Walmart emerged from a willingness to try new things and learn

Thanks to Mark Perry at Carpe Diem for the link to this video illustrating Walmart and Sam’s Club growth.

We see the success stories after they’ve become successful and don’t often think how they got to that point.

I recommend reading Sam Walton’s book Made in America. It paints a good picture of how Walmart emerged from Walton’s constant experimentation and trial-and-error learning, in the store, store location and in the supply chain. It took him years to evolve the retailing model into something that would fund its own expansion by simply pleasing its customers.

It’s been awhile since I’ve read it (~15 years), but a few stories are stuck in mind.

Walton started his first store in a town on the eastern side of Arkansas. He grew it into a success and when it came time to renew his lease, the landlord kicked him out to take Walton’s store for himself. There Walton learned to build renewal options into his leases.

When Walton opened his store right across from a competitor in Bentonville, most people thought he was crazy, but Walton relished the competition and would try things to get people to try his store and keep them coming back, which was great for the customer. Walmart still gets a lot of resistance to this strategy — generally from people who care less about the customer.

He wasn’t too proud to borrow ideas from competitors. When he read an article about a store with a self-serve model in Minnesota or Wisconsin, he hopped on a bus (or train) and visited to see how it worked and then adopted the model in his stores and changed the retailing industry forever.

As he opened more locations, he tinkered with various ownership structures and incentives to drive the right behavior. He discovered joint ownership was the best incentive structure, which carried through all the way to employees of the eventual Walmart earning shares of stock. Early stores were partnerships between him and the store’s general manager.

Even after Walmart was getting larger, they tried new things. They took on a massive project in the warehouse in the 1980s to improve product distribution efficiency. It took years and a few costly mistakes, but it eventually paid off. I often think about that when I see companies ditch a project after the first failure. I wonder if it could be successful with some more learnings applied.

Businesses emerge from the interactions of customers and business owners. They aren’t designed by consultants in board rooms.

Market Share Myth

Company managers love to chase market share.  They like it because it’s a competitive head-to-head score, like a score to a baseball game. If you “take” market share from your competitors, then you’re beating them up and that’s good. If they take it from you, that’s bad.

I don’t think we should worry much about market share.  I have several reasons.

First, it isn’t necessarily a good read on the measure of business health.

Consider a simple ad absurdum: Would you be better off by doubling market share by cutting price in half?

No. You may be worse off. What if you cut your salary in half and got two jobs?

Sure with more clients, you’re less dependent on any one client. But, it will cost twice as much to serve those clients. So, you’ve doubled your costs while keeping revenue flat. And, you may have attracted a less loyal client that is more likely to leave you.

Several years ago, a company I worked with exited a line of business that had given it some market share and consistent financial losses for six years. It showed no signs of producing profits. There’s another name for such a line of business: unnecessary cost.

The managers kicked themselves on the earnings conference call for losing that market share. Rather than kicking myself, I would’ve celebrated giving up that line because it would mean getting rid of an unnecessary cost and more money for shareholders.

Getting rid of unprofitable market share, as in the example above, can be good. Acquiring unprofitable market share can be bad.

Earnings is a better measure of health.

Second, focusing on market share keeps managers too focused on their existing product lines. The best makers of buggy whips probably acquired significant share of the buggy whip market as the automobile was replacing the buggy.

Third, the “market” is to easy to get wrong. Is McDonald’s market share its share of hamburgers sold, its share of fast food hamburger restaurant sales, its share of fast food restaurant sales, its share of all restaurant sales or its share of all food and beverages sold?

Why pick one definition over the other? Should McDonald’s be bothered that you chose to buy a Coke at the vending machine in your office building instead of one its restaurants? Should they get into the office vending business in order to “capture” that market share?

I don’t think so.

Fourth, the market share paradigm turns the business world into a caricature of a “battle for control of the market”.  Company managers even try to act like that’s how it works as they bludgeon their troops to deliver results.

I think that’s an inaccurate and damaging representation of the business world.

Companies that gain profitable market share are those that provide products that clients value enough to buy at a price that more than covers the company’s costs.

Rather than a heartless battle for market share, the business world is really a trial-and-error lab that looks for ways to delight customers. Rather than Glengarry Glen Ross, it’s more like Starbucks.

Rather than gaining market share, businesses should be focused on pleasing customers and growing profits.

Growing profits is less like war and more like convincing a girl to go on a date. The secret to doing that is to give a girl what she wants. Figuring out what that is a trial-and-error process and can change at any time.

Library ebooks hit snag

My local library reports that one reason their ebook selection is low is because four out of the “Big Six” publishers do not allow libraries to purchase their ebooks and the other two either have restrictive purchase policies are charge libraries more for ebooks.

In other words, these publishers are acting like Blockbuster in the early days of Netflix.

Change is a bear.  I understand wanting to cling on to profits from your traditional business model as long as possible.  But, just as Blockbuster learned, it works out better to be the change agent than the stick-in-the-mud.

Where do great ideas come from?

In the commercial below, Domino’s Pizza CEO, Patrick Doyle demonstrates a value destructive bias held by many big company execs when he starts the commercial off saying:

In a big company, good ideas don’t usually come from the local store level…

In this case they didn’t let that bias get in the way, because the commercial features a good idea that came from a Domino’s store owner in Findlay, Ohio, Brian Edler: Parmesan Pizza Bites.

Doyle is right in his follow-up sentence:

…but, a great idea can come from anywhere.

Just look at the beginning of Domino’s Pizza, or most successful companies.  Very few were designed in a boardroom at a corporate headquarters.  Two brothers founded Domino’s Pizza when they bought a single shop for $900 in 1960.

Subway Sandwich Shops and Subway’s $5 foot-long are other good examples.   The founder of Subway borrowed $1,000 to open his first store (again not designed in a boardroom).

And Subway’s $5 foot-long promotion was discovered by a franchisee in Miami.  Executives at HQ were not fans of the promotion, but other franchisees began adopting it on their own, because it produced results for them.  Eventually these franchisee results convinced corporate.

I’ve seen this attitude at many companies.  I’ve seen quite a few failures resulting from business models designed by bureaucrats and consultants in HQ.

Good ideas can come from anywhere, sometimes even competitors (Blockbuster?).  I would advise companies to cast their idea net as wide as possible and be as open-minded as possible.

Here I wrote about McDonald’s approach to innovation.  They have a test kitchen and they let their franchisees experiment.

The “cheaper to keep a client than get a new one” myth

I’ve heard this repeated dozens of times to focus an organization on client retention.   The trouble is, it isn’t always true and if an organization focuses too much on client retention when it isn’t true, it can hurt.

Most organizations would love to have 100% client retention, except maybe non-profits whose goal is providing temporary help.

In the real world, no organizations have 100% client retention.  Even the best lose clients. Sometimes clients die, move or change what they value or just discover they want something different.

Good organizations will have client retention in the 70% – 85% range.  Organizations with less than 65% to 70% retention might have the opportunity improve retention, depending on the nature of the business.

But, at some point above 70% retention (and this varies depending on the type of organization and service, etc.) you reach a retention rate where you run into the law of diminishing returns.  To increase the retention by another 1%-point, for example, is costlier than bringing in new clients who value what you offer.

Let me illustrate with an example.

I use to use a small plumber for my home plumbing needs.  He was good and reasonable and good enough, in fact, that sometimes I had to wait a few days for him to come out. Once this proved to be a problem, because I had a leak that couldn’t wait a few days to fix.

I called another company and found they also did good work and I didn’t have to wait a few days.  They could have someone out within two hours.  That convenience advantage, along with their good work and reasonable prices, was enough to get me to switch.

However, my previous plumber still has plenty of work.  Losing me didn’t cost him much business.

For him to change his business to satisfy folks like me would cost him a lot.  He’d need to hire enough plumbers to cover the demand 24/7 and invest in more trucks and equipment. He’d need to hire schedulers and manage a larger workforce.

But, he’s happy with the business and profits he earns from his set of loyal clients, who don’t place as much value on how quickly the plumber arrives.  Perhaps his customers are builders and commercial accounts who can schedule work in advance, or simply people who can get by for a few days with a leak.

Even in a market that appears as homogeneous to outside observers as plumbing, there are some key things that differentiate the value proposition of what different plumbing companies offer and it is difficult for any one company to satisfy all these value differences.

For my previous plumber, it is cheaper to let me go to the competitor that offers what I value while spending his resources on finding another client who values what he offers.

That holds true until you reach a point where fewer and fewer customer value what you have to offer.  At that point, the market (i.e. customers) is sending you a signal that you need to change what you offer, or go out of business.

Admittedly, there’s a fine line and art between knowing when you need to just focus on finding clients that value what you offer and when you need to change.

Based on these thoughts I have a few recommendations for businesses.

First, don’t always assume that increasing retention is cheaper than finding new clients. It’s actually not very difficult to estimate the costs of each for any business.  Try it and see if you can compare the acquisition and incremental retention cost per client.

Second, if your retention is stable within a few percentage points, plus or minus, then that’s likely a sign that it’s just as effective to keep focus on both finding new clients and retention.  You should not favor one over the other.  You need both.

Third, be prepared for when retention does start to plummet.  Consumer preferences do change in unpredictable ways.  One way to prepare your organization for such changes is to run small experiments with various business model approaches and see which ones resonate. Also, keep and eye on what your competitors are doing differently and understand why that may or may not work for you.

I’ve seen too many organizations who only focus on their bread-and-butter value proposition and get caught by surprise when consumer preferences change.  That puts them in a dangerous position of throwing hail mary’s when preferences change rapidly. The chances of hail mary’s succeeding are less than the chances of small, unforced experiments.

I’ve also seen organizations who move too rapidly to change their business model even when it’s doing fine.  In the process, they often fundamentally lower the value proposition for existing clients.  New Coke is a good example.

Starbucks irked some of its faithful recently be introducing a light roast.  But, they didn’t repeat the mistake of New Coke, by replacing dark roast with light roast, they just added the new light roast to the existing product line.  Starbucks’ faithful will get over it, because they can still get the products they love and now more of their friends (the 40% of coffee drinkers who prefer lighter roasts) will come with them.

Fourth, develop a deep understanding of the value proposition your organization offers. Why do customers use your product or service?  Ask them and ask them again.  Don’t take their first answer as the real answer. There is probably four to ten reasons why they use you. Also, don’t just look for the answers you think are right. Some of the worst business strategy blunders come from folks who impose their own incorrect view of the value proposition on the organization.

Third Place + Wine

When I first heard a while back that Starbucks was testing serving wine in its stores, I didn’t think much of it.

When I read today that they were expanding this test, the value proposition suddenly occurred to me.

Before, I was  stuck on Starbucks as a coffee company.  But, they also have another business — providing comfortable space for folks to sit and chat, read or surf the net.  They call it the third place.  It’s not your home or business, but it’s close.

I suddenly thought about the times when I’ve been out with friends, family or business associates and we wanted to catch up over a glass of wine or beer, but we didn’t want a noisy, or empty, bar.  And we didn’t really want to sit at restaurant where everybody else is eating.  We struggled to find a place to go.  Often we settled for picking up some bottles of wine at a grocery store and heading home or going to bar.  Neither was ideal.

Sipping some wine at Starbucks would be the perfect place for that.

I also thought about the times when I’m on the road — be it for business or vacation.  It would be nice to have a low-key place to grab night-cap, catch up on emails (and blogs) and do some mild people watching.

I can see how this fills a nice niche for consumers.  I hope their tests work.

Silly Gingrich

I wish I could advise Newt Gingrich not to attack Romney’s business record as the head of Bain Capital.  It should actually be applauded.

Gingrich can distinguish himself easily enough from Romney on their political records alone.  Gingrich brought financial accountability to the Federal government and reformed welfare under a Democrat President.  Romney basically implemented the liberal platform as Governor.

The Wall Street Journal reported today that Romney’s political opponents are stepping up attacks on his business record.

The attacks will center on Bain’s failures and portraying Romney as a “corporate raider” that acquired companies and fired people.

The journal tracked the results of the 77 companies acquired by Bain when Romney was in charge.  Here’s what they found:

1. “…22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses.”

2. “An additional 8% ran into so much trouble that all of the money Bain invested was lost.”

3.  “Bain produced stellar returns for its investors”

4. “Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested.”

5. “Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.”

6.  “If the Journal analysis were limited to bankruptcies and closures occurring by the end of the fifth year after Bain first invested, the rate would move down to 12%. “

It’d be tough to argue with this record.  It’s outstanding.  Criticizing this record is a bit like criticizing a major league baseball player who hit .350 driving in multiple game winning grand slams.

I agree with Romney’s response to Gingrich:

Doesn’t he understand how the economy works? In the real economy, some businesses succeed and some fail.

Many times in business, even if everything is done right, the business fails.  Consumer preferences change, competitors get a leg up, innovation obsoletes a product, new regulations put a crimp in the economics of a business.  Any number of things can happen. Sometimes they happen all at once.  Sometimes the best baseball hitters strike out.  Sometimes the most winningest professional teams coaches lose.

And to the argument that Bain fired people, they also created lots of jobs.  You don’t create $2.5 billion in gains without employing a few people along the way.

I realize that Gingrich is likely trying to appeal to voters who reflexively scoff as phrases such as “corporate raider” and “firing workers”, but for those of us who know better, this just makes Gingrich look silly.

Jacob Marley is a good salesman

So was Charles Dickens.

The thought of being forgotten sealed the deal

I agree with Charles Rowley that Jacob Marley simply re-framed generosity for Ebenezer so that it appealed to his self-interest.  And it seems that Dickens’ story has lived for over 150 years, retold in many different variations, with very few people recognizing that.

Here’s another interesting piece on A Christmas Carol from Steven Landsburg.

 

 

 

Is the value proposition back at Walmart?

Yesterday I was looking for two relatively common things to buy for Christmas presents.

Target:  Strike 1

Best Buy:  Strike 2

Walmart:  Homerun.  They had plenty of both in stock.

I may have to rethink the reasons why I went to Target and Best Buy first.  Having things that people want to buy in stock is a key value proposition for a retailer.

Many believe that Walmart’s key to success was low prices.  That was part of it.

But, prior to the 00′s, they had a more complex value proposition than that.  They also happened to have what people wanted in stock more of the time than their competitors (good supply chain management), they had good customer service (good people management) and a no-questions-asked return policy.

Somewhere in the early 00′s, their focus seemed to go to low prices alone.

Customer service declined.  Staff became grumpy and phantom.  One reason I didn’t go to Walmart first is the memories from the early 00′s of going there to buy a couple things and having to wait in 30 minute long lines to checkout because they managed cashier wage expense tightly to keep prices down.

This decline in Walmart’s value proposition opened the door for competitors like Target and Kohl’s and gave a lifeline to Kmart.

Not only did Walmart have plenty of what I needed yesterday, but when I went to check out there was a helpful cashier, without a line, smiling and waiting for me.

Unintended Consequences Realized?

In this post, I predicted that one unintended consequence of shrinking the fry size in a Happy Meal and including fruit — for the sake of health — would be higher sales at McDonald’s as folks would choose to order extra fries to make up for the reduced size.

McDonald’s just reported a 7.4% surge in sale in November.

Of course, its press release makes no mention of the Happy Meal change as a driver of the sales.  They claimed that the increase was caused by higher breakfast demand, the Peppermint Mocha and a McNugget promotion.

Could be.

All I know is that having contributed to press releases in the past, I know that reasons given for performance changes can be arbitrary and sometimes they can be hard even for the company analysts to decipher.

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