Charlie Munger on retail and chain stores

A CASE STUDY IN ECONOMIES VS. DISECONOMICS - WAL-MART VERSUS SEARS, ROEBUCK. -------------------------------------------------------------------------------- A chain store can be a fantastic enterprise. Munger: On the subject of advantages of economies of scale, I find chain stores quite interesting. Just think about it. The concept of a chain store was a fascinating invention. You get this huge purchasing power - which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. (reducing risk when innovating) And you get specialization. If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, he's going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying. The reverse is demonstrated by the little store where one guy is doing all the buying. It's like the old story about the little store with salt all over its walls. And a stranger comes in and says to the store owner, "You must sell a lot of salt." And he replies, "No, I don't. But you should see the guy who sells me salt." So there are huge purchasing advantages. And then there are the slick systems of forcing everyone to do what works. So a chain store can be a fantastic enterprise. Sam Walton played the game harder and better than anyone. Munger: It's quite interesting to think about Wal-Mart starting from a single store in Bentonville, Arkansas - against Sears Roebuck with its name, reputation and all of its billions. How does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck? And he does it in his own lifetime - in fact, during his own late lifetime because he was already pretty old by the time he started out with one little store.... He played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything anybody else ever did that was smart - and he did it with more fanaticism and better employee manipulation. So he just blew right by them all. -50- And he had a very shrewd strategy.... Munger: He also had a very interesting competitive strategy in the early days. He was like a prize fighter who wanted a great record so he could be in the finals and make a big TV hit. So what did he do? He went out and fought 42 palookas. Right? And the result was knockout, knockout, knockout - 42 times. Walton, being as shrewd as he was, basically broke other small town merchants in the early days. With his more efficient system, he might not have been able to tackle some titan head-on at the time. But with his better system, he could sure as hell destroy those small town merchants. And he went around doing it time after time after time. Then, as he got bigger, he started destroying the big boys. Well, that was a very, very shrewd strategy. I believe that the world is better for having Wal-Mart. Munger: You can say, "Is this a nice way to behave?" Well, capitalism is a pretty brutal place. But I personally think that the world is better for having Wal-Mart. I mean you can idealize small town life. But I've spent a fair amount of time in small towns. And let me tell you - you shouldn't get too idealistic about all those businesses he destroyed. Plus, a lot of people who work at Wal-Mart are very high grade, bouncy people who are raising nice children. I have no feeling that an inferior culture destroyed a superior culture. I think that is nothing more than nostalgia and delusion. But, at any rate. it's an interesting model of how the scale of things and fanaticism combine to be very powerful. Sears was a classic case study in diseconomics. Munger: And it's also an interesting model on the other side - how with all its great advantages, the disadvantages of bureaucracy did such terrible damage to Sears, Roebuck. Sears had layers and layers of people it didn't need. It was very bureaucratic. It was slow to think. And there was an established way of thinking. If you poked your head up with a new thought, the system kind of turned against you. It was everything in the way of a dysfunctional big bureaucracy that you would expect. In all fairness, there was also much that was good about it. But it just wasn't as lean and mean and shrewd and effective as Sam Walton. And, in due time, all their advantages of scale were not enough to prevent Sears from losing heavily to Wal-Mart and other similar retailers.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com