Can Wal-Mart Get Any Bigger?

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Yet for Wal-Mart to get where it isn't is going to be a lot harder than it was to get where it is. Even with sales expected to grow to about $240 billion for the fiscal year that ends Jan. 31, price wars in its grocery business narrowed Wal-Mart's profit margin to its lowest level in four years. The company plans to fatten profits by becoming more of a producer and even designer of its goods, especially clothing. It's making blouses in China and towels in India that it intends to sell everywhere from Berlin to Beijing and Boston. But fashion is a notoriously fickle business. And by diving deeper into the manufacturing of more of its products, Wal-Mart is braving a path that has brought grief to some of history's biggest retailers, such as A&P and Sears.

Wal-Mart's centralization of power at its headquarters in Bentonville, Ark., could produce agitation among the managers of its stores, who have traditionally been granted considerable independence in stocking what locals want. And consumers get bored by one-size-fits-all merchandise. Says Ira Kalish, an analyst for consultancy Retail Forward, in a mostly bullish report on Wal-Mart: "Excessive size could breed bureaucracy as well as failures in the areas of merchandising and customer relations."

Whether--and how--Wal-Mart meets these challenges will be of vital importance to its customers, its 1.3 million worldwide employees, the owners of its widely held stock and even the U.S. economy. According to an independent study by McKinsey & Co., Wal-Mart's efficiency gains were the source of 25% of the entire U.S. economy's productivity improvement from 1995 to 1999. "When you become No. 1 and as big as we are, business has a tendency to complicate if you don't do things to force yourself to keep it simple," says Tom Coughlin, head of Wal-Mart's store operations. As simple as keeping the right products in stock--a huge problem for Kmart. And maintaining a smooth checkout system. "We call it Take the Money," says Coughlin. What's the point of low prices if consumers can't pay for their items quickly? Wal-Mart's operating mantra has been "a store at a time," meaning that no one can manage thousands of stores; it has to be done locally.

Long before it was fashionable, Wal-Mart pushed responsibility and information to the lowest ranks. Managers of departments such as sporting goods or women's apparel still get detailed reports of sales and profits in their areas, and they have a say in which products are stocked. Store managers can still buy locally and ask headquarters to adjust inventory of company brands that it has asked them to stock. Coughlin says Wal-Mart will not stray far from the locals-know-best model, even as more information and merchandise flows through Bentonville. At headquarters, management focuses on the top 20% and bottom 20% of its stores, as measured by sales and profitability. It wants to know who has been naughty and who has been nice and why. The rest are largely on their own.