The below write-up is part of a series that draws on patterns that I find interesting in the build up of some of the world’s most successful companies.
In my sophomore year in college, our administration introduced a new bus route called the “Walmart path” — the bus would take students from the campus to Walmart every Wednesday. Within two weeks of launch, the route became the busiest of all outbound trips from the campus. The Walmart trip used to be one of the highlights of our week.
In 2014, a year after I graduated, Walmart became the highest revenue company in the world.
Recently, I started researching brands for which I’ve had the greatest affection as a customer. Walmart ranked at the very top of this list. In the below post, I’ve highlighted a few counterintuitive patterns that mark the development of some of the most successful companies.
The Birth of Walmart:
In 1945, after struggling as an associate in J.C. Penney’s retail business, Sam Walton used $5,000 of his personal savings to purchase a small retail outlet called the Ben Franklin Store. At the time, the store was losing significant amounts of money.
Over a five-year period, Sam was able to turn the business around — a consistent focus on cheaper merchandise and lower prices helped increase sales volume and overall profits. However, five years later, the store came to an abrupt closure. Sam had made an amateur mistake of signing a lease without a renewal clause. Since the store had developed a strong brand, the landlords refused to renew the lease, and instead launched their own storefront on the property. In his autobiography, Sam wrote:
“It was the lowest point of my life. I felt sick to my stomach… I had built the best variety store in the whole region and worked hard in the community. I had done everything right and now I was being kicked out of town.” — Sam Walton
In subsequent months, Sam quickly launched a new store called Walton’s Five and Dime. By the end of the 1950s, the chain had scaled to 15 stores across the country, operating on the same formula of using low prices to build scale. However, the stores delivered mediocre profitability despite the stickiness of the brand.
In 1965, Sam launched Walmart based on a realization that large-scale retail stores could bring unparalleled cost efficiencies to the retail business. About 50 years later, Walmart became the largest revenue company in the world, establishing large-scale retail stores as an industry standard. In studying businesses that tend to travel the longest distance — a few common patterns emerge.
- Learning to survive, endure and ultimately thrive —
Some of the most iconic companies tend to fumble initially, taking on initial failures before landing on breakthroughs. The path to success is paved with failures along the way.
In the making of Walmart, the first phase was that of learning to survive — from overcoming initial amateur mistakes (e.g. signing leases for stores without renewal clauses) to navigating low margins in the retail business, the team learned the survival code via the first successful venture (the Ben Franklin Store), which ultimately fell apart.
The second phase was that of learning to endure — this came in the form of building and scaling Walton’s Five and Dime to 15 properties with healthy profits.
It was only during the final phase of Sam’s entrepreneurial journey that Walmart was born — through years of experience in the retail space, the team had learned how to do things better, cheaper and faster. In the case of Walmart, the breakthrough came in the form of realizing that larger stores could drive major cost efficiencies. In the process, Walmart transformed an entire industry.
- Building something that customers cannot live without —
For consumer businesses that travel the distance, a common pattern is the strength of the product-market fit. Very few companies are able to deliver an experience that customers cannot live without.
One way to quantify customer love is through a simple litmus test — if our product or offering was unavailable to customers on a given day, would they find creative and desperate ways to gain access? Would customers email us or call our helpline to regain access, or would they move on? This is often one of the leading indicators of a product or service that has transformative potential.
Back in college, if/when the Walmart bus route was full, students immediately defaulted to the next best option — finding a friend who had a car. If that didn’t work, then we would find someone to split a cab with. The weekly trip to Walmart was a must-have.
Students loved going to Walmart. From doormats and mosquito repellants to kettles and pillows, the store was a one-stop-shop. Walmart also made us feel rich — we could buy a lot with just $20. The price delta between Walmart and the next best alternative was significant.
- Innovation often happens deep in the trenches —
In most cases, true innovation comes at low levels of detail — some of the highest impact breakthroughs result from doing ordinary things in extraordinary ways.
In the case of Walmart, the biggest drivers of innovation were concentrated in the details of close-to-source procurement practices and operating efficiencies that stemmed from larger stores. It took the Walmart team many years of iterations to ultimately land on a superior operating model for large-scale retail stores.
In the 1960s, Walmart pioneered the industry’s transition toward large-scale retail stores — the conviction to move in that direction stemmed from a deep understanding of the P&L and the cost structures. The largest concentration points in the cost structure of a retail business are fixed in nature and can be optimized by spreading these costs over a large base of sales volume. Walmart’s innovation came by engaging at low levels of detail.
Thanks to Aatif Awan and Muhammad Sheharyar Javed for reviewing and commenting on drafts of the above post.
Last updated: November, 2022