#154 - Counting Pennies
Lessons in Frugality from Wal-Mart Founder Sam Walton
Hi 👋 - Frugality is a common trait among successful businesses. Sam Walton, Wal-Mart’s founder, provides a masterclass in lean operations. Today, lessons in frugality from Wal-Mart, based on Walton’s autobiography Made in America. As always, thanks for reading.
“Waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything.” – Benjamin Franklin
A Penny Saved Is A Penny Earned
Sam Walton was a man in a hurry. Still, a penny could stop him in his tracks. Even as he topped the Forbes charts as the richest person in America, he’d bend over to pick one up. Wal-Mart’s founder couldn't leave Abraham Lincoln hanging. Frugality was part of his DNA. It was part of Wal-Mart’s too.
Although he was worth billions, Walton drove an old pickup truck (often with one of bird dogs riding shotgun), flew coach1, stayed at Holiday Inns, and got his hair cut at the barbershop off the town square in Bentonville, Arkansas. Wal-Mart's executive offices looked like something you’d find in a truck terminal: sagging floors, fluorescent lights, and walls covered in inexpensive paneling. David Glass, the company’s CEO from 1988 to 2000, quipped that if he hadn’t read the proxy statement, he’d have sworn that Walton was broke. Rodents might have influenced Glass’ perception. A 1990 magazine profile described Walton’s hunting camp this way2:
This is a camp where your host hands you your towel, points you to a bedroom in the trailer, and explains: ‘Don’t let the noise in the ceiling worry you, it’s just rats.’
Even the origin of Wal-Mart’s name is thrifty. The main reason was that Walton liked Sol Price’s Fed-Mart (a precursor to Costco), so he riffed on it. But the kicker was that neon lights were expensive, and Wal-Mart only had seven letters; much cheaper than Benjamin Franklin which had 16. Walton firmly believed that every dollar spent on nicer hotels or clubbier offices translated into higher costs for Wal-Mart’s customers. That was anathema.
The Great Depression
Walton was born in 1918 in Kingfisher, Oklahoma. Like many of his generation, growing up during the Great Depression left a lasting impression and shaped his relationship with money. Sam’s father, Thomas Gibson Walton, held a variety of jobs, including servicing farm loans for Metropolitan Life Insurance. During the Depression, he had the unenviable task of repossessing hundreds of farms, which Sam experienced firsthand as a teenager.
His parents – Thomas and Nancy – were thrifty 3:
One thing my mother and dad shared completely was their approach to money: they just didn’t spend it.
At age seven, Walton began selling magazine subscriptions to help support his family. By seventh grade, he was delivering papers, a job he held throughout college. On the side, he raised and sold rabbits and pigeons. This, coupled with the Great Depression, instilled a deep respect for the dollar4:
We learned how much hard work it took to get your hands on a dollar, and that when you did it was worth something.
Satisfaction Guaranteed
Decades later, this attitude would permeate Wal-Mart from the boardroom to the stockroom. Like many great businesses, Wal-Mart is obsessed over its customers. Walton knew they worked hard for their paychecks, and wanted to ensure they got their money’s worth. The company’s tenants are customer centricity, low prices, and satisfaction guaranteed. Frugality served all three5:
Sometimes I’m asked why today, when Wal-Mart has been so successful, when we’re a $50 billion-plus company, should we stay so cheap? That’s simple: because we believe in the value of the dollar. We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money. Every time Wal-Mart spends one dollar foolishly, it comes right out of our customers’ pockets. Every time we save them a dollar, that puts us one more step ahead of the competition—which is where we always plan to be.
The most profitable customers are loyal customers. To win customers, Wal-Mart had to offer low prices. To retain them, Wal-Mart had to maintain low prices. Running lean was the way to do this.
Behind the parsimony was the knowledge that shoppers vote with their feet. Since graduating the University of Missouri in 1940, Walton had worked in retail and seen many businesses rise and fall. The only thing that could guarantee job security was customer satisfaction. If a competitor undercut Wal-Mart, shoppers would flee. Like the foreclosed farms he saw during the Great Depression, success could vanish overnight6:
Because our sales and earnings keep going up doesn’t mean that we’re smarter than everyone else, or that we can make it happen because we’re so big. What it means is that our customers are supporting us. If they stopped, our earnings would simply disappear, and we’d all be out looking for new jobs. So we know what we have to do: keep lowering our prices, keep improving our service, and keep making things better for the folks who shop in our stores. That is not something we can simply do in some general way. It isn’t something we can command from the executive offices because we want it to happen. We have to do it store by store, department by department, customer by customer, associate by associate.
Like dogs and their owners, businesses tend to take after their founder. When it came to frugality and stewarding capital, Walton led from the front. Once, when opening a new store, he and a group of managers slept in a sleeping bag on the floor of an employee’s home to save money. When on the road and not curled up in a sleeping bag, he was doubled up at a budget hotel. Wal-Mart was not a three martini lunch type of place. Hell, even ordering a martini in Bentonville might get you fired7:
I wonder if a lot of these companies wouldn’t do just as well if their executives lived a little more like real folks. A lot of people think it’s crazy of me to fly coach whenever I go on a commercial flight, and maybe I do overdo it a little bit. But I feel like it’s up to me as a leader to set an example. It’s not fair for me to ride one way and ask everybody else to ride another way. The minute you do that, you start building resentment and your whole team idea begins to strain at the seams.
Despite success, Walton was perpetually dissatisfied – there was always something to improve. Change or die was his mantra8. He carried around a yellow legal pad and tape recorder when he visited stores and competitors9, which he did constantly, always taking notes and soliciting associates for how to improve things. It wasn’t uncommon for him to start his morning at 4am by bringing a box of donuts to the truckers’ break room to ask them what they were seeing at stores.
Walton was the epitome of skin-in-the-game. Saturday morning meetings – a time for managers to share information, work through tricky problems, and cross-pollinate successful tactics between stores – epitomize his management philosophy. Walton felt deeply that if the associates were working weekends, managers shouldn’t be out on the golf course. He also knew that the time to deal with a problem was today. The effect was making operating efficiently an all-hands-on-deck endeavor with buy-in from around the company, not just the penny-pinchers on the finance team. Culture eats strategy, and Walmart’s culture would be difficult to replicate, especially if it wasn’t ingrained at inception. To paraphrase Nick Sleep, good things happen when you care about pennies.
Staying Alive – Frugality & Corporate Strategy
Wal-Mart made money by controlling expenses. It’s obsessed with undercutting competitors. Controlling expenses better than anyone else is one of Walton’s operating North Stars. Frugality provides a pair of shock absorbers and creates competitive advantage10:
This is where you can always find the competitive advantage. For twenty-five years running—long before Wal-Mart was known as the nation’s largest retailer—we ranked number one in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.
CEOs should write those last two sentences out on a chalkboard 100 times at least once a year. That’s because exogenous shocks are regular occurrences: recessions, wars, pandemics, market crashes, whatever FTX was. Great businesses compound over decades and compounding takes time to work its magic. Avoiding fatal blow-ups is a precondition. Efficient operations are more resilient to shocks, providing a longer runway for compounding.
Companies have far more control over expenses than revenue. I’ve been through enough planning cycles to know that expenses show up with a far higher degree of probability than revenue. Cutting costs is always an option; the constraint is managerial fortitude. Walton had no sympathy for managers who punted tough decisions:
Anytime a company grows as fast as Wal-Mart has, pockets of duplication are going to build up, and there will be areas of the business which we may no longer need. No boss or employee really likes to dwell on such matters: it’s only human nature not to want to have your job, or the jobs of the people who work for you, eliminated. But it is absolutely the responsibility of a company’s top management to be thinking about this issue all the time—to ensure a sound future for the overall company.
Investing for Competitive Advantage
One of Wal-Mart’s advantages is that it is started in Bentonville, Arkansas. The small town provided convenient access to four different quail hunting seasons11 – Walton was an avid hunter – and not much else. However, avoiding the spotlight suited Wal-Mart. The company’s growth strategy focused on smaller towns that other retailers passed by; places like Carthage, Missouri, Claremore, Oklahoma, and Jackson, Tennessee. Flying under-the-radar gave it time to hone its operations. As it grew, Walton knew that it would face more competition and that the way to handle this was keeping costs as low as possible.
Being cheap doesn’t mean you can’t invest. While Walton would never pay to fly business class or stay in a fancy hotel on the company’s dime, he shelled out for major projects that deepened Wal-Mart’s moat. Over the years, this included computer systems, distribution centers, a trucking fleet, and satellite communications connecting stores.
The company’s distribution network is a prime example. Wal-Mart invested heavily in distribution and transportation to lower costs and increase flexibility (it’s worth noting that Jeff Bezos closely studied Walton and Wal-Mart). A typical Wal-Mart store carried 80,000 SKUs. About 85% of these could be directly replenished from a Wal-Mart warehouse compared to 50-60% at competitors. Additionally, Wal-Mart could replace stock from its warehouses in two days, compared to about five days for competitors. Building out a distribution network gave Wal-Mart a speed advantage, more flexibility, and cost savings. When Made in America was published in the early 1990s12, the company spent 3% of revenue shipping goods to stores versus 4.5-5% for competitors. That’s a tremendous advantage in the hyper-competitive world of discount retailing.
Walton never forgot the importance of a basis point here and a penny there.
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More Good Reads and Listens
Founders Podcast on Sam Walton and Sol Price. Thomas Reiner of Platform Aeronaut on Booking.com’s frugal culture around stock-based compensation. Frugality was one of the traits that investors Nick Sleep and Qais Zakaria targeted in their investments at Nomad Investment Partnership. Below the Line on Nomad’s investing process: part 1, part 2, and part 3.
As Wal-Mart expanded, Walton would eventually buy a used plane that he piloted himself to visit stores and scout real estate.
Sam Walton, Sam Walton: Made in America, June 1993.
Sam Walton, Sam Walton: Made in America, June 1993.
Sam Walton, Sam Walton: Made in America, June 1993.
Sam Walton, Sam Walton: Made in America, June 1993.
Sam Walton, Sam Walton: Made in America, June 1993.
Like Buffett, Walton lived a lifestyle well below his means. He shunned ostentation:
It goes back to what I said about learning to value a dollar as a kid. I don’t think that big mansions and flashy cars are what the Wal-Mart culture is supposed to be about. It’s great to have the money to fall back on, and I’m glad some of these folks have been able to take off and go fishing at a fairly early age. That’s fine with me. But if you get too caught up in that good life, it’s probably time to move on, simply because you lose touch with what your mind is supposed to be concentrating on: serving the customer.
Walton on the necessity of change:
So I’ve made it my own personal mission to ensure that constant change is a vital part of the Wal-Mart culture itself. I’ve forced change—sometimes for change’s sake alone—at every turn in our company’s development. In fact, I think one of the greatest strengths of Wal-Mart’s ingrained culture is its ability to drop everything and turn on a dime.
Walton proclaimed that he’d been in more Kmart stores than anyone in the world.
Sam Walton, Sam Walton: Made in America, June 1993.
Bentonville, Arkansas sits at the intersection of three other states: Kansas, Missouri, and Oklahoma.
Made in America was published in 1993, so these numbers are a bit stale. However, they’re indicative of the types of projects that Wal-Mart would invest heavily in.