C: Wal-Mart (WM) Stores Inc

Learning Objectives The sources of WMs Competitive Advantages in discount retailing How sustainable position in discount retailing will be in the future, and How effective their diversification into food industry will be

Introduction
In 1972 cost of 30 warehouses was $150 million; Walton took Wal-Mart public and raised $3.3 million; at the end of 1993 market value of WM became $57.5 billion --- a rate of appreciation 39.3% compounded every year for last 20 years. Total return to share holders was even higher since this does not reflect dividends paid. Compounded average sales growth was 35%

Introduction
Is this phenomenal success attributable to the attractive industry in which Wal-Mart competes? Please refer to Ex 4. If this such a broad industry, why all the ROE so high?(above 13%)

SCA over time

1. Of the top 10 discounters in 1962, when WM opened for business, not one remained in 1993 2. Where as in 1986 the top 5 discounters accounted for 62% business, in 1993, they accounted for 71% 3. The company operated with 50 or Discount stores accounted for 82% What above three points mean to you?

SCA over time

The answer is simple; Ex 3 these are survivors many others have gone bankrupt over the years. So What? This raises the sustainability. Among these current players, which will be able to sustain their CA over time? We are here to understand the bases of WMs phenomenal success. What are their sources of CA?

Sources of CA
So you have already told; we have broadly classified around three headings: 1. Low cost/efficient operations 2. Market position, and 3. Culture/human resources management And also Sam Walton Now let us discuss all these CA in organized manner

1. Low cost/efficient operations

WM has developed an efficient low cost huband-spoke distribution network. Why? ----Historically, it generates scale, now cost advantage thru efficiency Automation and technology is widely used in distribution centers (eg. pick to light to reduce error). Trucks are more than 60% full on back hauls. Why? Is this a good number? ----Typically industry percentage are less than 20%

1. Low cost/efficient operations

At the stores, all square footage is devoted to selling. How? ----WMs efficiency results from picking up goods from US suppliers within their distribution network. Deliveries are made several times a week, considerably reducing the need for back room inventory at each location What else is being done to increase productivity at the stores as well as distribution centers ---POS (Point of Sale) scanning and other use of technology are widely employed ----As a result, at the time of case, WMs sales per square foot was $300 VS Target $209; Kmart $147

 How/why the relations with vendors are on WMs terms? ----WM dictates the terms by focusing on price, JIT availability, and national advertising support ----Since WM generally picks up their merchandise at the POS, the entire negotiation tends to focus on price and terms ---Negotiations take place in small impersonal buying rooms with no windows, a table, and few folding chairs

1. Low cost/efficient operations

1. Low cost/efficient operations

How being tough negotiator adds value/lowers cost? ----They rarely sole source a product category; eg in bicycles they have at least two major suppliers and aggressively trade one off against the other How partnership with any vendor(s) adds value/lowers cost? ----In few instances, they have forged partnership with key suppliers; eg. GE (light bulbs) and P&G. ------GE manages WMs inventory at the distribution center level achieving substantial cost savings in the value system which in part passed on to WM in the form of lower price. -----P&G has some 35 people in Bentonville directly managing their products for Wal-Mart

2. Market Position
What are the two major potential sources of CA? First, WMs small town Strategy ---Has evolved into network of stores with relatively large number of local monopolies (only 55% compete directly with Kmart and 23% with Target) ---In these rural communities WM has displaced small local merchants and the only competition is probably a WM in the next town

2. Market Position
---Do you think Sam Walton made his fortune by gouging the residents of these small towns? --- No; goods available and prices charged were higher before WM arrived; small local merchants went bankrupt and town became increasingly dependent on WM Second, WMs emphasis on nationally branded products and EDLP (every day low price) is clearly defined competitive position in the market --- CA.

2. Market Position
---Once the reputation of EDLP is established, customers tend to patronize without shopping around. WMs low cost CA allow them to firmly establish this position --- Although this positioning requires communicating (media) when entering new geographic location to create awareness; in the long run less communication cost (ad and promotion); as opposed to rivals weekly circulars, WM issued 13 times in a year --- WMs store managers often post competitors circulars in their stores weekly. What is the impact of such a practice?

2. Market Position
---It reinforces the EDLP concept and customers need not go to other place as WM has items at same or lower price. --- How should competition adjust their ad content if WM is posting them? --- Their strategy should be to advertise only those items that WM does not carry, if possible; advertise specials for which customer must go to the stores to learn the price; advertise items for discount WM may not be that great

3. Culture/HR Management
How WM culture can be CA? --- Associates live to wok for the glory of WM; they are clearly empowered and committed. --- Their department run as store within the store, store managers and their team decide on merchandise mix, pricing, store layout, hiring policies, and so forth. ---They are paid well plus incentive for accomplishment of target. The shrink incentive plan, profit sharing at the sore level; sense of ownership --- Commitment of Associates is even more extreme at Bentonville; weekly meetings debate and policy decision; family oriented rally on Saturdays broadcasts/video taped broad casts etc reinforce the culture

Sam Walton
Is Sam a source of CA? --- Sam maintained personal value as embodiment of WM culture; his work ethics, almost fanatical frugality --- He drove a pick up truck and was very similar to the type of customers who shopped at WM. He was biggest enthusiast and cheerleader Sam provided tremendous value by having vision, setting the strategy, and creating the culture that drove the entire strategy

Quantification of CA
To understand CA of WM it is not enough to have laundry list of S/W. Have a look to exhibits; align the cos data with industry ---WMs cost are lower in all dimensions: pay roll lower due to rural location and high use of techy. Ad cost lower (13 circulations/year) and basically EDLP strategy. Store rentals lower due to rural location. Misc exp are lower due to frugal culture --- 1% savings means $700 million; 0.1% means $70 million --- Comparing 1984 to 1992 administrative cost fallen from 18.5% of sales to 15%

Sustainability of CA
How sustainable the rural strategy and EDLP strategy? -- The high density of stores strongly contributes to WMs low cost position through regional economics of scale in logistics. -- The suburban strategy is questionable as it brings them in direct competition with Kmart and Target; however their superior cost position is their defensible CA

Sustainability of CA
-- WM attempt to achieve first mover advantage to newly growing suburban; hopes competitors will not open another store across the street; if head-to-head, only defense low cost -- What about the wheel of retailing? -- Mom and pop department stores chains of department stores discount stores --- some format threats include catalog shopping, computer shopping, home shopping, focused discounters, destination outlet malls, warehouse clubs and super centers. -- They have entered most threatening (or promising) warehouse clubs and super centers

Sustainability of CA
-- Sams clubs could be potential threat to WM in suburbs, is probably good business itself and fits well with WMs core competencies. -- Kmart and Target can imitate WMs logistics, techy, empowerment etc std imitation risk -- Limits to grow; impossible to continue to manage from Bentonville; perhaps regional infrastructure; challenges work ethic, commitment, WMs value in place like NY. Transfer of skill international expansion; difficulty of maintaining significant advantage eg the threat of creeping organizational slack -- The 22% drop in stock price during 2nd qtr of 1993 suggest that market does not think the current rate of growth sustainable. Some WM stores sales slowed to 7% to 8% and Sams were down by 3% might have triggered drop in stock price. By early 1994 the stock price had rebounded somewhat but not to its historical highs

Are Supercenters the Answer to the Threats Identified?

Supercenters offers the potential for high growth they seek. However they have to compete with the superstores chain who are already efficient and extremely competitive; moreover WM may not have distinctive competence like in discount retailing; they have to develop new competencies to fight with tough groups

Are Supercenters the Answer to the Threats Identified?

On the positive side, they excellent location, having designed for expansion in mind; a supercenter is simply a large WM with a supermarket attached Assuming their strategy to roll out supercenters from their rural heartland, having learnt and experienced they can move further

Are Supercenters the Answer to the Threats Identified?

The food segment is very large, Wal-Mart is credible, large relative to competitors, well located, and has some of the competencies required; but there are many obstacle to overcome, including very tough focused competitors, competencies they do not possess, and they are late, as opposed to an early mover

What we have learnt?