How do you think online shopping changes the cost structure of the corporation/company of this industry?

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How do you think online shopping changes the cost structure of the corporation/company of this industry?

Wal-Mart Stores
This case was prepared by Charles W. L. Hill of the School of Business, University of Washington, Seattle.
 
CI0-1Introduction
In July 1962, Sam Walton opened his first Wal-Mart discount store in Rogers, a small Arkansas town with a population of 6,000. That same year, both Kmart and Target opened their first stores, although unlike Sam Walton, they focused on large metropolitan areas. By 2017, Wal-Mart had eclipsed its rivals to become the largest retailer in the world, with annual revenues of close to $490 billion. The company had 2.3 million employees and more than 11,700 stores in 28 countries including 5,350 in the United States that were served by more than 150 distribution centers. In the United States. Wal-Mart was bigger than the next four retailers combined. The company accounted for over 7% of all U.S. retail sales. More than 96% of the U.S. population lived within 20 miles of a Wal-Mart store.
However, all was not well in Bentonville, Wal-Mart’s Arkansas headquarters. While the company continued to perform well, the strong growth of an earlier era was no longer evident. Indeed, in 2015, annual revenues fell for the first time since the company went public in 1970. Not only was the core U.S. market saturated, Wal-Mart was also facing increasing competition from online retailers, particularly Amazon.com. As of 2017, Amazon was generating $120 billion in online sales, far more than Wal-Mart’s $16 billion. Moreover, Amazon’s 2017 acquisition of the Whole Foods chain signaled that it was going after the grocery business, a category that Wal-Mart had dominated since first expanding into the area back in 1988. In the wake of its August 2017 takeover of Whole Foods, Amazon cut grocery prices by as much as 40% on some products. Store traffic surged by 25%.
 
CI0-2Early History
The Wal-Mart store in Rodgers was not Walton’s first retailing venture. That was a Ben Franklin variety store in Newport, Arkansas that Walton, an Arkansas native, took over in 1945 when he was just 27. Variety stores offered a selection of inexpensive items for household and personal use—a concept that had been pioneered by F. W. Woolworth in the late nineteenth century. By 1962, Walton was a well-established Ben Franklin franchisee running 15 variety stores in small towns across Arkansas and Kansas. It was a business where Walton had honed his skills, competing against other small-town variety stores. From the outset, Walton focused relentlessly on reducing prices, cutting costs, and making a living on slim margins. His overarching philosophy was to sell items that people need every day just a little cheaper than everyone else, and to sell it at that low price all the time. He believed that if you offered everyday low prices, customers would flock to you. His experience in the variety store business had taught him the value of this approach. To make this strategy work, you had to control costs better than the next guy. By all accounts, Walton made a religion out of frugality, tightly controlling expenses. Moreover, while still a Ben Franklin franchisee, he had pushed the boundaries of what was possible in the retailing business. Walton was one of the first retailers in the country, and the first in the South to adopt a self-service format.
Walton was fascinated by what other retailers were doing. He was known for visiting them and checking out their stores. He would walk into their headquarters, often unannounced, and ask to meet with senior managers. He would pepper them with questions, writing everything he saw and heard down on a yellow legal pad. When the discounting concept started to emerge in the mid-1950s in the Northeast he made a point of visiting those stores, befriending their management, and gathering as much information as he could. These visits convinced Walton that large-footprint, general merchandising discount stores would be the wave of the future. He believed that the wider range of products and better buying power of discount stores would ultimately put traditional small-town variety stores like his out of businesses. This led to the establishment of the first Wal-Mart store.
Initially, Walton had wanted Ben Franklin to back his idea of building large discount stores in small towns. As he put it, “I was used to franchising, and I liked the mindset, I generally liked my experience with Ben Franklin, and I didn’t want to get involved in building a company with all that support apparatus.”
Ben Franklin turned him down. They didn’t see the value in small towns. Walton’s experience as a Ben Franklin franchisee, however, had taught him that there was money to be made in small towns.
The Rodgers store took two years to hit its stride, but by 1964 it was generating $1 million in annual revenues, three to five times what traditional variety stores made. This gave Walton the confidence to open two additional Wal-Marts in nearby towns, in Harrison and in Springdale. The Harrison Wal-Mart was a basic affair. It was just 12,000 square feet with an 8-foot ceiling, a concrete floor, and bare-boned, wooden plank fixtures. Walton called it ugly. David Glass, who would become CEO after Walton, said that it was the worst-looking retail store he had ever seen. But as Walton noted, “We were trying to find out if customers in a town of 6,000 people would come to our kind of barn and buy the same merchandise strictly because of price.”
By keeping costs as low as possible, Walton found he could keep prices 20% below those of nearby variety and specialty stores. He quickly discovered that his promise of everyday low prices attracted many customers.
In Springdale, a town of close to 15,000, Walton was trying to learn something else—would a 35,000- square-foot store work in a larger town? Here too, the answer was yes. The key was that these stores would draw in people from the surrounding small communities, who would drive an hour to the Wal-Mart to gain price discounts. Although similar discounts might be available at large suburban stores, those might be three hours’ drive or more away. These early Wal-Mart stores had longer opening hours that rival merchants, plenty of parking space, and they utilized the self-service concept.
By the time Walton had three Wal-Mart’s up and running, he realized that the discounting formula was a success. The strategy that was emerging from these early experiences was to put a good-sized discount store into little, one-horse towns that everyone else was ignoring. While rivals like K-Mart wouldn’t go into a town smaller than 50,000, Walton believed that towns as small as 5,000 could support one of his stores when you considered the population of the surrounding area. As noted by Ferold Arend, Wal-Mart’s first vice president:
The truth is, we were working with a great idea. It was really easy to develop discounting in those small communities before things got competitive. There wasn’t a lot of competition for us in the early days because nobody was discounting in the small communities.
One of the problems of focusing on small towns, however, was that getting good deals from distributors and wholesalers was difficult. They would charge Wal-Mart for the extra cost of delivering to a small-town store out in the sticks, something that irritated Walton, whose obsession with controlling expenses knew no bounds. To make matters worse, large, consumer-product companies such as Procter & Gamble, Gillett, and Kodak would dictate how much they would sell to Wal-Mart, and at what price. In the early days, ordering merchandise was also decentralized to individual store managers, so there was no opportunity to realize economies of scale from bulk purchasing.
Walton realized that this situation was untenable. The solution was to open the first Wal-Mart distribution center, close to the company’s headquarters in Bentonville, Arkansas. Buying was centralized in Bentonville to get discounts from bulk purchases. Suppliers would drop ship merchandise at the distribution centers. Then Wal-Mart would truck it out to the stores in the area to replenish inventory. A cross-docking system was developed in the distribution center to facilitate this process. It was at this point that Wal-Mart started to build its own trucking fleet to transport inventory.
For the distribution system to work efficiently, Wal-Mart needed information to know what merchandise to order and when to replenish each store. This requirement drove Wal-Mart to become an early adopter of computer-controlled inventory systems. Walton himself realized the need for better information systems early on, and enrolled in an IBM school for retailers in 1966. Nevertheless, he was reluctant to spend the money on information technology and only relented in the 1970s after pressure from some of his managers. In retrospect, Walton acknowledged that Wal-Mart was forced to be ahead of the times in distribution and information systems because the stores were situated in small towns.
During this period, Walton was also building a strong management team. In what would become a hallmark of Walton’s approach, he would spot talented managers at other retailers and try to persuade them to work for him. Walton could be tenacious. He would keep pursuing talented managers until they agreed to join the company. For example, David Glass, who would eventually succeed Walton as CEO, was pursued by Walton for a decade before he agreed to join Wal-Mart in 1976. Early recruits included Ferold Arend, the company’s first chief operating officer, Bob Thornton, who was bought on to open Wal-Mart’s first distribution center, and Ron Mayer, who joined in 1968 as VP for finance and distribution. All three had experience at other retailers. Mayer pushed Walton to invest in computer systems to improve distribution, and hired the first data processing managers.
By the late 1960s, Walton had established the foundations for future growth. The Wal-Mart discounting concept had proved attractive; the strategy of focusing on small towns was already paying dividends; he had surrounded himself with a talented team of managers; and with the opening of its first distribution center; and the adoption of formal inventory control systems the company was well placed to replicate its formula across America. At the same time the company was still small-Wal-Mart only had 18 stores in 1969 and sales of $9 million, whereas K-Mart had 250 stores and sales of $800 million (Kmart was owned by the well-established department store retailer Dayton Hudson). To grow, Walton needed capital.
Up to this point, Walton had financed Wal-Mart’s growth from a mix of cash flow and debt. By 1969, the company was not generating enough cash to fund Walton’s growth ambitions and pay down the company’s debt. Walton believed that he needed to grow the company rapidly before rivals figured out his small-town strategy. Initially he tried to raise more debt, but was turned down by several institutions who didn’t buy into his strategy, and was “fleeced” by those who were prepared to lend him more. Walton was getting tired of owing other people money. He decided to take the company public. On October 1, 1970, Wal-Mart had its initial public offering (IPO), selling 300,000 shares at $16.50 a share. After the IPO, the Walton family still held onto 61% of the stock. The IPO raised close to $5 million. This allowed Walton to pay down debt and fund the next stage of expansion.
CI0-3Building the Colossus
Wal-Mart’s growth strategy was very deliberate. While other discounters were leapfrogging from large city to large city, for decades Wal-Mart focused on its small-town strategy. The company wanted stores to be within a day’s drive of distribution centers (about 350 miles) so that they could be restocked regularly. Regular replenishment reduced the need to store inventory in a dedicated space at the back of the store, which meant that more square footage could be devoted to selling merchandise, increasing sales per square foot. While rivals typically devoted 25% of their square footage to storing inventory, Wal-Mart kept this figure down to 10%. As Wal-Mart expanded its own trucking fleet, it also started to pick up merchandise from suppliers in the area, rather than have them drop goods off at the distribution centers. Trucks would replenish a store, then pick up goods from a supplier on the way back to the distribution centers so they had loads on the backhaul. When Wal-Mart took logistics costs off suppliers, it negotiated lower prices, and then passed on those cost savings on to its customers in the form of lower prices.
Initially, Walton wanted stores to be situated close enough to each other so that they were within reach of management at Bentonville. Walton, a licensed pilot, would frequently fly his small plane from Bentonville to surrounding stores, often dropping in unannounced. As the company grew, he appointed regional vice presidents to oversee stores clustered in certain territories. Wal-Mart started to invest in a fleet of small aircraft. The regional vice presidents were based in Bentonville. They would fly out on Monday morning to visit stores in their territory, returning Thursday. Walton insisted that they return with at least one good idea to pay for the trip. As always, expenses were tightly controlled. When travelling, managers were expected to stay in cheap hotels, share rooms, and eat at budget restaurants. On buying trips to suppliers, managers were instructed to keep expenses below 1% of total purchases.
As it expanded, Wal-Mart first saturated the area within a day’s drive of Bentonville. Once an area was saturated Wal-Mart would build another distribution center in an adjacent area, go as far as possible from that center and put in a store, and then fill in the territory around the distribution center. As Walton described it:
We would fill in the map of that territory, state by state, country seat by county seat, until we had saturated that market area. We saturated northwest Arkansas. We saturated Oklahoma. We saturated Missouri … and so on.
Wal-Mart never planned to enter cities. Instead, the company would build stores in a ring around cities, some way out, and wait for the growth to come to the stores. The strategy seemed to work.
The saturation strategy had benefits beyond management control and distribution efficiencies. Walton never liked to spend much on advertising. The company found that when it went from small town to small town, filling in an area, word of mouth would get Wal-Mart’s everyday low pricing message out to customers, allowing it to reduce advertising expenses. Clustering stores also made it difficult for rivals to get traction in an area. For example, in the Springfield, Missouri area, Wal-Mart had 40 stores within 100 miles. When K-Mart finally entered the area with three stores, they had a hard time getting business.
Walton himself would spend a good deal of time flying around an area scouting out possible store locations. From the air, he could get a good idea of traffic flows, see which towns were growing, and evaluate the location of competitors, if there were any. He had a major hand in picking the first 150 store locations before being forced by the growing complexity of managing Wal-Mart to delegate that task.
CI0-3aDeveloping Information Systems and Logistics
Over time, one key to Wal-Mart’s expansion was the introduction of state-of- the-art information systems and logistics. Walton had been interested in the potential of computers as far back as the mid-1960s, but the real push came with the hiring of David Glass in 1976 as executive VP of finance. Glass convinced Walton to put mini computers in every store to track sales. These were linked to the distribution centers and to the headquarters at Bentonville. Glass was instrumental in persuading Walton to insist that suppliers place barcodes on every item so that they could be scanned at sale. Indeed, Wal-Mart was the first retailer to mandate that suppliers’ barcode every item.
The company originally used phone lines to transmit data on sales, but as the volume of data grew the phone lines became congested. In the days before the development of the Internet and high-capacity, fiber-optic communications systems, this was a major bottleneck. To deal with this problem, Wal-Mart committed $24 million to build a communication system under which data would be uploaded via microwave dishes at every store to a satellite, which would then transmit the data to Bentonville and the distribution centers. Launched in 1983, the system was the first of its kind. The satellite system allowed Wal-Mart to dive deep into its operations, tracking the history and real-time sales for every single item at every single store.
Glass also pushed for the development of highly automated distribution centers linked by computers and the satellite system to the stores and to suppliers. Wal-Mart’s first distribution center outside of Bentonville was built at Glass’ insistence. Goods are bought into distribution centers, scanned, placed on laser-guided conveyer belts, and then directed to the appropriate truck to deliver them to stores. By the early 1990s, Wal-Mart had 20 distribution centers around the nation. Wal-Mart was now directly replenishing about 85% of its in-store inventory from its own distribution centers, compared to only 50 to 65% for its rivals (today, there are over 150 distribution centers in the United States). The internalization of logistics allowed Wal-Mart to reduce to two days the gap between when stores placed a request for replenishment and when they received that inventory. This compared to a five-day gap for many competitors. By the early 1990s, Wal-Mart estimated that its logistics costs were running at about 3% of sales, compared to 4.5-5% of sales at rivals.
As Wal-Mart added distribution centers, its trucking operation grew. Today, it operates the largest private trucking company in the United States. This consists of over 7,200 drivers, 6,000 trucks, 53,500 trailers, and 5,600 refrigerated trailers. As a vital link in the company’s logistics network, the trucking operations of Wal-Mart have become progressively more efficient over time. For example, in 2005, Wal-Mart set itself the goal of doubling the efficiency of its fleet by 2015. By 2014, the company reported that its trucks had delivered 830 million more cases while driving 300 million fewer miles than in 2005, an improvement of 84.2% over 2005. This had been achieved through more efficient loading and unloading of merchandise, better routing, GPS tracking, new tractor technologies, and so on.
One important innovation for which Glass was responsible was Wal-Mart’s Retail Link program. First introduced in 1985, this proprietary, trend-forecasting software delivers important sales information to suppliers at no direct cost. Retail Link benefitted suppliers, enabling them to adjust their own production schedules and product plans to meet consumer demand as reviled by Wal-Mart’s sales data. At the same time, this software gave Wal-Mart deep insight into a supplier’s sales and profit margins, information that Wal-Mart uses to bargain for lower prices from suppliers. As is the practice at Wal-Mart with all cost reductions, those cost savings were then passed onto consumers in the form of lower selling prices.
One consequence of Wal-Mart’s investments in information systems and logistics has been better stock replenishment and faster inventory turnover. By 2016, Wal-Mart was turning over its inventory 8.39 times per year, compared with 5.88 times per year at Target and 7.70 times at online rival Amazon. Among other things, faster inventory turns can boost sales per square foot. On this measure, Wal-Mart has long bested rivals such as Target. According to eMarketer, in 2016 Wal-Mart regitered sales per square foot of $425, compared with $276 at Target.
Despite Wal-Mart’s prowess in information systems, not all its initiatives have succeeded. In 2003, for example, it announced that its top 100 suppliers would have to tag pallets and cases of goods with radio frequency identification (RFID) tags. The goal was to improve the efficiency of Wal-Mart’s logistics operation by passively tracking goods as they passed through the supply chain. In practice, technological problems resulted in spotty implementation and the initiative stumbled. But Wal-Mart learnt something from this—the company realized that RFID might have uses inside a store to maintain the right inventory mix. For instance, a shelf may look full of shirts, but what if they are only in sizes small and extra large? RFID can help scan a shelf without the cost of tedious hand sorting of merchandise or bar code scanning to identify stocking shortages.
CI0-3bSupplier Relations
As Wal-Mart grew, its relationship with suppliers shifted. In the early days, powerful suppliers of branded products such as Procter & Gamble had dictated terms to Wal-Mart. However, Wal-Mart consolidated its buying in Bentonville, and as the company grew its buying power began to increase. Today Wal-Mart is by far the largest distributor for many consumer products companies. For example, in 2015 Clorox earned 26% of its revenue from Wal-Mart sales, Kellogg 21%, Campbell Soup 20%, and Procter & Gamble 14%.
Wal-Mart refers to its 60,000 plus suppliers as “partners,” but there is little doubt who is the senior partner in this relationship. Wal-Mart does work closely with its suppliers, providing them with detailed information through its Retail Link program that helps them to identify inefficiencies and improve their product planning and product offerings. Wal-Mart also provides suppliers with the opportunity to attain tremendous sales volume, which can enable them to achieve economies of scale. Even if suppliers make very slim margins selling to Wal-Mart, the information and economies of scale they get may enable them to make more money elsewhere. To take advantage of this relationship, many of Wal-Mart’s larger suppliers have established offices next to Wal-Mart’s headquarters in Bentonville. One of the first to do so was Procter & Gamble, which open its Bentonville office in 1987 and now has a 250-person team dedicated to working with Wal-Mart.
In return for its provision of data and volume, Wal-Mart is relentless in demanding lower prices and better payment terms. Any cost savings achieved are then passed on to Wal-Mart’s customers in the form of lower prices. As David Glass once said, “We want everybody to be selling the same stuff, and we want to compete on a price basis, and they will go broke 5% before we will.”
Wal-Mart’s Bentonville buying center is legendary for its sparse fittings—conference rooms with no doors furnished with cheap tables and mismatched plastic chairs that Wal-Mart was not able to sell—so it used them to furnish their offices instead. Some supplier representatives have reported having to sit on boxes because there were no chairs available. Suppliers were also required to give Wal-Mart a toll-free number to call, or to take collect calls from Wal-Mart buyers. The idea was to convey an impression of austerity. Wal-Mart’s buyers constantly push suppliers to lower their prices, often by 5% per year. After squeezing out all the efficiencies they can at home, many suppliers have only been able to achieve further cost reductions by moving production offshore to low cost locations such as Mexico or China, leading to claims that Wal-Mart has been a major reason for the hollowing out of U.S. manufacturing.
Wal-Mart has also used its power to extract better payment terms from its suppliers. Suppliers may be paid net 60 days after Wal-Mart takes ownership of a product, as opposed to the normal net 30 days. They may have to pay additional fees to cover the cost of their goods being transported through Wal-Mart’s logistics system. Since the early 2000s, Wal-Mart has been pushing suppliers to agree to “pay on scan” contracts where Wal-Mart does not take ownership of a good until it is scanned for sale at the checkout, effectively enabling Wal-Mart to push off significant inventory costs onto suppliers.
Since the early 1990s, Wal-Mart has also developed its own store brand offerings. These include goods sold under the Sam’s Choice and Great Value labels. Often priced 20-30% lower than national brands, the presence of private label offerings is another mechanism that can be used to pressure suppliers to reduce their prices. As a management consultant who worked with Wal-Mart suppliers noted:
Year after year, for any product that is the same as what you sold them last year, Wal-Mart is going to say, here’s the price you gave me last year. Here’s what I can get a competitor’s product for; here’s what I can get a private label version for. I want to see a better value that I can bring to my shopper this year. Or else I’m going to use that shelf space differently.
CI0-3cManaging the Business
Sam Walton believed in hard work, frugality, discipline, loyalty, and a restless effort at constant self-improvement. He described himself as a conservative, except when it came to business, where he was a champion of innovation and disruption. He believed in treating employees well, in giving them responsibility and a stake in the business through stock and profit sharing, but also in checking up on them. He was a numbers man, he wanted data on everything, and Wal-Mart’s information systems gave him that. In turn, the data gave him and his managers the raw material required to control his ever-expanding empire, to manage its merchandise offering, inventory turns, stores and employees.
He looked for the same values in the people he hired. If he saw a successful manager at another retailer who shared his values, he would do his best to hire them. If they said no, he would persist until he got his way. He would interview other applicants for management positions multiple times before making a hiring decision, trying to get a sense for who this person was and what their values were.
To this day, the consequences are easy to see. Wal-Mart’s headquarters’ staff works relentlessly hard. Buyers and midlevel staffers get to work at 6:30 a.m., senior executives often arrive even earlier. Routine quitting time ranges from 5 p.m. to 7 p.m. depending on the job, the season, the workload. All white color workers work from 7 a.m. to 1 p.m. on Saturday, including attending the legendary Saturday morning meeting. The meetings open with the Wal-Mart cheer, an idea that Walton got from a visit to a South Korean tennis ball factory in 1975. At the meetings, Walton and other managers would discuss the performance of the company, it’s stores, departments, and even individual items. There would also be entertainment—performances by well-known music stars and comedians, pep talks by NFL football players, competitions between top managers, light hearted hazing of managers who had lost a bet with Walton. Walton himself once danced the Hula in a grass skirt on Wall Street after losing a bet with David Glass about sales. After losing a bet with Walton, another manager road a horse down the main street in Bentonville wearing a blond wig and pink tights.
The stores have their own version of the Saturday morning meeting. Associates meet before every shift to talk about the store’s performance, describe their favorite in store items, and perform the Wal-Mart cheer.
Wal-Mart centralizes much of its operations in Bentonville, including buying, logistics and decisions about information systems. It even controls the temperature of its U.S. stores from Bentonville. However, it does give store managers discretion on merchandizing and some on pricing. Regarding merchandizing, Wal-Mart understands that different locations require a different merchandizing mix, which is why Walton always stressed that store managers should be good merchants with a close eye on what sells in their community. Wal-Mart’s buyers are told to pay close attention to what the merchants in the store want. Through its information systems, Wal-Mart also supplies store managers with detailed information on what is selling in their store, along with their monthly profit and loss statements, allowing them to fine tune the merchandizing mix and compare their performance with other stores in Wal-Mart’s system. On pricing, store managers have long had the authority to match prices being offered at competing stores in their neighborhood if those prices are lower than Wal-Mart’s.
More generally, store managers are responsible for hiring and supervising employees, meeting financial goals, enforcing work place regulations, delegating work, tracking inventory, analyzing sales data, processing payroll and coordinating merchandising ship-ments. Store managers are supervised by Regional Vice Presidents. Wal-Mart does not have regional headquarters, which saves money. Instead the Regional VPs are based in Bentonville, but typically travel 3-4 days a week, visiting stores in their territory. Store managers earn between $50,000 and $175,000 a year. In addition, they earn bonuses tied to store performance and participate in Wal-Mart’s profit sharing plans.
Wal-Mart refers to its hourly paid employees as “associates.” Sam Walton came up with the idea of calling employees “associates” after visiting a retail stores in the United Kingdom where employees were called associates. It got him thinking about the importance of building a partnership with employees. Walton freely admits that in the early days, he was so cheap that he didn’t want to pay hourly employees much. Over time he came to the realization that if the company treated employees well, they would treat customers well, and happy customers would come back and buy more. Wal-Mart had a profit sharing plan in place for managers after it went public in 1970. The following year he expanded the plan to include any associate who had been with the company for at least a year and worked at least 1,000 hours. Using a formula based on profit growth, Wal-Mart contributed a percentage of every employee’s eligible wage to a profit sharing plan. Much of the money in that plan was invested in Wal-Mart stock. When they leave the company, employees can take the accumulated amount either in Wal-Mart stock or cash. For many years, the annual contribution amounted to about 6% of an hourly employee’s earnings. For those who got in early, the accumulated amount upon retirement could be hundreds of thousands of dollars in Wal-Mart stock. To boost this still further, Wal-Mart introduced an employee stock purchase plan, where employees can purchase Wal-Mart stock through a payroll deduction at a 15% discount to the market value. Wal-Mart changed the associate plan in 2010, replacing it with a 401 k plan under which Wal-Mart will match 100% of an employee’s contribution up to 6% of their pay.
Walton also instituted an open book policy at Wal-Mart, sharing important information on a regular basis with associates including store purchases, profits, sales, and markdowns. In Walton’s view, it was important for associates to get to know the business, so that they could become better employees. The open book policy also fed into Wal-Mart’s strategy of promoting from within. Around 75% of store managers at Wal-Mart today started as hourly paid associates. The company claims it now promotes around 160,000 associates each year. Associates can get promoted to supervisors, department managers, assistant managers, and finally store managers. Store managers move frequently, often every 18 to 24 months, a practice which Wal-Mart uses to deepen their experience. Talented store managers can continue to move up in the organization becoming, for example, regional vice presidents.
CI0-3dCriticisms of Wal-Mart
While much has been written about Walton’s ability to find, recruit and empower ordinary people to do extraordinary things, Wal-Mart has also been the target of sustained political and legal criticism over its treatment of employees, particularly since the turn on the century. Action lawsuit on behalf of 1.5 million women who have worked at Wal-Mart alleged systematic sex discrimination in promotion and pay. Other lawsuits have alleged that store managers routinely force hourly employees to punch out at the time clock, then return to work, putting in hours of unpaid labor. Wal-Mart has also been cited for knowingly hiring illegal immigrant labor to clean its stores, and shockingly, locking them in the stores at night.
Others have criticized Wal-Mart for paying its hourly employees so little that they must rely upon state assistant such as food stamps to make ends meet, leading to the allegation that Wal-Mart is indirectly subsidized by the state. Consistent with this, one academic study found that U.S. counties with more Wal-Mart stores in 1987, and counties with more additions of stores between 1987 and 1998, experienced greater increases (or smaller decreases) in family poverty rates during the 1990s-economic boom.
Another body of academic research suggests that the arrival of a Wal-Mart store frequently puts other local retailers out of business. A classic study by Kenneth Stone of Wal-Mart stores in Iowa found that while general merchandise sales grew 44% in the five years after Wal-Mart arrived, competing grocery stores lost 5% of their business, specialty stores 14%, and clothing stores 18%. Stone also found that between 1983 and 1993, small Iowa towns with populations of between 500 and 1000 lost 47% of retail sales as people simply drove to Wal-Mart to shop. Data like this has resulted in some small towns blocking Wal-Mart from locating in their area.
For its part, Wal-Mart has countered these criticisms by taking steps to improve its image. It has instituted a diversity program to try and equalize opportunity and pay across gender and ethnicity. In 2016, it increased its minimum wage for new hires to $10 an hour. The company also points out that it does offer a health care plan for employees who work more than 30 hours a week. Regarding the negative impact on local communities, Wal-Mart cites academic research that shows that long run price declines of 7-13% occur when Wal-Mart enters an area, which increases the disposable income of residents. Research also shows that while competitors lose jobs, after accounting for both job losses at competing retailers, and job gains at Wal-Mart, the establishment of a Wal-Mart store in a county does lead to a small net gain in jobs.
CI0-4Supercenters and Groceries
By the early 1990s, Wal-Mart was starting to encounter limits to its growth. It’s traditional market, small towns, was increasingly saturated. The company was relying for growth on suburban areas where competition was more intense. About this time, Wal-Mart decided to experiment with doubling the size of its stores to sell groceries alongside its general merchandise offerings in a format it called supercenters. At the time, the grocery business was dominated by long established supermarket chains including Albertsons, Safeway and Kroger.
In 1990, Wal-Mart had just nine supercenters. By 2000, it had 888, and by 2017, it had more than 3,500 supercenters in the United States alone. Along the way, Wal-Mart delivered a hammer blow to traditional grocery stores. By 2000, it was already the largest grocer in America. By 2016, Wal-Mart and its Sam’s Club subsidiary combined accounted for 26.2% of the food retail market in the United States; Kroger was second with at 10.2%, and Albertson’s third with 5.4%. Wal-Mart now generates more than half of its annual revenues from grocery sales.
One reason for Wal-Mart’s success in groceries is everyday low prices. Wal-Mart’s goal is for grocery prices to be 15% lower than that of its competitors 80% of the time. For a family of four that spends $500 a month of groceries, this can result in annual savings of $900 a year. The consequence for established grocery chains has been devastating. During its first decade in the grocery business, Wal-Mart’s dramatic rise in grocery sales pushed more than 30 supermarket chains into bankruptcy. Wal-Mart was cited as a catalyst in 24 of those cases. The price pressure continues today, with Wal-Mart driving down prices and pressuring margins at Kroger, Albertson’s and Target. To match Wal-Mart, Kroger states that it spent more than $3.7 billion to lower prices between 2006 and 2016. Despite Kroger’s attempts to match Wal-Mart, in 2016 Kroger’s food prices were still 4% above those of Wal-Mart according to price checks. On non-perishable and frozen items, Kroger was charging 5.6% more than Wal-Mart. Due to the ongoing price war for grocery sales, year to year food prices fell by 1.3% in 2016.
Keeping grocery prices low requires Wal-Mart to do what it has always done, use its economies of scale in purchasing and its logistics knowhow to drive down the price it pays suppliers and maximize its supply chain efficiency. For example, Charles Fishman explained how Atlantic salmon that might have cost $20 a pound in 1990 was selling for just $4.84 a pound in 2006. The Atlantic salmon sold at Wal-Mart is sourced from farms in Chile. Wal-Mart’s salmon use to come from Norway or Canada, but the constant quest for low prices drove Wal-Mart to look for lower cost supplies elsewhere. In turn, that helped to jump start the growth of fish farms in Chile, which is now the world’s second largest salmon producer (the introduction of fish farms, and the “mechanization” of salmon production is one reason for the price drop). In Chile, fish is harvested early in the morning while it is still dark, taken to processing plants, processed, then put on a truck or plane to Santiago, and then on a plane to Miami. Fish harvested in Chile can be on a dining room table in Iowa within 48 hours. Multiple the salmon story across Wal-Mart’s product lines, and it becomes clear why grocery prices are so low at Wal-Mart.
CI0-5SAM’S CLUB
Sam’s Club is a deep discount warehouse type store selling a limited range of merchandise at wholesale prices to buyers who wish to make bulk purchases. To shop at Sam’s Club, you must pay an annual membership fee ($45 in 2016). Wholly owned by Wal-Mart, the first Sam’s Club was established in 1983. Sam Walton got the idea from his friend and rival, Sol Price, who had pioneered the concept with his Price Club stores in California back in 1976. The original target market for Sam’s Club was small business owners, but it has expanded to include general consumers who wished to make bulk purchases of household items. As of 2016 there were 650 Sam’s Clubs in the United States and they generated $57 billion in annual revenues.
Sam’s Club faces very tough competition from Costco, the world’s second largest retailer. Costco had 750 warehouse stores around the world, and generated $129 million in annual revenues in 2017. Costco benefits from a focus on higher income households-Sam’s Club estimates that medium household income of its customers is around $80,000, compared to $120,000 for Costco. Costco also has very loyal customers, with about 90% renewing their annual membership. In addition to competition from Costco, Sam’s Club has reported some cannibalization of sales from Wal-Mart supercenters, and growing direct competition from Amazon.
To deal with competition from Costco, Sam’s Club started to shift its strategy in 2016. First, the company aims to open 8 to 10 new clubs each year in more affluent areas. Second, it will shutter underperforming stores. Third, it aims to adjust its merchandising categories to appeal to more upscale customers. Finally, it will continue to expand its private label offerings. Whether this strategic shift will be enough to attract new customers remains to be seen.
CI0-6International Expansion
In 1991, Wal-Mart started to expand internationally with the opening of its first stores in Mexico. The Mexican operation was established as a joint venture with Cifera, the largest local retailer. Initially, Wal-Mart made several missteps. It had problems replicating its efficient distribution system in Mexico. Poor infrastructure, crowded roads, and a lack of leverage with local suppliers, many of which could not or would not deliver directly to Wal-Mart’s stores or distribution centers, resulted in stocking problems and raised costs and prices. Initially, prices at Wal-Mart in Mexico were some 20% above prices for comparable products in the company’s U.S. stores, which limited Wal-Mart’s ability to gain market share. There were also problems with merchandise selection. Many of the stores in Mexico carried items that were popular in the United States. These included ice skates, riding lawn mowers, leaf blowers, and fishing tackle. Not surprisingly, these items did not sell well in Mexico, so managers would slash prices to move inventory, only to find that the company’s automated information systems would immediately order more inventory to replenish the depleted stock.
By the mid-1990s, however, Wal-Mart had learned from its early mistakes and adapted its operations in Mexico to match the local environment. A partnership with a Mexican trucking company dramatically improved the distribution system, and more careful stocking practices meant that the Mexican stores sold merchandise that appealed more to local tastes and preferences. As Wal-Mart’s presence grew, many of its suppliers built factories nearby its Mexican distribution centers so that they could better serve the company, which helped to further drive down inventory and logistics costs. In 1998, Wal-Mart acquired a controlling interest in Cifera. Today, Mexico is a leading light in Wal-Mart’s international operations, where the company is more than twice the size of its nearest rival.
The Mexican experience proved to Wal-Mart that it could compete outside of the United States. It has subsequently expanded into 27 other countries. In Canada, Britain, Germany, and Japan, Wal-Mart entered by acquiring existing retailers, and then transferring its information systems, logistics, and management expertise. In Puerto Rico, Brazil, Argentina, and China, Wal-Mart established its own stores (although it added to its Chinese operations with a major acquisition in 2007). Due to these moves, in 2017, the company had some 6,200 stores outside the United States, 800,000 foreign employees on the payroll, and generated international revenues of $116 billion.
In addition to greater growth, expanding internationally has brought Wal-Mart two other major benefits. First, it has been able to reap significant economies of scale from its global buying power. Many of Wal-Mart’s key suppliers have long been international companies; for example, GE (appliances), Unilever (food products), and P&G (personal care products) are all major Wal-Mart suppliers that have their own well established global operations. By building international reach, Wal-Mart used its enhanced size to demand deeper discounts from the local operations of its global suppliers, increasing the company’s ability to lower prices to consumers, gain market share, and ultimately earn greater profits. Second, Wal-Mart has found that it is benefiting from the flow of ideas across the countries in which it now competes. For example, Wal-Mart’s Argentina team worked with its Mexican management to replicate a Wal-Mart store format developed first in Mexico, and to adopt the best practices in human resources and real estate that had been developed in Mexico. Other ideas, such as wine departments in its stores in Argentina, have now been integrated into layouts worldwide.
Moreover, Wal-Mart realized that if it didn’t expand internationally, other global retailers would beat it to the punch. In fact, Wal-Mart faces significant global competition from Carrefour of France, Ahold of Holland, and Tesco from the United Kingdom. Carrefour is perhaps the most global of the lot. The pioneer of the hypermarket concept now operates in 26 countries and generates more than 50% of its sales outside France. Compared to this, Wal-Mart is a laggard, with just 24% of its sales in 2017 generated from international operations. However, there is still room for significant global expansion—the global retailing market remains very fragmented.
For all its success, Wal-Mart has hit speed bumps in its drive for global expansion. The overall profit rate of its international business is lower than its U.S. business. In 2006, the company pulled out of two markets, South Korea—where it failed to decode the shopping habits of local customers—and Germany, where it could not beat incumbent discount stores on price. It has also struggling in Japan, where the company does not seem to have grasped the market’s cultural nuances. One example is Wal-Mart’s decision to sell lower-priced gift fruits at Japanese holidays, which failed because customers felt spending less would insult the recipient! In 2016, Wal-Mart closed 115 underperforming stores in Brazil and several other Latin American countries in response to depressed local economic conditions.
The markets where Wal-Mart has struggled most were all developed markets that it entered through acquisitions, where it faced long-established and efficient local competitors, and where shopping habits were very different than in the United States (Germany and South Korea, for example). In contrast, many of those markets where it has done better have been developing nations that lacked strong local competitors, and where Wal-Mart has built operations from the ground up (e.g., Mexico, Brazil, and, increasingly, China). Wal-Mart has also done well in the United Kingdom, which it entered by purchasing ASDA, a retail chain that had imitated Wal-Mart’s U.S. strategy and was culturally similar to Wal-Mart.
CI0-7Looking Forward: The E-Commerce Revolution
Wal-Mart’s biggest challenge going forward may be holding off competition from e-commerce retailers, particularly Amazon.com. Wal-Mart first established an online presence in 2000, when it created Walmart.com. This subsidiary is headquartered not in Bentonville, but near San Francisco, where the company has access to the world’s deepest pool of Internet executive and technical talent. For years, Walmart.com lagged the sales growth achieved by Amazon. By 2016, the company was generating only about one sixth the online revenue of Amazon.
In 2016, the company changed strategy. It purchased the fast-growing ecommerce retailer, Jet.com, for $3.3 billion. Jet.com went online in mid-2015, and by 2016 was already on track for $500 million in revenue. With the acquisition, Wal-Mart gained access to Marc Lore, the founder of Jet.com, who is considered by many to be one of the sharpest minds in e-commerce. Lore’s stated that under his direction, Wal-Mart would move “at the speed of a startup.” In January 2017, Lore announced that walmart.com would offer free two-day delivery on orders over $35, putting Wal-Mart on a par with Amazon. Wal-Mart’s online inventory also grew rapidly from just 10 million items in 2016 to at least 67 million in late 2017. The expansion was helped by several other acquisitions of fashion and apparel ecommerce retailers, including Bonobos, ModCloth, ShoeBuy, and Moosejaw. These brands are sold on Jet.com, which continues to operate as a standalone site. Jet.com gives Wal-Mart the opportunity to sell upscale brands to online consumers who wouldn’t normally shop at Wal-Mart.
Since 2016, Wal-Mart has also made concerted efforts to better leverage its brick and motor stores and distribution systems. By the Fall 2017, it had expanded its grocery pickup service to more than 1,000 stores and launched a service offering discounts on items ordered online that are picked up at the stores. The company is also installing pick-up towers in some stores to make in-store pickups easier.
The early results of this strategic shift have been dramatic, with online revenues surging by more than 60% in the first year after the Jet.com acquisition. However, Amazon.com is not standing still. In June 2017, Amazon acquired Whole Foods for $13.7 billion, a deal that catapults Amazon into hundreds of physical stores and fulfills a long-held goal of selling more groceries. With the Whole Foods acquisition, Amazon gets a network of physical stores where it can implement decades worth of experience in how people pick, pay for, and get groceries delivered. Amazon was quick to signal its commitment to price discounting, cutting prices of select items at Whole Foods by 40% immediately after the acquisition closed in August 2017. In November 2017, it upped the ante by announcing a slew of price cuts for Amazon Prime members in advance of the annual Thanksgiving Holiday. Amazon, it would seem, is trying to beat Wal-Mart at its own game.
 
Carefully read the assigned case and complete the following steps:
a) Define the Industry
b) Implement Porter’s Competitive Forces Model Analysis
c) Implement an Industry Life-Cycle Analysis
d) Evaluate the Macroenvironment
e) Identify the Competitive Advantage of the Company and its building blocks
f) Implement a Value-Chain Analysis
g) Analyze the Competitive Advantage and Profitability of this corporation/company
 
h) Answer the following questions:
1. What resources underlie the position of this corporation/company in the industry?
2. How do these resources enable the corporation/company to improve one or more of the
following: efficiency, quality, customer responsiveness and innovation?
3. Apply the VIRO framework and describe to what extent these resources can be considered
valuable, rare, inimitable, and well organized?
4. What must the corporation/company do to maintain its competitive advantage going
forward in the industry?
5. What are the barriers to entry into the market for the industry described in the case?
6. What are the implications of these entry barriers for new entry?
7. What stage of development is the industry (described in the case) now at?
8. What, if anything, can the main industry (described in the case) player do to limit price
competition?
9. What functional-level strategies can pursue the corporation/company to boost its
efficiency?
10. What functional-level strategies can pursue the corporation/company to boost its customer
responsiveness?
11. What does product quality mean for the corporation/company? What functional-level
strategies has (or can) it pursued to boost its product quality?
12. How can innovation help the corporation/company to improve its efficiency, customer
responsiveness, and product quality?
13. Do you think that the corporation/company has any rare and valuable resources? In what
value creation activities are these resources located?
14. How sustainable is the corporation/company competitive position in its industry?
15. Regarding its core segment, what did the corporation/company offer its customers?
16. Using the Porter model, which generic business-level strategy is/was the
corporation/company pursuing?
17. What actions can be taken at the functional level to enable the corporation/company to
implement its strategy?
18. How does the ability to purchase online has change (or could change) this
corporation/company consumer’s behaviors?
19. What kind of firm do you think will perform best in consumer electronics: a) physical
bricks-and-mortar stores only, b) online only, c) stores that have both physical and online
presence? Why did you choose the answer you did?
20. How do you think online shopping changes the cost structure of the corporation/company
of this industry?

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