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Chapter 12 Making the Customer Number One
  "Sam Walton understands better than anyone else that no business can exist without customers. He livesby his credo, which is to make the customer the centerpiece of all his efforts. And in the process ofserving Wal-Mart's customers to perfection (not quite perfection, he would say), he also servesWal-Mart's associates, its share owners, its communities, and the rest of its stakeholders in anextraordinary fashionalmost without parallel in American business."----ROBERTO C. GOIZUETA,chairman and CEO, the Coca-Cola CompanyFor my whole career in retail, I have stuck by one guiding principle. It's a simple one, and I haverepeated it over and over and over in this book until I'm sure you're sick to death of it. But I'm going tosay it again anyway: the secret of successful retailing is to give your customers what they want. Andreally, if you think about it from your point of view as a customer, you want everything: a wide assortmentof good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy;friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience. Youlove it when you visit a store that somehow exceeds your expectations, and you hate it when a storeinconveniences 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 ofyou who've been around as long as I have, and who spent your early days in small towns too, it's nothard to remember how different small-town life was in the first half of this century. Newport was a prettyprosperous little town with a fairly competitive retail environment, but it's still a good example of howthings worked back then. It was a cotton town, which meant that a lot of the folks who shopped therereally lived outside of town on farms. Most of the men worked long hours in the fields, and most of thewomen worked at home. Very few women held jobs in those days, although a lot of them had workedduring the war, and they were beginning to think about going back to work when they got their familiespretty well underway.

The town itself had several small department stores, including, as I mentioned earlier, a Penney's and fora while that little Eagle Store I opened up. It also had a couple of good variety storesmine and JohnDunham's Sterling Store. There were drugstores, hardware stores, tire and auto storeslike Firestone andWestern Autoand little family grocery stores. In lots of little towns, you didn't even have many one-stopgroceries. You might have one shop that specialized in butchering meat, another that carried good freshvegetables, and maybe another that would wring a chicken's neck and dress it for you right there behindthe counter while you waited.

Folks back then weren't accustomed to all the variety and abundance of goods and services that wehave available today. During the Depression, few of us had enough money to shop very often, and duringWorld War II, everythingmeat, butter, tires, shoes, gasoline, sugarwas rationed. But by the time Istarted out, the shortages were pretty much over, and the economy was growing. Compared to theDepression 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 thewhole family would drive to town and spend a few hoursmaybe the whole daywalking around lookingfor what they needed in all the stores. Something had to attract them to a particular store, maybe acombination of things: the storekeeper's personality, the freshness of the goods, the pricesan ice creammachine. We thrived in that competitive environment.

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


"Saturdays around the Bentonville square were really something special. Dad always had somethinggoing on out on the sidewalks or even in the streets, and there was always a crowd. That's where SantaClaus would come, and that's where we had all the parades. To me, as a kid, it seemed like we had acircus or a carnival going on almost every weekend. I loved Saturdays. I had my popcorn machine outon the sidewalk, and I was covered up in business. Everybody wanted some of that popcorn, and ofcourse 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 alsowhere we encountered our first discounter competition Gibson's. We knew from then on that the retailbusiness was going to be changing in major ways for years to come, and we wanted to be part of it. Weknew early on that variety stores weren't going to be as big a factor in the future as they had been in thepast, and we were heavily invested in them. The important thing to recognize, though, is that none of thiswas 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 orKorea 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 hadat least one carand many had twoand the country had started building its interstate highway system, allof 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 bigdowntown department stores had to follow their customers and build branch stores out in the suburbanmalls. Traditional diners and cafes suffered because of the new car-oriented chains like McDonald's andBurger King, and the old city variety stores like Woolworth's and McCrory's just got smashed by Kmartand some of the other big discounters. The oil companies stuck service stations on practically every othercorner, and pretty soon something called convenience stores7-Elevens and suchcame along andstarted filling up the other corners. It was when all this began that Bud and I had opened that BenFranklin in the shopping center at Ruskin Heights, that big new subdivision community outside KansasCity.

For the most part up where we werein the small towns of northwest Arkansas, Missouri, Oklahoma,and Kansasyou didn't see much of the mall construction and fast food neon that you saw everywhereelse. McDonald's didn't go into the small towns, and neither did Kmart. You saw the small-towncommercial centers start to sort of shrivel up. A lot of our customer base had moved on, and the oneswho remained behind weren't stupid consumers. If they had something big to buysay a ridinglawnmowerthey wouldn't hesitate to drive fifty miles to get it if they thought they could save $100. Notonly that, but with the introduction of TV and new postwar car models, being modern had become a bigthing. Everybody wanted to feel up-to-date, and if they knew Kroger or somebody had a big newgrocery store in Tulsa or somewhere they'd drive in there to shop it. When they saw that the prices werelower and the selection was better, they would go back again and again, until somebody brought asupermarket to their town.

It was this kind of strong customer demand in the small towns that made it possible for Wal-Mart to getstarted in the first place, that enabled our stores to thrive immediately, and that eventually made itpossible to spread the idea pretty much all over the country. For many years, we lived entirely off theprinciple that customers in the country and in small towns are, just like their relatives who left the farmand moved to the city: they want a good deal as much as anybody. When we arrived in these little townsoffering low prices every day, satisfaction guaranteed, and hours that were realistic for the way peoplewanted 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 itmarked our return to Newport, Arkansas, nineteen years after we had basically been run out of town. Bythen, I was long over what had happened to us down there, and I didn't have revenge in mind. It was alogical town for us to expand into, and I admit that it did feel mighty good to be back in business downthere. I knew it was a town where we would do well. As it happened, we did extraordinarily well withour Newport Wal-Mart, and it wasn't too long before the old Ben Franklin store I had run on FrontStreet had to close its doors. You can't say we ran that guythe landlord's sonout of business. Hiscustomers 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. Somepeople 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 aresomehow the enemy of small-town America. Nothing could be further from the truth: Wal-Mart hasactually kept quite a number of small towns from becoming practically extinct by offering low prices andsaving literally billions of dollars for the people who live there, as well as by creating hundreds ofthousands of jobs in our stores.

I don't have any trouble understanding why some merchant who's having a hard time competing with uswouldn't be too happy about our being there. What I haven't been able to figure at all is these peoplewho have decided we're somehow responsible for the decline of the small town. My guess is that a lot ofthese 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 waswhen they left it back in 1954. It's almost like they want their hometown to be stuck in time, anold-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 supposedto go out to the intersections of highways and build malls with lots of free parking. That's just not the waysome of these people remember their old towns. But folks who grew up in big cities feel the same wayabout what's happened to their cities over the last forty or fifty years. A lot of the stores and the movietheaters and the restaurants that they remember loving as kids have boarded up and either gone out ofbusiness 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 wellknown as the small-town merchants that we became an easy target. Certain folks figured they couldcreate 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 amention of your company in one of these publications. When you become moderately successful, theystill ignore you unless something bad happens to you. Then, the more successful you become, the moresuspicious 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 thesmalltown retailing era than I do. That's one of the reasons we chose to put our little Wal-Mart museumon the square in Bentonville. It's in the old Walton's Five and Dime building, and it tries to capture a littlebit 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 thebest merchant in town," and just kept doing everything exactly the way we were doing it, somebody elsewould have come along and given our customers what they wanted, and we would be out of businesstoday. I don't know who it would have been. Maybe Gibson's or TG&Y would have pulled it off. But Isuspect it would have been a combination of Kmart and Target, which, like McDonald's, would haverolled 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 thereplacement of the buggy by the car and the disappearance of the buggy whip makers. The small storeswere just destined to disappear, at least in the numbers they once existed, because the whole thing isdriven 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 thesmall-town merchant isn't any different from what happened when supermarkets first appeared in thefifties. The whole point of retailing is to serve the customer. If you're a merchant with no competition, youcan 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 comesalong, don't expect your customers to stick with you for old times' sake. There are plenty of ways tocompete successfully with Wal-Mart or any other big retailer. The principle behind all those ways ispretty 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 justweren't doing a very good job of taking care of their customers before we, or somebody else, came inand offered something new. And they didn't do a very good job of reacting to our arrival either. Youknow, there have been articles, and even one little book, written on how to compete with us. And I'vegot a few suggestions of my own.

Unless small merchants are already doing a great job, they'll probably have to rethink theirmerchandising and advertising and promotional programs once a discounter arrives on the scene. Theyneed to avoid coming at us head-on, and do their own thing better than we do ours. It doesn't make anysense to try to underprice Wal-Mart on something like toothpaste. That's not what the customer islooking to a small store for anyway. Most independents are best off, I think, doing what I prided myselfon doing for so many years as a storekeeper: getting out on the floor and meeting every one of thecustomers. Let them know how much you appreciate them, and ring that cash register yourself. That littlepersonal touch is so important for an independent merchant because no matter how hard Wal-Mart triesto duplicate itand 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 theway Don Soderquist did when he was president of Ben Franklin. He saw that there just wasn't any futurein competing with Wal-Mart and Kmart so he started converting a lot of their variety stores into craftstores. They offered a much bigger assortment of craft merchandise than any Wal-Mart could, and theyheld classes in things like pottery and flower arranging, services we could never think about providing. Itworked. They stayed in business in the small towns and have been quite successful with many of thosestores. The same thing can be done with fabrics: offer higher quality material and throw in some sewingclasses. Or ladies' apparel. I don't care how many Wal-Marts come to town, there are always niches thatwe can't reachnot that we won't try. Just like everybody else, in order to survive, we need to keepchanging the things we do. Now in the case of hardware stores, I don't deny that we've been hard onsome 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 hardwarestore operator can just beat us to death if he thinks about what he's doing and commits to putting up afight. If he gets his assortment right and makes sure his salespeople have excellent knowledge of theproducts and how to use them, and goes out of his way to take care of his customers, he can keep plentyof business away from us. We don't have nearly the assortment of a hardware storeplumbing suppliesand electrical equipment and specialty tools. And not all of our folks can explain how to fix a leaky faucetor rewire a lamp the way folks in a hardware store should be able to. Our paint customers don't getwaited on much either. They have to pick out their own paint and then walk around with it looking for therest of the things they want. The same is true in sporting goods, where the customer can't expect to getnearly 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, aniche, and then you capitalize on it. And let me tell you, not all small merchants in these little towns hateus. 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 everhappened.' I thanked her and asked her what she did there in town, and she said, 'Well, I run a paintstore 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 hadsince her paint store opened. 'You're pulling all these people into our shopping center. And the neatestthing happened to me Saturday. A man came in looking for a particular kind of paint and said he knewwe had it. He said he knew because he'd been in the Wal-Mart looking for it, and the paint departmentmanager 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 takingcare of the customer. What makes me sad these daysand a little angry toois that some of these storesare starting to shut down before we come to a town. They hear we're coming, and they close up beforewe ever even get there. We get a bad rap for that, but to my mind somebody who'll close his store justbecause 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 mostwelcome in almost every community where we do business. That's partly because of our economiccontribution. But it's also because we go out of our way to instill a sense of community involvement in ourstore management and associates so that they'll be even better citizens. We know that some of our storemanagers do a better job at this than others, and it's a constant effort to make everyone work oncommunity involvement. We already have community scholarship programs and matching charity grantprograms, but we're working hard every day to improve the ways in which we give back to thecommunities we're in. If we ever let our sense of being hometown merchants slip too far, we run the riskof 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 wecan reasonably satisfy them. Occasionally, we will change a proposed location, or make someconcessions if they make sense to us. Today, though, we have almost adopted the position that if somecommunity, for whatever reason, doesn't want us in there, we aren't interested in going in and creating afuss. I encourage us to walk away from this kind of trouble because there are just too many other goodtowns out there who do want us. For every one that doesn't, I'd say we have another two hundredbegging us to come to their town. Wal-Mart wants to go where it's wanted. I've always said that thesimplest test of how right we are on this issue would be to go into any town where we've been for acouple of years and let everyone vote on whether they wanted us there or not. My Lord, they'd go crazyif we left. In fact, every now and then we do have to close up a store someplace because we just can'tmake 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 bysticking to our philosophy of putting the customer ahead of everything else. On the surface, the idea ofserving the customer sounds so simple, so logical, and so obvious. But from the very beginning, the waywe 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 fromselling to discounters like us because they hated what we were doing: offering our customers prices muchlower than theirs. In some states, the department stores used so-called "fair trade" laws to try and blockdiscounters from doing business at all.

Our vendors resented us for prying the lowest prices out of them. And some manufacturers'

representativesindependent sales agents who generally work on commission to represent severaldifferent manufacturershave complained about some of our practices. We don't have any problem withthe idea of paying a middleman a commission on a sale, if his services add value to the purchasingprocess by making it more efficient.

But from the days when I was hauling that little trailer over into Tennessee to buy panties and shirts andavoid paying Butler Brothers' markup, our philosophy on this has always been simple: we are the agentsfor our customers. And to do the best job possible, we've got to become the most efficient deliverer ofmerchandise that we can. Sometimes that can best be accomplished by purchasing goods directly fromthe manufacturer. And other times, direct purchase simply doesn't work. In those cases, we need to usemiddlemen to deal with smaller manufacturers and make the process more efficient. What we believe instrongly is our right to make that decisionwhether to buy directly or from a repbased on what it takesto best serve our customers.

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

To understand Wal-Mart's point of view on middlemen, and our relationship with our vendors, you haveto look back to our beginnings in the discount business. In the early days of the industry, mostdiscounters were served entirely by middlemen, jobbers, or distributors who came in and said to thoseold promoters, "We'll keep your shelves filled for 15 percent of the gross." In other words, the price onevery item included a 15 percent commission to the jobber for supplying the merchandise. That's how thefast-buck promoters got into the business without even having to think much like merchants. They tookwhat the jobbers gave them, added on the 15 percent, and still under-priced the department stores by along shot.

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


"There's a difference between being tough and being obnoxious. But every buyer has to be tough. That'sthe job. I always told the buyers: 'You're not negotiating for Wal-Mart, you're negotiating for yourcustomer. And your customer deserves the best price you can get. Don't ever feel sorry for a vendor. Heknows 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 anyroom for a kickback because we don't do that here. And we don't want your advertising program oryour delivery program. Our truck will pick it up at your warehouse. Now what is your best price' And ifthey told me it's a dollar, I would say, 'Fine, I'll consider it, but I'm going to go to your competitor, and ifhe says 90 cents, he's going to get the business. So make sure a dollar is your best price.' If that's beinghard-nosed, then we ought to be as hard-nosed as we can be. You have to be fair and upfront andhonest, but you have to drive your bargain because you're dealing for millions and millions of customerswho expect the best price they can get. If you buy that thing for $1.25, you've just bought somebodyelse'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 getby with anything because they are going to take care of themselves, and your job is to take care of thecustomer. I'd threaten Procter & Gamble with not carrying their merchandise, and they'd say, 'Oh, youcan't get by without carrying our merchandise.' And I'd say, 'You watch me put it on a side counter, andI'll put Colgate on the endcap at a penny less, and you just watch me.' They got offended and went toSam, and he said, 'Whatever Claude says, that's what it's going to be.' Well, now we have a real goodrelationship with Procter & Gamble. It's a model that everybody talks about. But let me tell you, onereason for that is that they learned to respect us. They learned that they couldn't bulldoze us likeeverybody 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 havegotten along just fine without us. Today, we are their largest customer. But it really wasn't until 1987 thatwe began to turn a basically adversarial vendor/retailer relationship into one that we like to think is thewave of the future: a win-win partnership between two big companies both trying to serve the samecustomer. Believe it or not, as big as we had become by then, I don't believe Wal-Mart had ever beencalled on by a corporate officer of P&G. We just let our buyers slug it out with their salesmen and bothsides lived with the results.

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


"During that time on the river, we both decided that the entire relationship between vendor and retailerwas at issue. Both focused on the end-user the customerbut each did it independently of the other. Nosharing of information, no planning together, no systems coordination. We were simply two giant entitiesgoing our separate ways, oblivious to the excess costs created by this obsolete system. We werecommunicating, 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 ofsoul-searching and thinking, and within three months we had created a P&G/Wal-Mart team to build awhole new kind of vendor-retailer relationship. We formed a partnership to conduct our business, withone of the most important outcomes being that we started sharing information by computer. P&G couldmonitor Wal-Mart's sales and inventory data, and then use that information to make its own productionand shipping plans with a great deal more efficiency. We broke new ground by using informationtechnology 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 animportant partner. The partnership was also a model for many of our other vendor relationships. In oursituation today, we are obsessed with quality as well as price, and, as big as we are, the only way we canpossibly get that combination is to sit down with our vendors and work out the costs and margins andplan everything together. By doing that, we give the manufacturer the advantage of knowing what ourneeds are going to be a year out, or six months out, or even two yearsout. Then, as long as they arehonest with us and try to lower their costs as much as they can and keep turning out a product that thecustomers want, we can stay with them. We both win, and most important, the customer wins too. Theadded efficiency of the whole process enables the manufacturer to reduce its costs, which allows us tolower our prices.

One thing we don't ever want to do, though, is let all these complex strategic issues between us andother big companiesor these controversies like small-town merchants and middlemenget in the way ofour thinking like customers, which may be the most basic way in which we make the customer numberone.


"I was in a store recently where a manager and an assistant manager were taking a department managerthrough her department. They were saying, 'If you were a customer, how would you buy that item' Shewas 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 findthem'

"I loved it. So many times we overcomplicate this business. You can take computer reports, velocityreports, any kind of reports you want to and go lay out your counters by computer. But if you simplythink like a customer, you will do a better job of merchandise presentation and selection than any otherway. It's not always easy. To think like a customer, you have to think about details. Whoever said 'retailis detail' is absolutely 100 percent right. On the other hand it's simple. If the customers are the bosses, allyou have to do is please them."I couldn't agree with David more. Everything we've done since we started Wal-Mart has been devotedto this idea that the customer is our boss. The controversies it has led us into have surprised me, butthey've been easy to live with because we have never doubted our philosophy that the customer comesahead of everything else.


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