Revolution in a Blue Apron

Forbes magazine recently released a list of the world’s billionaires—they also publish a list of the richest people in the world and a list of the richest Americans. Given all the overlap one wonders if they’re not pandering to billionaire vanity—and a look at the top of the list is a pretty interesting commentary on the state of the economy. Predictably, Microsoft founder Bill Gates and the preternaturally genius investor Warren Buffett occupied the top spots. What is most striking, however, is that five of the ten richest people in the world have the same last name: Walton. They are the widow and four children of the late Sam Walton, founder of Wal-Mart, who if alive today would be the richest man in the world. His fortune, now divided among his heirs, totals about $100 billion, or almost double that of Bill Gates. Admittedly, Gates has given away billions in recent years, but Walton’s accomplishment is nevertheless staggering.

I’m writing about Wal-Mart today because, counterintuitively, Wal-Mart is the business story of the last decade. The Internet was important, but the dot-coms were clearly overhyped and the truly innovative uses of the Internet are yet to be invented. Instead, it is Wal-Mart—prosaic, big, boxy, uncool, rural Wal-Mart from Bentonville, Arkansas—that has changed the way business is done in America. McKinsey, the same company that a lot of my senior classmates will be working for next year, recently released a study detailing just how important Wal-Mart is. Their findings, available online, show that Wal-Mart accounted for 27 percent of all general retail sales in America in 1995, a staggering market share that has likely only grown in the last seven years. More importantly, Wal-Mart has and continues to implement managerial and technology innovations that make it among the most productive companies in the world. These same innovations force Wal-Mart’s competitors—K-Mart, Target, Costco and Sears—to play a constant game of catch up. Taken together, McKinsey found convincing data to show that the general retail industry, led by Wal-Mart, contributed one-quarter of the productivity gains experienced by the economy from 1995 to 1999. This data bears repeating: one company’s innovations created a quarter of the productivity gains experienced by the whole U.S. economy.

Common wisdom held that technology alone could explain the growth. After all, every large corporation in the country, and many of the smaller companies, invested in technology at a breakneck pace. All it took to increase productivity was a computer on every desk and an e-commerce store for everything, so we were told. Yet few saw the tremendous productivity improvements that were promised, something that many in the tech industry could have predicted. It’s an old joke among the technology companies that the only firms that know how to use technology well—with rare exceptions like Wal-Mart—are technology companies themselves.

Wal-Mart is an exception because it focuses on management instead of technology. It shares just about every piece of market data it collects—we’re talking petabytes here—with its suppliers, which has proven so vital for the consumer products industry that Proctor & Gamble, makers of everything from Charmin to Crisco to Cover Girl, have an office employing more than 200 people in Wal-Mart’s small-town Arkansas headquarters. Its logistics and distribution system is smart enough to know which ethnicities of Barbie sell better in which stores. It pioneered the “big box” format and continues to extend it with bigger and better stores and different brands like Sam’s Club.

Sam Walton’s fortune starts to make a little more sense, then, as you begin to understand the scope of Wal-Mart’s achievement. It manages its suppliers and its customers better than any company in America, and it knows more about its products and its prices too, allowing it to undersell all its competitors. It invests in technology but only buys the software and hardware that will improve productivity, preferring to let other companies jump on faddish technology bandwagons. Case in point: Wal-Mart waited longer than just about every retailer in the country to launch its website, thereby avoiding millions of dollars in losses in a fruitless attempt to compete for miniscule sales. It’s no wonder that some of the best run companies in retailing, from Amazon.com to Costco, got where they are today by emulating Wal-Mart’s success. Wal-Mart’s economic impact may even go beyond the productivity statistics: because of its amazing shared data, suppliers were able to see the downturn in the economy more clearly than they have in past downturns, and they cut their production and inventories sharply in response. That alone may have lessened the severity of last year’s recession.

Microsoft aside, it’s unusual for someone talking about the business practices of one company to be able to claim economic ramifications applicable to the whole country, but McKinsey shows that to be precisely the case with Wal-Mart. From its founding in Bentonville in 1962 to today’s 1600 stores, 1000 supercenters, 1000 international stores and 500 Sam’s Clubs, Wal-Mart has gotten to the point where it is a macroeconomic force in the countries in which it operates.

Alex F. Rubalcava ’02 is a government concentrator in Eliot House. His column appears on alternate Wednesdays.