CEO OF THE YEAR 1995
You have spoken. Chief Executive readers have nominated and a selection committee of peers has confirmed Wal-Mart’s David D. Glass [...]
July 1 1995 by JP Donlon
You have spoken. Chief Executive readers have nominated and a selection committee of peers has confirmed Wal-Mart’s David D. Glass as l995 Chief Executive of the Year.
“In a tough competitive business where execution counts a lot more than vision, David Glass has done an amazing job.” says Microsoft’s Bill Gates, 1991 Chief Executive of the Year and honorary chairman of the selection committee. “Wal-Mart is a model for how business can continue to deliver outstanding results.”
Though Glass walks in the shadow of the company’s charismatic, homespun founder, judges were keenly aware of the differences. “He’s not just following Sam Walton’s plan,” says Johnson & Higgins’ David Olsen. “He’s been working on his own plan for many years.” Adds Andersen Consulting’s George Shaheen, “Glass is without peer in retailing today. He created new ways to exploit technology as a strategic weapon and charged forward with a vision that continues to cast Wal-Mart as the company to watch. His phenomenal success is a textbook example of how you win, and win big.”
Performance measures outline the victory’s dimensions. On Glass’ watch, Wal-Mart sales exploded from $20.6 billion in 1988 to $82.5 billion in 1994. Net income more than tripled from $837 million to $2.7 billion. Are shareholders satisfied? Wal-Mart’s market capitalization soared from $15 billion to more than $54 billion today, producing annual stock price appreciation of about 20 percent.
“His vision of distribution systems and the ability to capitalize on information technology have fueled Wal-Mart’s expansion and results.” says Ryder System’s Tony Burns. Boeing’s Frank Shrontz, Deloitte & Touche LLP’s Mike Cook, and Data General’s Ron Skates credit Glass with striking a balance between vision and execution. “It’s leadership that maintains this on a sustained basis,” concludes Mellon Bank Corp.’s Frank Cahouet.
Chief Executive salutes David D. Glass, 1995 Chief Executive of the Year
David Glass is no San Walton, swapping the latter’s affability for expertise in distribution and technology. With Wal-Mart set to crack $100 billion sales, Glass is targeting global markets and adjusting to slower growth.
One may be forgiven for not immediately identifying David D. Glass from a lineup of leading executives as the CEO of the world’s largest and most successful retailer. The Mountain View, MO-born Glass is unlikely to don a Hawaiian grass skirt and dance the hula on Wall Street as his predecessor and Wal-Mart founder Sam Walton once did on a bet. Where Sam was avuncular in person and spellbinding in public, Glass is quiet-almost reticent-preferring to listen rather than talk. Nor would Glass be seen dressed in a pink tutu, riding on the back of a flatbed truck cruising the town square as Wall-Mart managers from Ozark, MO, once did to raise money for charity. From James Cash Penney, Stanley Marcus, Marvin Traub, and Leslie Wexner to Sam Walton, retailing is overstuffed with colorful personalities. Glass, 59, admits he has no charisma of this sort. His talents lie in a different direction.
Son of a feed-mill-operator father and a mother who worked as a uniform factory supervisor, David Glass earned a business degree at Southwest Missouri State University before working for a small Springfield, MO, drugstore chain, J.W. Crank Co. in 1960. He later joined another chain, Consumers Markets, where he came to the attention of Sam Walton, who, over the next several years, tried to hire him. Attending Wal-Mart’s second store opening in Harrison, AR, Glass was not impressed with the yet-to-be-legendary Walton. On that summer day, watermelons trucked in for outdoor sale and display exploded from the intense heat and soon mixed with the droppings left by a donkey brought in for kiddie rides. The mess was not auspicious for a store opening. Glass remembers telling Walton that maybe he should find another line of work. Thinking Glass “one of the finest retail talents” he had met, Walton persisted. Glass joined Wal-Mart in 1976 as executive vice president of finance, before rising to vice chairman and CFO in 1982, and president and COO in 1984. Walton’s first attempt at CEO succession proved a disaster. EVPs Ron Mayer and Ferold Arend became chairman/CEO, and president/C00, respectively, in 1974. By his own admission, Walton did not truly wish to retire, thus causing divided loyalties among management. Chastened by the experience, Walton took his time over a decade later in tapping Glass for the job and stepping down in earnest.
From its rise from a single discount store in Rogers, AR, in 1962 to more than 2,000 units in North America with more on the way in South America and Asia, Wal-Mart changed the competitive fundamentals of retailing. By locating large discount stores in small rural towns with “everyday low prices,” Sam Walton grew his company and its profits at an average annual rate of 25 percent. At its current rate of 18 percent, Wal-Mart should hit the $100 billion sales mark by the close of the fiscal year ending Jan. 31, 1997. By locating in obscure, one-horse towns, Walton avoided direct competition from urban-centered retailers such as Kmart, which throughout the 1980s, he held in awe. At the time, manufacturers had the whip hand in deciding what goods were available to which retailers. The distribution revolution changed all that. Wal-Mart was not the first to marry computers to retailing. But in building on the innovations of others, it forged an integrated supply chain, enabling vendors to exchange invoices, purchase orders, and other documents with Wal-Mart via electronic data interchange. Stores are linked to the Bentonville, AR, headquarters via satellite, enabling the $83 billion giant to track and rapidly replenish inventory, and reorder at will from any of its thousands of suppliers. Sharing data with vendors, Wal-Mart merchandisers track sales by store and by item for a 65-week period. Satellite video links enable store managers in real time to inform one another of what’s selling and what’s not. Wal-Mart Stores Division President Bill Fields observes, “Computers can always tell you what you’ve sold, not what you should have sold.” Addressing that conundrum, the company is working with the Teradata unit of AT&T Global Information Solutions to troubleshoot the store product mix with an expert system, software that reviews more than 50 million store and product combinations daily to make replenishment and marketing decisions. The collaboration also allows Wal-Mart to streamline basic customer transactions such as using scanners to automatically fill out and approve customers’ personal checks, thereby reducing delays at the cash register.
Assessing the distribution juggernaut in hindsight and the executives who contributed to its success-Walton wrote in his autobiography, “Made In America,” that “David Glass has to get the lion’s share of the credit for where we are today in distribution. David had a vision for automated distribution centers-linked by computer both to our store and to our suppliers-and he set about building such a system, beginning in 1978 at Searcy, AR.” The math can be disarmingly simple. If it costs Wal-Mart 3 percent to ship goods to its stores while competitors’ costs run 4.5 percent to 5 percent to move the same goods to its stores, that’s 2.5 percent more profit before merchandising skills come into play. To hardscrabble Sam Walton, “damncomputer” was one word. To David Glass, it was the great enabler to develop Wal-Mart as the low-cost merchandiser. (Wal-Mart’s sales, general, and administration expenses tend to average around 15 percent of sales compared with Kmart’s 20 percent, and 22 percent to 25 percent for other mass merchants.)
So is David Glass simply stepping into Sam’s hunting boots wearing CEO eyeshades? In naming him 1995 Chief Executive of the Year, a panel of his peers was impressed by Glass’ ability to build and improve on the company’s basic strengths. In the 1980s, vision was big. Today, it’s execution. Under Glass’ stewardship, Wal-Mart pushed past Sears, then Kmart, to become the nation’s largest retailer. From 1988, when he took over as CEO, to 1994, net sales increased from $20.6 billion to $82.5 billion at a compound annual growth rate of 26 percent. Net income rose from S837 million to $2.7 billion (at a 21.4 percent compound rate). In the mid-1980s, Walton introduced hypermarkets that sold everything from washing machines to bananas. The 200,000-square-foot stores had to be scrapped because of weak grocery sales. Nobody wanted to buy wilted lettuce from the same place they bought underwear. In 1988, Glass rolled out the first super-centers, megastores combining general merchandise and groceries, which were smaller and more focused in merchandising and logistics than Walton’s hypermarkets. Glass also is convinced that wholesale clubs-which sell commodities in quantity for resale-are the biggest sustainable advance in retailing since discounters emerged in the early 1960s. They operate on a 7 percent to 10 percent gross margin, less than half that of a discount store, and promise to make comparable returns. After a 1993 slump in same-store sales-which excludes any store not in existence for the full previous fiscal year these units reported a 6 percent increase in sales for the first quarter of fiscal year 1996. Glass also formally established in 1993 an international division to capitalize on growth opportunities outside the U.S. Wal-Mart acquired 122 Woolco units in Canada in March 1994, and through a joint venture with Mexico’s Cifra, now operates 68 stores in Mexico. In 1996, new stores are opening in Argentina, Brazil, and China. At a time when even companies with earnings growth are shedding employment, Wal-Mart’s expansion under Glass has resulted in another 417,000 U.S. jobs. (Only GM surpasses Wal-Mart as the country’s largest private-sector employer.)
The company spends billions on systems and technology, but Glass and his team continue to see Wal-Mart’s competitive advantage, as Walton did, in its Orientation as “agents for the customer,” and its emphasis on getting ordinary people to get extraordinary results. “We try to buy for the customer, rather than sell to the customer,” says Don Soderquist, vice chairman and COO. Managing 650,000 employees, or associates as Wal-Mart prefers to call them, Glass faces a major challenge in getting people to maintain their focus despite the corporate culture Walton created that runs the business one store at a time and doesn’t pay attention to size. With well over 2,000 stores, a personal visit and pep rally with the boss becomes more problematic. Glass visits stores two days a week and listens to managers’ concerns in small groups or by satellite conference. Managers say he is readily approachable, and as Wal-Mart International President and CEO Bob Martin points out, “David has an uncanny ability to simplify complex problems that allows us to do our jobs.”
“My father was charismatic and aggressive but not always detail-oriented,” admits Wal-Mart Chairman Rob Walton, eldest son of the founder, who died in 1992. “Our company would not be where it is today without David’s steady leadership in motivating large groups of people. Let’s face it, the technology is for sale. Anyone can buy it. How you enable people makes the difference.”
Kudos aside, Wal-Mart faces a number of critical challenges:
- Growth gets tougher the bigger you are. Investors are discounting Wal-Mart’s historical earnings growth. The 26 percent decline in stock price since the beginning of 1993 and collapsed valuations offset this to some degree, according to Merrill Lynch First Vice President Dan Barry. CS First Boston analyst Margaret Gilliam thinks the stock is now undervalued. Slower share growth also means stock ownership won’t continue to have the same motivating power it once did with associates.
- Increasingly, 75 percent of its stores face direct competition from Kmart, Target, and Dillards, among others, which also are gaining on the technology learning curve. Wal-Mart is moving into areas where land, construction, and labor costs are higher than in the rural areas to which it’s accustomed. But it’s well to note just how low Wal-Mart’s operating costs are if the razorbacks can operate in Long Island, NY, arguably one of the priciest areas of urban real estate, and still underprice the competition. Pushing into the Northeast, the least Wal-Martized region of the country, sparks opposition from small towns claiming the company puts mom-and-pop shops out of business and destroys communities. “60 Minutes” correspondent Morley Safer dutifully showed ghost after ghost town, all allegedly due to the bad boys of Bentonville. However, Safer didn’t point out that the town of Greenfield, MA, which initially had refused to issue Wal-Mart a zoning clearance, is looking for another site. Safer could have told viewers that Vermont’s Governor Howard Dean had flown to Arkansas to tell Glass his state wants to sort out difficulties created by its treacherous Act 250 environmental law. Vermont, the last holdout among the 50 states, now has its own Wal-Mart Nonetheless, land-use laws and stiffer labor costs will force the razorbacks to pick and choose more carefully.
- Recent retail weakness suggests to some that consumers soon may be tapped out. For example, Wal-Mart did not have a particularly good year in apparel sales in 1994. Demographically, most Americans are reaching the age when personal consumption is giving way to savings and retirement planning. Soderquist argues that supercenters, which increasingly will replace existing War Marts, are more attractive to value-conscious consumers. To buck retail head winds, Wal-Mart also is experimenting with concepts such as Disney shops, Vision Centers, fax and UPS centers, and computer learning centers.
Glass says the company has “plenty of opportunities” for growth. In the following interview with CE Editor J.P. Donlon at the company’s Spartan headquarters in downtown Bentonville, he talks about meeting the challenges ahead.
Information technology is one of Wal-Mart’s competitive strengths-especially since it recently began collaborating with Microsoft to develop a system that will take retail information to the next level. How will that work?
We’re using technology to sell products. We even use it to sell technology itself. For example, we sell a lot of PCs in our stores. The new technology will allow customers to turn on a PC and learn all about it from the screen. They can order a computer, configure it to their preference, and buy software without dealing with salespeople.
Another illustration is CDs. Technology will allow customers to pick from a catalog of CDs, we can record the music for them, and they can take it with them as they leave. This means we can have an unbelievable assortment in our inventory, ready for current delivery to a customer, without having to guess what people will want.
So you create the CD of choice, either at the store or nearby?
In time, we’ll create it at the store. Right now, our systems already capture at the cash register the individual sale of every item. We let manufacturers tie into our systems, so they can monitor, real-time, what products are selling including color, fabrication, and size-when, and which store. Based on that data, they can project what they need to manufacture, and to which demographic market they deliver it without doing test-marketing or research evaluation. Ultimately, the consumer benefits, because the manufacturer saves a lot in R&D and promotional costs by figuring out ahead of time what the customer wants to buy.
What sort of consideration does the manufacturer have to get in return for R&D assistance?
Nothing. We both want to deliver product to the customer more efficiently. As we grow in size, it is difficult to guarantee that there will be a consistent supply of product to sell and deliver at the store level. The larger the volume need, the longer the lead-time. This forces you to make decisions a year in advance, for product you’re going to deliver at some future date. We work with the manufacturers to shorten that time, by encouraging them to use down-time to increase productive capacity, expand their plants, or build new plants to ensure a consistent flow of product on a shorter lead time. That works to our advantage.
Wal-Mart insists its manufacturers adhere to precise procedures. Failure to do so can result in costs charged back to manufacturers. How do they absorb that?
For the most part, it’s never been a problem. Our vendor rules, regulations, and procedures are not intended to be punitive; they are intended to set high standards and bolster efficiency. When the industry adopted barcoding, for example, we required that cases of merchandise coming through our distribution center display the barcode on the outside of the carton to make it easier to identify and scan. We told vendors that we will assess fines against shipments that don’t have the barcode. Most complied with that request.
How does shopping via computer figure into your strategy?
We think there will he a market for shopping by computer, and we’ve put the technology in place to pursue it. However, the majority of today’s consumers’ like to go to the store and touch the merchandise. In rural America specially, shopping is still a social experience. That’s where our principal emphasis remains.
What percentage of your sales ultimately might be interactive?
It will always be small. In our Sam’s division or our wholesale club division, there’s a big opportunity for interactive selling, because they are designed to service small business and sell items for resale. In addition, customers eventually will be able to buy items that aren’t normally carried in a Wal-Mart store through an interactive network.
TRADING BLOOMIES FOR SAM’S
Your activity with Sam’s American Choice line and with selected Great Value products seems to portend a shift from national brands to generic brands. Is this a wave of the future?
We prefer to sell national brands, because if you have an everyday-low-price philosophy, the only way your customers can always verify that you really do have the lowest price is if you sell highly identifiable name-brand merchandise that they can price in other stores.
However, the American consumer has begun to change. In the 1980s, the label and the store in which you bought the item was important. Today, the customer says, “I don’t care where I buy it or what the label is. I just want a lot for my money.” That’s why we began to develop high-quality, low-priced Sam’s American Choice products and Great Value items in our supercenters.
Wal-Mart has a public image of being a bunch of good, old boys from Arkansas, who expanded their network primarily to the regions that the so-called “bigger” general merchandise retailers avoided or didn’t bother with. So why are you now running into opposition when you try to expand into a Northeastern state such as Vermont?
No matter what you do, it seems an anti-something group springs up. You all seem to have almost a monopoly on them in the Northeast. In reality, we are the good, old boys from Arkansas. But we had the discipline to continue to build from county seat to county seat, town to town, instead of jumping to move into heavily populated areas. People erroneously attributed our success to going to all these little towns, “where there’s no competition.” That’s not so. There was intense competition from regional discounters- including Gibson’s, TG&Y, and later, Knott. If you don’t quickly learn to outperform your competition in those kinds of situations, you fail miserably.
How do you respond to accusations that Wal-Mart is injurious to small business?
In some cases, we do have a negative impact on some small business. But in others, studies show that Wal-Mart helps make a small community a trade center, allowing small businesses to flourish.
Of course, if you go to Main Street America, many of the mom-and-pop shops haven’t spent a dime on improvements in the last 15 years. They still operate the way they did 20 years ago. They close on Saturday and Sunday, the two days most people want to shop, and during the week, they close at dark.
I grew up in a little town, Mountain View, MO. This town of 1,000 was a trade center. People came from everywhere to shop. Eventually, discount stores opened 50 miles away, and people began to travel to those areas to buy things. Little by little, Mountain View died. In 1985, we put a Wal-Mart store there. Now, people stay in town to shop, and there are 10 times the number of small businesses.
Looking at the big picture, will WalMart’s future be outside the U.S. because of market conditions?
We believe there’s still enormous domestic opportunity. However, we have decided to test the international waters. In three years, I want a third of our growth to come from outside the U.S.
Where will we start? Mexico and Canada are the two best candidates, because you can drive a Wal-Mart truck to either one. NAFTA presents the biggest opportunity. Dominating the overall North American consumer market is our No. 1 priority.
The second best opportunity is in South America, because we believe it eventually will be included in NAFTA. We plan to move into Brazil, Argentina, and Chile with nine stores, including a supercenter and a wholesale club. The other great opportunity is in Asia, mostly China.
What about Europe?
We rank Europe say down on the list of opportunities. There is too much bureaucracy; it takes a long time to get permits or zoning. You have to bring a plan for a long-term strategy. ‘There’s resistance in Europe. No one’s going to revolutionize it with low prices and great values – or anything else - for a while.
IN THE LOOKING GLASS
You followed in the footsteps a founder whose image is ubiquitous. How do you cope with that?
Sam had strong beliefs about retailing, many of which I share, partly because learned those things from him, and be cause we both grew up in rural towns, where you learn a work ethic and an approach to integrity. It’s a mind-set that includes everything from the Boy Scouts and delivering newspapers to a motherhood and-apple-pie approach that seems sort of Pollyannaish today.
It would have been easy for me to try to emulate Sam Walton. But he was one of a kind. I needed to keep all of Sam Walton alive that I could, and vet I had to be David Glass. It has been difficult. But there was a long enough period of time during which Sam and I functioned together, so people