Everyday Low Vices

In the late 1940s, when Sam Walton was franchising a Ben Franklin's variety store in Newport, Ark., he had a simple but momentous idea. Like any retailer, Walton was always looking for deals from suppliers. Typically, though, a retailer who managed to get a bargain from a wholesaler would leave his store prices unchanged and pocket the extra money. Walton, by contrast, realized he could do better by passing on the savings to his customers and earning his profits through volume. This insight would form a cornerstone of Walton's business strategy when he launched Wal-Mart in 1962.

The quest for low prices came naturally to Walton: He was freakishly cheap. Although he was ranked as the richest man in the United States by the 1980s, he continued, it is said, to have his hair cut by the local barber, a $5 expense that he never supplemented with a tip. (Perhaps he wasn't satisfied.) Cost-cutting was, as one might also expect, an obsession in the Wal-Mart culture, and Walton was almost as chintzy with his executives as he was with his cashiers. On business trips, everyone, including the boss, flew coach, and hotel rooms were always shared. Even a cup of coffee at the office required a 10-cent contribution to the tin.

But coffee taxes only went so far. Walton understood that a major requirement for keeping costs down was controlling the payroll. As he would write in his 1992 autobiography, Made in America, "No matter how you slice it in the retail business, payroll is one of the most important parts of overhead, and overhead is one of the most crucial things you have to fight to maintain your profit margin." Not only did Walton prefer to hire as few people as possible, but he also dreaded paying them more than he had to. Unions were particularly feared, and Walton did everything he could to fight them, almost always successfully.

If such a regimen seems stifling, Walton's employees nevertheless accepted it. In part, it was because Walton framed his cheapness as a crusade on behalf of the lowly consumer and as a quest for a better life for all Americans. It was also because he lived an outwardly modest life, driving an old truck with his hunting dogs in the back. Mostly, it was because he had charisma. Even when Wal-Mart grew outsized, Walton made a point of keeping in touch with his employees on the ground or, as he termed them, his "associates." This would often involve flying from store to store -- Walton had a pilot's license -- for impromptu visits.

But Walton's ability to keep his staff happy also relied on a sense of when to let penny-pinching take a backseat to other priorities. In 1985, amid anxiety about trade deficits and the loss of American manufacturing jobs, Walton launched a "Made in America" campaign that committed Wal-Mart to buying American-made products if suppliers could get within 5 percent of the price of a foreign competitor. This may have compromised the bottom line in the short term, but Walton understood the long-term benefit of convincing employees and customers that the company had a conscience as well as a calculator. He also made sure to give his staff a stake in the company. In 1971, he introduced a profit-sharing plan that allowed employees to put a certain percentage of their wages towards the purchase of subsidized Wal-Mart stock. For employees who stuck around, this could mean quite a bit of money. According to a truck driver named Bob Clark, quoted in Walton's autobiography: "[Walton] said, 'If you'll just stay with me for twenty years, I guarantee you'll have $100,000 in profit sharing' … Well, last time I checked, I had $707,000 in profit sharing, and I see no reason why it won't go up again."

Equally important was Walton's ability to sell employees on the notion that working at Wal-Mart meant limitless opportunity. Here, from Fortune, is a portrait of Walton at a Saturday-morning meeting in 1989:

[Walton] proposes that whenever customers approach, the associates should look them in the eye, greet them, and ask to help. Sam understands that some associates are shy, but if they do what he suggests, "It would, I'm sure, help you become a leader, it would help your personality develop, you would become more outgoing, and in time you might become manager of that store, you might become a department manager, you might become a district manager, or whatever you choose to be in the company…It will do wonders for you." He guarantees it.

And things could get downright cultish:

Then, just to make sure, Sam asks the associates to raise their right hands and execute a pledge, keeping in mind that "a promise we make is a promise we keep." The pledge: "From this day forward, I solemnly promise and declare that every customer that comes within ten feet of me, I will smile, look them in the eye, and greet them, so help me Sam."

Of course, Wal-Mart's success relied on more than just charisma and thrift. Technology, in particular, put the company ahead of its competitors. Already by the 1970s, Wal-Mart was using computers to link its stores and warehouses. Sales data allowed Wal-Mart to keep track of specific items and reduce inventory miscalculations. Only years later would Kmart realize how far it had fallen behind. Throughout Walton's career, a focus on innovation of this sort would make Wal-Mart a consistent leader in efficiency.