"Sam phoned to tell me he was going to start a wholesale-club. It was no surprise. He is notorious forlooking at what everybody else does, taking the best of it, and then making it better."SOL PRICE,founder1955Fed-Mart, and founder1976Price ClubI don't know what would have happened to Wal-Mart if we had laid low and never stirred up thecompetition. My guess is that we would have remained a strictly regional operator. Then, eventually, Ithink we would have been forced to sell out to some national chain looking for a quick way to expandinto the heartland market. Maybe there would have been 100 or 150 Wal-Marts on the street for awhile, but today they would all have Kmart or Target signs in front of them, and I would have become afull-time bird hunter.

We'll never know, because we chose the other route. We decided that instead of avoiding ourcompetitors, or waiting for them to come to us, we would meet them head-on. It was one of the smarteststrategic decisions we ever made. In fact, if our story doesn't prove anything else about the free marketsystem, it erases any doubt that spirited competition is good for businessnot just customers, but thecompanies which have to compete with one another too. Our competitors have honed and sharpened usto an edge we wouldn't have without them. We wouldn't be nearly as good as we are today withoutKmart, and I think they would admit we've made them a better retailer. One reason Sears fell so far offthe pace is that they wouldn't admit for the longest time that Wal-Mart and Kmart were their realcompetition. They ignored both of us, and we both blew right by them.

BUD WALTON:

"Competition is very definitely what made Wal-Martfrom the very beginning. There's not an individualin these whole United States who has been in more retail storesall types of retail stores too, not justdiscount storesthan Sam Walton. Make that all over the world. He's been in stores in Australia andSouth America, Europe and Asia and South Africa. His mind is just so inquisitive when it comes to thisbusiness. And there may not be anything he enjoys more than going into a competitor's store trying tolearn something from it."At first, we only butted heads with other regional discounters, like Gibson's and the Magic Mart discountdivision of Sterling. We didn't compete directly with Kmart. To put things into perspective, compareKmart and Wal-Mart after they had both been on the street for ten years. Our fifty-plus Wal-Marts andeleven variety stores were doing about $80 million a year in sales compared to Kmart's five hundredstores doing more than $3 billion a year. But Kmart had interested me ever since the first store went up in1962. I was in their stores constantly because they were the laboratory, and they were better than wewere. I spent a heck of a lot of my time wandering through their stores talking to their people and tryingto figure out how they did things.

For a long time, I had been itching to try our luck against them, and finally, in 1972, we saw a perfectopportunity in Hot Springs, Arkansasa much larger city than we were accustomed to moving into butstill close to home and full of customers we understood. We saw Kmart sitting there all alone, reallyhaving their way with the market. They had no competition, and their prices and margins were so highthat they almost weren't even discounting. We sent Phil Green in to open store number 52, which, youmay remember, is where he stirred up all the fuss with the world's largest Tide display and all his otheroutrageous promotions. He cut prices to the bone and stole a bunch of Kmart's customers.

Coincidentally, it was right about that time that Harry Cunningham chose to retire as the CEO of Kmart,which he had founded while he was chairman of S. S. Kresge. This was a big break for us. Harry wasreally the guy who, in just ten years, had legitimized the discount industry and made Kmart into the modelfor us allthough my good friend, John Geisse, who helped found the Target and Venture stores, wasanother pioneer way ahead of his time.

HARRY CUNNINGHAM:

"From the time anybody first noticed Sam, it was obvious he had adopted almost all of the originalKmart ideas. I always had great admiration for the way he implementedand later enlarged onthoseideas. Much later on, when I was retired but still a Kmart board member, I tried to advise the company'smanagement of just what a serious threat I thought he was. But it wasn't until fairly recently that they tookhim seriously."I guess we really were a flea attacking an elephant, and the elephant didn't respond right away. MaybeHarry's right. Maybe they didn't take us seriously until much later. But I always believed it made themmad, our going in on them like that in Hot Springs. Just a few years later, around 1976 and 1977, wedefinitely got the message that Kmartwith 1,000 storesthought Wal-Martwith 150had gotten too bigfor its britches. All of a sudden they took a direct shot right into our backyard, by opening up in four ofour better towns: Jefferson City and Poplar Bluff, Missouri; and Fayetteville and Rogers, Arkansas. Theywere expanding like that all over the country at the time, and all the regional discounters were worried. In1976, we had a session of our discounters' trade group in Phoenix, and a lot of guys were talking aboutways to avoid competing with Kmart directly. I got a little mad, and told everybody they ought to standup and fight them. I made it clear we planned to.

HERB FISHER, FOUNDER, CHAIRMAN, AND CEO, JAMESWAY CORPORATION:

"Kmart was opening so many stores it was regarded as the Genghis Khan of the discounting business.

Sam has always been clear about his attitude: 'Meet them head-on. Competition will make us a bettercompany.'

"He is that way with everyone. Personally, he's such a fine, unassuming, quiet gentleman. But he's alwayspicking your brain, and he always has a notebook or that tape recorder. He'll learn everything you know,but he shares his information freely with you in return.

"Now, of course, he's a competitor to James-way. But he wouldn't ever apologize for that. He thinks itmakes us a better company. And he's right."Something else happened in late 1976 which really helped us gear up for competition. A research groupset up by a bunch of us regional discounterswho at the time didn't compete in each other'sterritorieshad its first meeting here in Bentonville. Guys like Herb Fisher of Jamesway, and Herb Gillmanof Ames, and Dale Worman of Fred Meyer all came down here and went through our stores to give ustheir opinion of how they thought we were doing. And, man, what they had to say really shocked us.

Nick white, executive vice president, wal-mart:

"Bill Fields was running the Rogers store, Dean Sanders was running Siloam Springs, and I was runningSpringdaleall close to Bentonvilleso we were all on the tour. These guysthe presidents of all thesecompaniesthey just ripped our stores apart, telling us how poorly we dideverything. The signing isn'tworth a damn.' 'You've got your prices too high on this.' This stuff isn't even priced.' 'You've got toomuch of this and not enough of that.' I mean, it was really critical."That was really a turning point in our business. We listened to everything they had to say, and made hugeadjustments based on those critiques. It helped us gear up for any competition, especially Kmart, whoseattack on us was probably the best single external event in Wal-Mart's history. We pulled ourselvestogether and designed a big plana promotional program and a people program and a merchandisingprogramfor how we were going to react. Since our run on Kmart in Hot Springs had turned out well,we were confident we could compete.

THOMAS JEFFERSON:

"Kmart really took us on in about 1977, and I remember Little Rock particularly. They took us on therein North Little Rock, where store number 7 had been one of our better stores. They got aggressive, andwe fought back. We told our manager there, 'No matter what, don't let them undersell you at all, onanything.' I remember he called me one Saturday night and said, 'You know, we have Crest toothpastedown to six cents a tube now.' And I said, 'Well, just keep it there and see what they do.' They didn'tlower it any more than that, and we both just kept it at six cents. Finally, they backed off. I alwaysthought they learned something about us at that storethat we don't bend easybecause they never cameat us with that degree of price cutting anywhere else."We got so much better so quickly it was hard to believe. We totally stood Kmart off in those smalltowns of ours. Almost from the beginning, they weren't very successful at taking our customers away inJeff City and Poplar Bluff. Once Kmart arrived, we, worked even harder at pleasing our customers, andthey stayed loyal. This gave us a great surge of confidence in ourselves.

But at the time, remember, our sales were about 5 percent of Kmart's. And we had recently sufferedthat exodus of executives following the Ron Mayer departure. So we were having a heck of a timeconvincing Wall Street to stick with us. A lot of people didn't think we could stand up toreal competition.

One analyst, Margo Alexander of Mitchell Hutchins Inc., really worried about the exodus in her reporton Wal-Mart. She wondered if it wouldn't discourage other executives from coming on board. She saidthey might see an inevitable conflict with "the entrepreneur who will never be satisfied with another personrunning 'his' company," in other words, me. She also questioned whether I, having retired once, was ascommitted to running the business as I had been previously.

Here's some of what she wrote about us in January of 1977:

One of the key elements in Wal-Mart's success has been the lack of competition in its small, ruralmarkets ... It is clearly easier to operate in this kind of situation than in a competitive one: pricing need notbe so sharp, and the "right" merchandise is less critical, simply because customers have no alternative . . .

Although Wal-Mart says its stores compete effectively against Kmart, the company will avoid a Kmart ifpossible. While we don't expect Kresge to stage any massive invasion of Wal-Mart's existing territory,Kresge could logically act to contain Wal-Mart's geographical expansion . . . Assuming somecontainment policy on Kresge's part, Wal-Mart could run into serious problems in the next few years.

We would very much like to recommend purchase of the stock . . . Unfortunately, however, the future ofthe company appears uncertain, and we think that Wal-Mart is one of those threshold companies thatruns the risk of stumbling.

Reports like that one didn't help us much, but the truth is that her analysis of the situation wasn'tnecessarily as wrong as it looks today. All those things could have come true. She missed a few keypoints, though. Her biggest mistake was the uncertainty she felt about the management team that followedRon Mayer. As I said earlier, having David Glass and Jack Shewmaker both on board in senior positionsgave us about as much talent under one roof as any one retailer could ever hope to have. In recent years,I've taken a lot of pride in the fact that our fastest expansionthe greatest growth period in the history ofretailactually came after everybody thought our goose was cooked and ready to be eaten by the Kmartfolks from Detroit.

Another point missed by Margo Alexander and others was that a very fortunate thing happened to us onthe competitive front: Kmart was developing its own problems. Toward the end of 1976, they hadpurchased more than two hundred store locations left over from the defunct Grant's chain, and they hadtheir hands full trying to make that work. Not only that, they seemed to have a management philosophy atthe time of avoiding all change, something that never works in this business. I'm sure that worrying aboutWal-Mart fell way down on their priority list, and I occasionally think back to how lucky we were not tohave had to face Harry Cunninghamor Kmart's current management teamduring that period.

Regardless of what was going on at Kmart, the new team we had in place in Bentonville by the lateseventies had us well positioned for the next decade of growth. It was around this same time that many ofthe high-flying promoters in the discounting business began to struggle for their lives. The nationaleconomy weakened in the mid-seventies, and the intense competition among the real merchants began todrive the fast-buck types out of the business. The more efficient Kmart, Target, Wal-Mart, and some ofthe regionals became, and the more we bumped into each other in competitive situations, the more wewere able to lower prices.

The percentage of gross margin in this industryreally, the markup on merchandisehas dropped steadilyfrom around 35 percent in the early sixties to only 22 percent today. Almost all of that representsincreased value and savings to the customers who shop discount stores. So the guys who weren't runningefficient operations, who had taken on lots of debt and were living high and not taking care of theirassociates, who weren't scrambling around to get the best deals on merchandise and passing those dealson to their customers, these guys got into trouble. When we saw Kmart headed right after us in 1976 and1977, we decided we could pick up some speed in our expansion efforts by acquiring some strugglingdiscounters.

Because Wal-Mart had always been such a homegrown operation, this whole period sparked a lot ofphilosophical debate around our offices, and, frankly, I changed sides so often that I drove everybodyinvolved pretty crazy. I didn't have many problems at all with our first real acquisition, which came in1977. My brother Bud and David Glass negotiated a deal to buy a small chain called Mohr Valuediscount stores up in Illinois. Their stores had been averaging $3 million to $5 million a year per store,and it seemed like a good way to put a beachhead into some new territory. We closed five stores andconverted the remaining sixteen to Wal-Marts, and it wasn't much of a shock to our system.

It sure didn't slow us down any because two years later, in 1979, with about 230 stores on the street,we hit a billion dollars in sales for the first time. Of all the milestones we ever reached, that one probablyimpressed me the most. I have to admit, I was amazed that Wal-Mart had turned into a billion-dollarcompany. But I couldn't see any logic to stopping there, and right about then another acquisitionopportunity came our way.

This one was a good bit more disruptive, but it helped us make a geographic leap that was very important to our expansion. A lot of people back East who don't know much about Wal-Mart still think of ustoday as a "Southern" discount operator. Maybe it's because we're in Arkansas, which most people thinkof as a Southern state, even though where we are is really more Midwestern. Or maybe it's because ofour downhome image. But the truth is that until 1981, we had almost no stores east of the Mississippi.

We were big in Arkansas, Louisiana, Mississippi, and Texas, but had nothing in Tennessee, Alabama,Georgia, or the Carolinas. We weren't much of a competitor in the South at all.

On the other hand, Kuhn's Big K stores had become a good-sized player in the South. Based inNashville, Tennessee, Kuhn's had started as a single variety store back sometime before 1920. JackKuhn and his brother Gus had converted the company into a discounter, made an acquisition or two, andgrown it into a chain of 112 stores, concentrated in Tennessee, but also doing business in Kentucky,Alabama, Georgia, and South Carolinaall states where we thought we could do well. We were a goodbit bigger than they were, but the two of us had been watching each other pretty closely. It was sort oflike the old variety store days when one chain, like TG&Y, wouldn't go into the territory of another chain,like Hested's. We knew that one way or another we had to head on into the South, and I guess westirred them up by crossing the Mississippi and opening a store in Jackson, Tennessee. They retaliated byopening stores in West Helena and Blytheville, Arkansas. The truth is, we were closing in on Kuhn's andreally doing a better job than they were. In fact, they were beginning to f............