Wal-Mart Stores’ Discount Operations
In October 1985, Forbes declared Sam Walton the richest person in the United States. With his four children, he owned stock worth $2.8 billion. That put him $1 billion ahead of the next person on the list, H. Ross Perot. By the end of April 1986, Walton’s net worth had swelled by another $1.6 billion.
Walton’s fortune consisted of a 39% stake in Wal-Mart Stores, a retailer that had focused historically on the Sunbelt. Although Wal-Mart had begun to diversify into other areas, discounting still accounted for 91% of the company’s sales in 1985 and 96% of its pretax profits. Wal-Mart had consistently led other discounters in both profitability and growth. Exhibit 1 summarizes Wal-Mart’s history over the past decade; Exhibit 2 compares its performance with that of its competitors. As a result of such comparisons, Wal-Mart’s market value in early 1986 was twice K mart’s, even though it was only a third as large. Analysts thought that Wal-Mart would overtake K mart as the largest discounter by the turn of the century, but they were divided over whether Wal-Mart stock remained a good buy at a price-earnings multiple of 26.
This case describes discount retailing and the distinctive features of Wal-Mart’s discount operations. It also sketches the areas into which Wal-Mart was diversifying in the mid-1980s.
Discount Retailing
Discount stores emerged in the United States in the mid-1950s. They followed on the heels of supermarkets, which sold food at unprecedentedly low margins. Discount stores extended this approach to general merchandise by charging gross margins that were 10%–15% lower than those of conventional department stores. To compensate, discount stores cut costs to the bone: fixtures were distinctly unluxurious, in-store selling was limited, and ancillary
