Is America’s Richest Family’s Wealth at Risk?

The Walton family has a lot on the line, can Wal-Mart's new leadership deliver?

Jul 27, 2014 at 6:03PM

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The heirs of Wal-Mart's (NYSE:WMT) founder Sam Walton are an American dynasty. The closest thing we have in the United States to an aristocracy, they are the richest family in America, edging out the second-wealthiest family, the Koch Brothers, by a reported $63 billion.

For perspective, if the Walton family wealth were held by one person, that would be the richest person in the world by nearly two-fold; the family's wealth is an estimated $152 billion versus Carlos Slim's reported $80 billion .

And on the surface things look good: the economic engine of that wealth -- Wal-Mart stock -- is sitting near five-year highs. Beneath that, you find the biggest threat to the Walton Family's wealth: complacency.

A logistical powerhouse
Complacency wasn't something that described the Wal-Mart of the past. After a successful retail career, patriarch Sam Walton opened the first Wal-Mart store in 1962. Within 10 years the scrappy retailer added 50 more stores, recorded sales of $78 million, and had its stock added to the New York Stock Exchange.

The victorious cycle continued by a relentless focus on two things: logistical and distribution chain excellence and a ruthless focus on containing costs and passing them on to the customer. The tight and focused supply chain was the disruptor, giving Wal-Mart a competitive advantage. In turn the company would return a portion of those savings to the customer under the "Every Day Low Prices" banner.

Walton's vision culminated in leading the Fortune 500 in 2002. In the decade-plus that's followed, Wal-Mart has fallen no lower than second place.

Disruptor, meet disruption
Being atop the Fortune 500 list is an impressive accomplishment, but let's be fair – it only measures gross revenues, not revenue growth. And in the relative shark tank that is retail, if you aren't moving forward you are slowly dying. Compared to the decade prior, 1992-2002, revenue growth per year from 2002-2014 dropped substantially: 7.3% versus 16.6% -- eventually culminating in a disappointing year-over-year growth of 1.6%. As far as valuations go, the company is still looking to eclipse the market cap established in the early '00s.

There are many reasons for this -- online retailer Amazon and club-giant Costco among others are disrupting Wal-Mart's model. For example, Amazon grew revenue an astonishing 30.7% per year from 2002-2013 whereas Costco grew it 9.5% per year.

To be fair, outside of Amazon and Costco, there's been scant successful innovation in retail since Wal-Mart logistical management. That's especially true when it comes to showrooming. Most innovations focus on product delivery (Amazon's e-retailer model) or revenue capture (Costco's annual-membership warehouse club model). While it is prudent to note that Wal-Mart has its own discount club, Sam's Club, it hasn't been nearly as successful as Costco; Costco's perfected this business model.

There's limits to Wal-Mart's current model
There are limits to Wal-Mart's low-cost business model. Where many articles have been written about Wal-Mart's low wages, it is more prudent to evaluate Wal-Mart's employees from a productivity standpoint. While the acrimonious debate swirls about wages, focusing on what Wal-Mart is getting out of its employees is just as important to the long-term health and vitality of the company. And to be honest, Wal-Mart hasn't been good here.

Wal-Mart20032013
Total Revenue (millions) $231,577 $476,294
Total Employees (millions) 1 2.2
Revenue per employee $231,577 $216,497

Source: Revenue:10Ks: Total Employees 2003, 2013

As you can see, Wal-Mart is actually getting less out of each employee than it was in 2003. In the last decade plus, hallmarked by huge productivity gains, Wal-Mart employees are actually less productive than they were in 2003 when measured on a revenue-per-employee standpoint.

Although there are outside factors that could weigh on these results -- like part-time versus full-time mix and international employees versus U.S. -- those don't appear to explain the lack of revenue growth per employee on an inflation-adjusted basis. At the long-run rate of inflation (3%), Wal-Mart employees would need to provide revenue per employee of $311,200 in today's dollars to be as productive -- a figure nearly $100,000 more than today's figures.

That's not to say these individuals aren't hard working, but it does point toward an organization that's complacent in challenging its employees.

Final thoughts
Wal-Mart's built an empire on the back of disruption. The problem with logistical management as a disruptive force is it's eventually replicable. The greatest threat to the Walton Family wealth –much of it in Wal-Mart stock – is a slow slide toward irrelevance.

And while that's hard to imagine right now, there are signs the Waltons -- among other levels of Wal-Mart leadership -- are looking to head in a new direction. Recently, U.S. CEO Bill Simon unexpectedly left the company amid disappointing U.S. store sales for the last five quarters. CEO Doug McMillon is also new, taking the reins on Feb. 1.

Of course, Wal-Mart has 2.2 million ways to change its narrative. Each employee has the potential to add value to the customer's experience. As the largest private employer in the U.S., Wal-Mart has a built-in advantage to grow a sluggish top line. Let's hope these recently appointed executives get the memo … the Waltons have billions on the line.

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Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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