Walmart: Low Prices Start in the Warehouse

The story

Sam Walton opened the first Walmart store in Rogers, Arkansas, on July 2, 1962. His idea was simple: sell for less than anyone else, and make up for thin profits on each item by selling many more items. Many of his early stores were in small towns.

Low prices are easy to promise and hard to keep. If a store pays too much to get goods onto its shelves, it cannot cut prices for long. So Walmart treated logistics, the business of moving and storing goods, as a weapon. Around 1970 to 1971 it opened its first distribution center in Bentonville, Arkansas. A distribution center is a giant building where trucks from suppliers unload and other trucks carry goods out to stores. Walmart built new stores within driving distance of these centers, like spokes around the hub of a wheel, so its own trucks could restock them quickly.

Walmart became famous for a method called cross-docking. In a normal warehouse, goods arrive, sit on shelves for weeks, and then get shipped out. In cross-docking, goods from a supplier's truck move across the building and onto a truck headed to a store, often within hours, without being stored at all. That saves rent, labor and the cost of money tied up in inventory. A widely cited figure says Walmart moved about 85 percent of its merchandise this way.

Technology made the system faster. Walmart began scanning bar codes at its registers in 1983, so it knew exactly what sold. In 1987 it finished the largest private satellite network in the United States, at a cost of about $24 million, linking every store to headquarters for voice, data and video. Around 1991 to 1992 it created Retail Link, a system that let suppliers see how their products were selling in each store, so they could plan production and restock shelves before they went empty.

All of this supported a pricing idea often called "everyday low prices." Many stores use a high-low approach: regular prices are higher, and then big sales pull shoppers in. Walmart aimed instead for steady low prices on most items, every day, so customers did not have to wait for a sale. From 1988 to 2007 its slogan was "Always Low Prices. Always." Steady prices also made demand easier to predict, which helped the supply chain run smoothly.

The results were striking. Walmart reached $1 billion in yearly sales in 1980 and its first $100 billion year in 1997. By 2009, it sold through its entire inventory about 8.5 times a year, compared with about 6.4 times for Target and fewer than 2 times for the average U.S. retailer.

Walmart's rise also brought real criticism, which is part of a fair story. Critics have argued that its low prices hurt small-town shops, that it pushed suppliers hard, and that it paid workers too little; employees have held strikes over wages, and Walmart has since raised its starting pay. Families can admire the cleverness of the system while still asking who pays for low prices.