mayer stepped aside and Walton reassumed leadership of the company. Sam was frank when interviewed about it by the Wall Street Journal –Mayer had left “because I wasn’t able to assume a passive role… I wasn’t about to force myself to stay out” of the company’s decision process. Walton offered Mayer a vice chairmanship, but he declined and chose to leave the company instead. The founder was now back in charge. By the end of 1979, Wal-Mart had 278 stores, over a billion dollars in sales, and operated in 11 states. The magic circle was growing.

The photos above are from 1976, 1978 and 1979 respectively. These pictures remind me of the very first Wal-Mart store I ever laid eyes upon, around 1976, years before I (and much of America) learned of the company’s famous founder. In the early 70’s, my stepfather bought a small farm in rural west Tennessee. It was a rustic place, with a creaky old farmhouse without air conditioning. We’d spend about three weeks there every summer, and many years we would drive down the day after Christmas and spend the rest of our Christmas break there, trying to keep the pipes from freezing. The summers were definitely a shock to the system of this 12-year old Chicagoan, used to spending my vacations lying around the house, watching reruns of Petticoat Junction and Green Acres. Now I was digging postholes and sweating like I never had in my life. (Fresh Air! Bah. Of course now I look back at it as great experience, naturally.) The Wal-Mart location was in Martin, Tennessee, a college town, and was Wal-Mart’s third or fourth store in the state. I clearly remember thinking that it had to be the single store of a family-owned business. Regrettably, we never set foot in the place, and it would be years before I would experience the wonder of Wal-Mart.

6 comments:

  1. I'm curious about the Sports Center signs. What was going on with that?

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  2. The sports center signage is new to me, but I suspect that it refers to the stores having a sporting goods department which likely carries local team letterman jackets, gym bags, etc. given the size of the towns served, which was a market often served by mom and pop sporting goods stores. If this is correct, then Wal-Mart's impact on the independent businesses of these towns was certainly a harbinger of the future, as that would have spelled the end for many of them.

    As Sam Walton, put it, it was the customers who voted with their feet(and dollars), he was just doing what he could more efficiently than the small retailer. As long as he remained a small regional, Wal-Mart's impact would probably have been less controversial, though the towns which Wal-Mart was dominant would have still be affected the same way, it would have flown under the national radar.

    I'll admit I'm guilty of pointing the finger at Wal-Mart, but Sam did speak the truth, no one forced the customers to shop Wal-Mart and abandon the competition, however, Wal-Mart long undercut the competition, even in its early days, and one would feel foolish to deliberately pay more for the same you could get at Wal-Mart, as most consumers don't perceive their shopper WalMart would have led to the demise of many a downtown business and other competing retailers in their small town. In true free enterprise, survival of the fittest ultimately wins out.

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  3. Steven - I've never seen it officially explained, but my guess is because W-M's original Ozarks market area is a hotbed of outdoor sports activity - hiking, fishing, boating and especially hunting. They probably stopped using it (substituting "We Sell For Less" in its place) in order to present a broader image.

    Ken - Great insights. And if it hadn't been Wal-Mart, it probably would have been someone else filling their current role. Many other chains folded long before Wal-Mart was a factor in their markets. And sadly, there's been quite a bit of pressure on "Mom and Pop" outfits for the entire postwar era.

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  4. Oh, gosh, how I have missed this site!!!

    Even the vintage photos of Walmart show a more boring and subdued store.

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  5. Ken your comments are right on the mark. Everybody says horrible things about Walmart, especially on these history retail sites. When all Sam Walton did was want to provide good products and services to as many people as possible, at a good price. And that is exactly what he did, and Walmart continues that same basic business model today. And as you said, no one forces people to shop at Walmart, people are just making their own choices

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  6. Didi - Thanks and welcome back! I agree that their decor has always been low key compared to others.

    Jamie - Thanks, and well said.

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