Case Study

Wal-Mart Case Study Assignment

By: Dr. Cesar De Castro

Date: 04/22/2021

Background

Wal-Mart is an American retailer that operates a chain of hypermarkets, discount stores,

and grocery stores in the United States and other foreign countries. It was founded in 1962 by

Sam Walton. In the first year of operation, sales at Wal-Mart stores were $975,000. Ten years

later revenues had reached to $78 million. In 2005 Wal-Mart stores reported net sales had

reached to $285 billion. It had presence in nine countries with 5,289 stores and 1.6 million

employees worldwide. Wal-Mart was not only the largest company in the world but also the

most admired company according to Fortune magazine.

Wal-Mart’s success was attributed in its unique combination of culture and strategies that

set it apart from its competition. Wal-Mart main strategy was providing quality goods at a low

price in a friendly environment. A key strategy in Wal-Mart’s early days was opening discount

stores with sizable spread of assorted merchandise in a small, one-horse towns. It avoided direct

competition from a stronger players since larger companies such as K-Mart believed that

populations under 50,000 would not be able to support a large store in the long run. Thus, Wal-

Mart was able to grow below its competitors’ radar. The other critical strategies were relentless

cost control and partnership with suppliers. It had an unrivalled Distribution and Logistics

management system. The distribution network was based on the hub-and-spoke concept, with

warehouses at the center of a trade area where no store was more than a day’s drive from the

distribution center. Lastly, Wal-Mart’s unique culture of profit sharing helped execute these

strategies to its full effectiveness. Wal-Mart was the first retailer to start profit sharing plans for

rank-and-file workers, and not limited merely to executives. Crucial Corporate information such

as financial numbers was shared with every employees. This not only conveyed trust, but also

helped staff to understand and care for the business.

Wal-Mart Quest to Go Global

In the early 1990s, Wal-Mart started focusing to unchartered waters in the overseas

markets. Management firmly believed that consumers were alike everywhere around the world in

searching for quality products at great prices and desiring to be treated well. In exporting its

business model, Wal-Mart had met with mixed reception. It had done well in Mexico, Canada

and Great Britain. But it was struggling in Japan and Korea. In Germany the initiative was

seriously hindered by strict union rule, high labor costs, and zoning laws and existing

competition. This caused Wal-Mart to withdraw completely from Germany. China is the ultimate

prize because of its tremendous population and the progressive climb of the middle class looking

for higher quality goods at a reasonable price.

Unexpected Challenges in Going Global

China created a level of uncertainty to foreign investors that would like to do business in

the country. China with 1.3 billion in population had a projected sales of $860 billion in 2006,

making it the world’s seventh largest retail market. Local protectionism was a serious problem

faced by many multinational firms trying to expand operations throughout China. Out of

province trucks were arbitrarily stopped at city borders and subjected to tolls that local trucks

were not required to pay. Local governments also had incentives to protect state-owned

enterprises under their jurisdiction as they were the base of their political power, and a source of

private benefits as well as fiscal revenue. China’s infrastructural deficiency created substantially

higher costs and more waste especially with regard to perishable goods. Lastly, the lack of

information technology network with suppliers caused purchasing and distribution very costly

and difficult. Web-based system allowed suppliers hourly tracking of sales, inventory and pricing

of their goods. This was not allowed in China and created significant inefficiencies in purchasing

and re-stocking with 15,000 local suppliers who supplied 95% of the goods sold in its local

stores.

Chinese Consumers have Different Buying Habits:

Chinese consumers displayed behaviors that were different to that of consumers in Wal-

Mart’s home markets, which added pressure to Wal-Mart’s operational costs and directly

impacts profit margins. Chinese consumers’ obsession with freshness of food and limited space

at home meant people would rather pick up small amount of goods at any one time and visit

frequently than purchase in bulk. The average spend per visit in hypermarket was estimated at

just $6 to $10. As a result, the average cost of serving each customer greatly increased. Fresh

means alive, customers’ demand for absolute freshness combined with the poor transportation

network required that a large variety of foods had to be procured locally instead of through

centralized procurement system. Diminished economies of scales and interrupted supply chain

meant higher cost in satisfying Chinese consumers.

Conclusion

The highly fragmented market impaired distribution network, and unique consumer

behavior in China pushed Wal-Mart’s operating costs higher and worked against a straight

duplication of the US model. It was exacerbated by local competition that were supported by

government policy and financial support. This put so much pressure in exhausting Wal-Mart’s

formula of “Everyday Low Prices (EDLP)”. Considering all these challenges, the president and

CEO of Wal-Mart Asia was confident of the ultimate win in China. This was a quote from Joe

Hatfield, president and CEO of Wal-Mart China, “We have the core beliefs and operating

strategy of American stores, but it is critically important to let Chinese customers understand

those. We should crawl, walk and eventually run”.

Reference

Farhoomand, A. (n.d.). Wal-Mart Stores: “Every Day Low Prices” In China. Asia Case Research

Centre. The University of Hong Kong. 06:29