A Low-Cost Empire: How Sam Walton Made His Billions
In the first quarter of 2016, Wal-Mart made $115.9 billion in revenue. During that same time, Sam's Club made $13.6 billion in revenue. Combined, that's almost $130 billion from two chains that happen to be owned by the same company: Wal-Mart Stores, Inc. And all that comes from selling $1.98 boxes of Better Cheddar crackers and 36 boxes of Kleenex for $43.92. This low-cost empire is the vision of one Oklahoma-born man who believed that by cutting overhead, he could make billions. He was right. Here's the story of Sam Walton, founder of Wal-Mart and Sam's Club.
Walton was born in the small town of Kingfisher, Oklahoma in 1918, the son of a banker. He was an Eagle Scout, student council president and quarterback of the state champion football team. In other words, an "all-American boy." After graduating from the University of Missouri, he became a management trainee with the J.C. Penney Company, which at the time was a relatively small regional department store. But on December 7th, 1941, Pearl Harbor was bombed. After that, like most men his age at the time, the twenty-three-year-old Walton became a soldier. He served as an Army captain and was discharged two days after Japan's surrender. Upon returning stateside and looking to go into the retail business, he convinced his father-in-law L.S. Robeson to lend him $20,000 so he could buy a Ben Franklin franchise, a cheap arts and craft variety store that still exists today. Walton (along with his brother) would go eventually own fifteen Ben Franklin franchises by the mid-1950s. However, Walton made an even more significant decision at that time, one which preserved - and later increased - his riches for years to come.
In 1954 on advice from his father-in-law, Walton and his brother formed Walton Enterprises, a family-owned LLC that still owns at least half of Wal-Mart's shares today. Doing so allowed him to immediately give away stakes in the company to his children, the oldest at the time being only nine years old. This shrewd move also allowed him to reduce his individual stakes and, therefore, his tax bill. While the company wasn't worth much in 1954, it was worth millions decades later. This keen forward-thinking or, depending on interpretation, finding of a loophole allowed him to avoid certain estate taxes and save he and his family millions. As he wrote in his autobiography, Sam Walton: Made In America, "The best way to reduce paying estate taxes is to give your assets away before they appreciate."
Another one of Walton's tricks was opening stores in towns with small populations, something he was doing way back when he owned that batch of Ben Franklins. While he originally put his stores in smaller communities to avoid competition and because he believed that rural areas deserved access to a larger variety of goods and cheaper prices, his success came at the cost of small businesses. Going toe-to-toe with the local mom-and-pop shops, Wal-Mart was able to provide more items at cheaper prices. To this day, many fault Wal-Mart for the destruction of America's small businesses.
In 1962, Walton expanded several of his Ben Franklin stores into what he called "Walton's Family Center" (starting a trend of naming stores after himself), which were essentially just larger versions of the stores. Revenue rose, so much so that he approached the owners of Ben Franklin with a dramatic idea - a chain of stores (run by Walton, of course) that sold items with only a markup of only about 12%, as opposed to the traditional 25%. They quickly said no to him, so Walton decided to go into business for himself.
On a very hot August day in 1962, Sam Walton opened Wal-Mart Discount City #1 in Rogers, Arkansas. While Wal-Mart's official history may say otherwise, it didn't go particularly well. According to Bob Ortega's book, In Sam We Trust, Walton had a truckload of ripe watermelons delivered for the opening. Always one to find a way to cut overhead, he simply had them dropped at the entrance with no display or set-up. In addition, he had hired a few donkeys to give kids rides. Needless to say, these two disparate decisions combined with the added element of oppressive summer heat didn't end very well. "The sweet, sticky juices of the watermelons flowed across the [parking] lot," wrote Ortega, "mixing in with donkey manure to form a disgusting, funky mess that customers tracked all over the store on their shoes."
This amusing story became part of another Walton business strategy. Always loathing the complicated nature of getting goods to stores and the enormous amount of involvement from middlemen, he began to operate his own distribution centers. Basically, Walton would buy goods straight from the manufacturers, have them delivered in bulk to either particular stores or a warehouse operated by Walton and then a fleet of Walton-owned trucks would deliver the cargo to his stores. In essence, he cut costs by becoming his own middleman.
Walton's business plan worked. By 1969, there were eighteen Wal-Marts scattered across the Midwest, all making a good profit, and all because he found unique ways to cut cost. Besides finding towns where his stores would be the only competition, he also was willing to occupy buildings other retailers "sneered at" - like an abandoned bottling plant or hollowed out factories with water pipes sticking out - literally big, boxy stores.
In 1970, Walton went public on the New York Stock Exchange (with Walton Enterprise still keeping 61% of the company) and he was soon a millionaire. To this day, the Walton family is still the richest family in America with their net worth at an astounding $130 billion.