homework for strategic management class

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9B11M024

THE TRANSFORMATIONS OF WAL-MART: EXPERIMENTING WITH NEW RETAIL PARADIGMS1

Danielle Cadieux wrote this case under the supervision of David Conklin solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2011, Richard Ivey School of Business Foundation Version: 2011-04-20 THE ORIGINAL MODEL By 2011, Wal-Mart had achieved an extraordinarily large market share in the types of products that it sold. Wal-Mart’s U.S. market share might have been as high as 25 per cent.2 Each of its 2,400 U.S. “Supercentres” was a big-box store of some 185,000 square feet, carrying a vast array of groceries, hardware, electronics, clothing, housewares and seasonal items — all at very low prices. The “Sam’s Club” division offered bulk sales to members at further discounts. Located outside of towns and in city suburbs, each had large parking areas for customer convenience, high ceilings to facilitate restocking and sophisticated point-of-sale technology to analyse sale patterns and facilitate inventory control. Customers could compare famous brand names with Wal-Mart’s own labels. The original model was based on a hub- and-spoke arrangement of stores and a central warehouse to facilitate logistics. Wal-Mart compelled its suppliers to take an active role in product innovation, cost-cutting and replenishing the shelves. It also continually compelled its suppliers to cut their profit margins. By preventing unionization, Wal-Mart was able to keep wages at very low levels. By 2010, the original model was being transformed through globalization, the addition of smaller stores, consolidation of supply chains and the “greening” of its products. Meanwhile, many competitors were losing market share. The U.K. firm Tesco created a competing chain in the United States, but failed to achieve profitability. Perhaps Wal-Mart was heading toward an inappropriate degree of global dominance.

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Wal-Mart or any of its employees. 2 U.S. sales of consumer products totaled some $2 billion. Of this volume, some product lines were not carried by Wal-Mart, such as automobiles, houses and home improvement goods, leaving approximately $1 billion sales of the types of products carried by Wal-Mart. Wal-Mart’s U.S. sales of more than $250 billion were some 25 per cent of this total.

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GLOBALIZATION: ADJUSTING TO DIFFERENCES AMONG NATIONS Beginning in the 1990s, Wal-Mart sought to maintain its rapid growth by investing outside of the United States. Although Wal-Mart had based its U.S. growth on “greenfield” operations, by building its own new supercentres, the company chose to enter other countries through the purchase of existing retail chains. This process created a new set of challenges because the existing chains had their own corporate cultures and operating procedures. Some countries already had competitors that had achieved the cost efficiencies of Wal-Mart. In some countries, potential customers had unique preferences regarding the services they expected to receive from their retailers. Wal-Mart experienced several surprising defeats. However, by 2010, Wal-Mart’s sales outside of the United States totalled more than $100 billion compared with its relatively stagnant U.S. sales of $250 billion. Wal-Mart’s aggregate profits reached $14 billion. In Germany, existing retail chains were able to retain much of their customer base in their battles with Wal-Mart. Customers regarded the extra services of Wal-Mart staff, such as packing the purchases, as inevitably leading to extra costs — and therefore higher prices. Wal-Mart sought to replicate the Wal-Mart model in Germany and to instill the traditional Wal-Mart corporate culture by sending U.S. managers to organize these changes, but this approach impeded the adjustments of Wal-Mart to the local culture. Government regulations prevented some of the Wal-Mart practices, such as extending store hours and cutting prices in violation of manufacturers’ price maintenance agreements. In 2006, Wal-Mart closed its operations in Germany. In South Korea, Wal-Mart purchased a retail chain that operated in buildings of six to eight floors within dense cities. Wal-Mart was both unable to adjust this chain to replicate the Wal-Mart procedures and unable to adjust its traditional model to operate efficiently in the different building structures. Wal-Mart closed its operations in South Korea. In Japan, Wal-Mart tried a joint venture by purchasing only a large stake in a retail chain, Seiyu, hoping thereby to merge existing expertise with Wal-Mart practices. By 2007, this venture had still not turned a profit, leading Wal-Mart to acquire a controlling interest as a way of compelling change. By 2010, Wal- Mart had still not achieved success in Japan. In India, small merchants feared that they would be driven out of business, and a widely held attitude opposed foreign ownership in retail. Even in 2010, foreign ownership was restricted to 51 per cent in single-brand retail and was prohibited entirely from multi-brand retail. The government steadfastly refused to allow Wal-Mart to enter. Wal-Mart did create a joint venture with Bharti Enterprises (Bharti), one of India’s leading business groups, which had operations in more than 21 countries and interests in telecom, financial services, retail, fresh and processed foods, and real estate. To avoid India’s foreign ownership restrictions, Bharti acted as a franchisee. By 2010, Bharti had only four of these franchise stores, but planned to open another 10 to 15 stores over the next two years. Local industry structure and the strength of existing competitors did matter. In the United Kingdom, Wal- Mart purchased Asda, a chain with similar procedures and culture. However, the United Kingdom already had tough competition with major chains such as Tesco. Countries in Latin America had less competitive markets, and the Wal-Mart emphasis on lower prices made rapid inroads. In 2009, Wal-Mart concluded a $2.6 billion deal to acquire a controlling interest in D&S, the largest retailer in Chile.

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In 2010, Wal-Mart announced its intention to pay $$4.6 billion to acquire “Massmart,” a large retail chain in Africa, which had annual sales of $7 billion in 290 stores, mostly in South Africa. A retail analyst pointed to a series of challenges:

The acquisition would also be a gamble for Wal-Mart, because it would be stepping into untested territory where no other major multinational retailer has gone previous. . . . And South Africa . . . suffers from unemployment, crime, and a highly unionized work force that has staged sometimes violent strikes . . . . Wal-Mart would inherit unfamiliar specialty chains, most notably a home improvement retailer.3

ADOPTING NEW STORE PARADIGMS In 2000, Wal-Mart launched a chain of what it called “Neighbourhood Markets,” stores limited to the sale of groceries. Some 150 of these were built. However, this concept was radically different from the traditional Wal-Mart model, and 10 years passed before Wal-Mart began to feel comfortable enough with the changes in procedures to consider a major expansion. Meanwhile, its Latin American acquisitions included “Bodega Aurrera Express” stores of only 4,000 square feet. In 2010, Wal-Mart announced a strategy to create a major chain of mini-Supercentres, each 40,000 to 60,000 square feet in size, to be located within cities. Some of the new smaller stores would be focussed on local ethnic groups. Hispanic neighbourhoods were an obvious target for this paradigm. The Financial Times quoted Bill Simon, head of Wal-Mart’s U.S. stores in regard to the mini-Supercentre model:

“After years of development, we are now prepared to accelerate the growth of this size store.” Mr. Simon said that Wal-Mart would initially open even smaller format stores on a pilot basis, drawing on the retailer’s global experience with small stores.4

In addition to the need to change its inventory levels and to rely on parking buildings rather than huge parking lots, Wal-Mart encountered strong opposition from labour unions. In particular, the United Food and Commercial Workers (UFCW) grocery workers’ union lobbied political leaders to prevent the zoning permissions that these new stores required. The unions realized that low wages would enable Wal-Mart to take market share from the local retail supermarkets, causing the latter to cut their wages and benefits as well. Meanwhile, Wal-Mart was using its new small-format stores in China:

Wal-Mart, the world’s largest retailer by sales, is launching a push to reach lower-incomes and rural consumers in China with a new “compact hypermarket” format originally developed in its Latin America markets.5

Doug McMillon, chief executive of Wal-Mart’s international business, described these stores in China:

He said that compared with the retailer’s large Supercenters, the compact hyper “is a smaller store, typically a cheaper physical plant, a cement floor, perhaps brick walls, sometimes we don’t have air conditioning.”

3 Marina Strauss, “Wal-Mart Gains an African Foothold,” Globe and Mail, September 28, 2010, page B2. 4 Jonathan Birchall, “Walmart Takes Smaller Format Path To Growth,” Financial Times, October 14, 2010, p. 19. 5 Jonathan Birchall, “Walmart Slims Down for China,” Financial Times, December 2, 2010, p. 17.

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Mr. McMillon told investors in October that “compact hypers will become even more important” in the future of Wal-Mart’s international business.6

“Project Impact” sought to remodel its U.S. stores to further increase sales per store. Wal-Mart was also experimenting with online grocery sales for home delivery service. The Financial Times reported that:

In Latin America, the retailer has started online retail operations in Mexico, Chile and Argentine, which together with China give it an e-commerce presence in half of the 14 countries outside the US where it currently has stores. In Mexico, where Wal-Mart is the largest retailer, it is now selling toys, consumer electronics and home appliances from its Wal-Mart.com.mx site.7 The retailer has been investing heavily over the past two years in creating a global e- commerce platform that be easily replicated in different markets. It has created a new global.com business unit. The strategy is aimed at unifying a previously fragmented e- commerce business that included its established Wal-Mart and Asda sites in the US, the UK, and a site in Brazil, launched in 2008.

With its new formats, Wal-Mart threatened established chains such as Safeway, Kroger and Supervalu. It also threatened convenience stores and chains of small discount stores. A new wave of consolidations might give Wal-Mart a global market dominance that could ultimately reduce competition, damage manufacturers, and hurt consumers. TRANSFORMING THE SUPPLY CHAIN Wal-Mart was continuing to cut costs by consolidating its global purchases, shifting to more global supply chains after the elimination of many wholesalers. Wal-Mart now sold $100 billion annually of private-label goods, and this market was expected to increase. Competitors would be hard pressed to deliver comparable products at comparable prices. Suppliers would face a “monopsony” situation, under the control of this one major purchaser. At the same time, Wal-Mart was taking a dramatic position in compelling its suppliers to adopt “green” practices, conducting audits of its suppliers and refusing to purchase from those who failed to measure up to new environmental standards. This new green image might create a unique competitive advantage for Wal-Mart.

6 Ibid. 7 Jonathan Birchall, “Walmart Expands e-Commerce Presence,” Financial Times, January 6, 2011, p. 14.

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