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To give you a sense of how much I enjoyed Sam Walton:Made in America, I'll tell you that I earmarked just about every other page in the book. Sure, the idea of Sam Walton and the Wal-Mart (NYSE:WMT) empire doesn't sit well with some. Here's a family that by far is the wealthiest in the world. In the latest Forbes report on the world's wealthiest people, Christy Walton, Jim Walton, S. Robson Walton, Alice Walton, and Helen Walton are all in the top 25, with holdings in excess of $15 billion each. But if you have written this book off as some sort of an apology for the wealth created by the Sam Walton family, think again. Walton acknowledges in this work that there are detractors who see Wal-Mart's business model almost like an environmentalist might view Exxon Mobil (NYSE:XOM). He writes:
"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 a 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."
The model that made it possible
He later adds, "What happened was absolutely a necessary and inevitable evolution in retailing, as inevitable as the replacement of the buggy by the car." Consumers chose Wal-Mart over shopping at the local variety store. Why? From Walton's perspective, the "efficiency" of Wal-Mart's business model saves the consumer billions of dollars. He provides an example: From 1982 to 1992, Wal-Mart averaged roughly $13 billion a year in sales. Using conservative figures, he estimates that customers saved 10% "over what they would be paying" if Wal-Mart wasn't there. In other words, over that 10-year period, consumers -- many of them residing in rural and small-town America -- saved $13 billion.
What magical formula of Wal-Mart's business model made it all possible? Hint: It's the same one employed by Target (NYSE:TGT), Kohl's (NYSE:KSS), Dick's (NYSE:DKS), Costco (NASDAQ:COST), Home Depot (NYSE:HD), and a huge list of other major retailers -- discounting.
The formula is simple: Increase scale to maximize discounting. The size of the store and of the overall company is important, since the larger the order, the greater the potential for savings. But that's only part of the equation -- the foundation of Wal-Mart's philosophy is discounting. Sam explains:
"Say I bought an item for 80 cents. I found that by pricing it at $1.00 I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater."
Oh yeah . and the other principles that made it all possible
This discount model is what made it all possible. Mostly. In reality, there are so many variables that came together to make this fairy-tale story of the entrepreneurial spirit a reality. Sam Walton's retail beginnings were humble - he started out in 1945 in Newport, Ark., a town with a population of 7,000, operating a store with annual sales of just $75,000. From there, he went to Bentonville, Ark., (population 3,000) in 1950, and opened the first Wal-Mart in 1962. In the fiscal year ending in January 2006, the company totaled $312 billion in sales derived from 1,209 Discount Stores, 1,980 Supercenters, 567 SAM'S CLUBs and 100 Neighborhood Markets, not including its various overseas operations. Considering all this, we realize just how remarkable the Wal-Mart story is.
This is a story about making a commitment, sharing profits with associates, motivating partners, communicating well, appreciating what associates do for the company, taking time to celebrate success, listening to everyone in the company, exceeding customer expectations, controlling expenses better than the competition, and last but not least, "swimming against the stream" - being willing to take risks even when everyone else is betting on failure.
A valuable lesson
These are valuable lessons not just for business owners, but also for folks like you and I, individual investors looking to place our hard-earned money in the best group of companies we can find. If you want to find solid long-term investment opportunities in which to build wealth, consider starting with these principles as a guide to weed out the ones who will become extinct in a few years. You'll be left with those who have the chance to become the next Wal-Mart.
Would you buy Wal-Mart today for a nickel a share? Of course you would, and the Motley Fool Hidden Gems newsletter can help you find the next company poised to become a household name. Try it free for 30 days.
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. Wal-Mart is an Inside Value recommendation. The Fool has a disclosure policy.
