Walmart Isn’t Resting on Past Success

Stephen DeAngelis

June 30, 2010

Walmart catches a lot of grief in the press for using strong-arm tactics, questionable labor relations, and putting mom & pop stores out of business wherever it sets up shop. No one can deny, however, that the company is a force to be reckoned with. As the world’s largest retailer, however, it isn’t resting on its laurels. As I noted in a previous blog [Walmart, MasterCard, and Visa Ramp Up e-Commerce], Walmart executives believe that the company can grow significantly by improving its e-commerce business. They recently explained their strategy at the company’s annual meeting [“Walmart targets e-commerce for growth,” by Jonathan Birchall, Financial Times, 5 June 2010]. Birchall reports:

“Mike Duke, chief executive of Walmart, … placed mobile technology and e-commerce at the center of the global expansion plans of the world’s largest retailer, as he set a long-term goal of serving more than a billion customers a week. Mr Duke told an audience of 16,000 employees and shareholders at the annual meeting in Arkansas that technology could help Walmart grow to reach that goal during the next 20 years, increasing from the 200m customers it currently serves in a week. ‘Think about giving everyone with a mobile device the platform and the information they want to buy, the exact product they want at the absolute best price anywhere in the world,’ Mr Duke said, in his most wide-ranging speech since becoming chief executive in February last year. The retailer operates significant e-commerce sites in the US, UK and Brazil and has recently stepped up its investment to develop a global e-commerce platform that will include mobile capacity. It is also expanding its online operations into new, larger headquarters near San Francisco.”

Walmart is a Johnny-come-lately in the e-commerce field having historically focused on expanding its brick-and-mortar stores. Birchall continues:

“Mr Duke admitted the retailer had lagged behind some rivals in its embrace of global e-commerce. It needed ‘an even deeper understanding of the role of mobile technology throughout the world, including in developing countries’, he said, adding that ‘building the very best web site will be just as important as getting our store formats right in the future.’ Walmart, along with other US consumer companies, is becoming increasingly active in social media initiatives. A live video feed of this year’s shareholder’s meeting was web-cast alongside a live stream of messages from attendees on websites such as Twitter and FourSquare, as well as photographs posted to Flikr. Mr Duke also said that digital technology meant the retailer was entering an ‘era of price transparency’, which could favor Walmart’s low-price model. He said the company would seek to ‘widen the price gap’ with competitors.”

Walmart executives know they are in a global competition with others. As I noted in another recent post [Carrefour’s Global Presence], the world’s second largest retailer is also determined to dominate the markets in which it operates. Birchall concludes:

“The presentation also underlined the need for the retailer to become ‘a truly global company’, playing ‘an even bigger leadership role on social issues that matter to our customers.’ This was a theme first articulated by Lee Scott, Mr Duke’s predecessor. During the week’s series of company events, Walmart also showed a continued interest in global acquisitions, with a presentation on its Moscow office’s efforts to explore opportunities in Russia. Walmart, which set up an office in Moscow in 2008, is said to have been in fresh talks over the possible acquisition of a share in Lenta, a Russian hypermarket chain that has been a regular target of takeover speculation. It also announced yesterday that its board had approved a $15bn share repurchase program.”

One of the topics that Walmart has stressed over the past couple of years is sustainability. Commenting on that subject, supply chain analyst Steve Banker writes, “My favorite [YouTube] video [on Walmart sustainability efforts] begins with Linda Hefner, EVP, Merchandising at Sam’s Club, explaining how sustainability fits into the company’s merchandising strategy and how ‘lifecycle thinking is helping Sam’s Club Members save money and live better'” [“The Walmart Sustainability Value Chain,” Logistics Viewpoints, 27 May 2010]. He continues:

“It’s a good video, but a bit long, so I’ll summarize the main takeaways here. Merchandising’s job is to make the best product choices for Sam’s Club members. The company attempts to select relevant and unique products with a superior value proposition. This value proposition combines quality, price, brand, package size, sustainability, and service. But in selecting products, Walmart thinks about the whole value chain. The company’s goal is to reduce costs by carefully analyzing the end-to-end supply chain. After her opening remarks, Linda turns the podium over to her key ‘home efficiency’ merchandising manager, Joel. The home efficiency aisle includes things like energy efficient florescent light bulbs and water efficient shower heads. These products are both good for the environment and save the customer money. This aisle in the store has many products in green packages and they have Energy Star or WaterSense logos from the U.S. Environmental Protection Agency. Key products have placards next to them explaining to customers how buying a green product can help the environment and save them money.”

Moving from rhetoric to reality, Banker reports that “Joel walks viewers through the toilet value chain, from product selection all the way to the consumer.” He continues:

“Walmart selected a dual flush toilet from Quality Craft. Dual flush toilets, fairly common in Europe but relatively new in the US, have two flush buttons: one for disposing of liquid waste, one for solid wastes. The solid waste button offers superior flushing. But even so, the average customer can save 16,500 gallons of water and $33 per year. Nineteen states that are actively trying to reduce water consumption provide rebates. On average, Walmart claims that someone who buys this toilet can pay for it in savings over three years. Walmart’s goal was to sell this toilet at the same price as regular toilets. Quality Craft manufactures them in China and Walmart buys them in bulk. Walmart and Quality Craft collaborated on packaging. They moved from rectangular cardboard boxes to trapezoid boxes with 16 percent more fiber that made the boxes 300 percent stronger. This is important because Sam’s Club forklift grippers need to pick the boxes up without damaging them. The packaging design meant that 50 percent more boxes could fit on a pallet, which led to a 15 percent savings on transportation costs.”

Because it is the world’s largest retailer, Walmart can force suppliers to meet its order fulfillment requirements. If they fail to do so, Walmart penalizes them. Although suppliers and distributors don’t like the fact that retailers dictate terms to them, the toilet example demonstrates one reason why they do. Banker concludes:

“What were the results of this end-to-end approach? A win for Walmart and Quality Craft (the product is selling well), and a win for the consumer and the environment. In Springfield, Missouri, for example, where Walmart sold 722 of these toilets in 9 months, 11.9 million fewer gallons of water were needed by households. And this was 11.9 million fewer gallons of water that had to be processed at the sewage facilities, which saved this town of 150,000 people about $23,000. … As a supply chain guy, I love this strategy. The supply chain is being linked to both brand improvement (a better image for Walmart as a caring company) and a competitive advantage (lower costs if customers shop at Walmart).”

Sam’s Club is also trying another, more controversial strategy: offering different incentives to individual customers [“Sam’s Club Personalizes Discounts for Buyers,” by Andrew Martin, New York Times, 31 May 2010]. Martin reports:

“For years, hotels, airlines, banks, online retailers and other data-driven businesses have turned to powerful computers to help determine the optimal price for their products, or to find ways to recommend items that groups of customers with similar tastes might want to buy. The big retail chains have been slower to adapt, in part because of the sheer volume of customers they serve and products they sell. But now, Sam’s Club, Wal-Mart’s warehouse chain, is offering a program called eValues that strives to offer bargains tailored to each member, based on that member’s buying history. Industry experts said they expected other retailers to move toward more individualized offers, too. Today, most retailers offer across-the-board discounts or deals aimed at categories of customers. ‘This is really the holy grail in a sense, pricing to the individual,’ said Willard Bishop, a retail consultant in suburban Chicago who focuses primarily on supermarkets. ‘Everyone is on the path to doing what you are talking about.'”

Sam’s Club is currently offering individualized coupons only to its “Plus” members, “who pay a higher yearly membership fee than do regular members. They can view the deals by e-mail, on the Sam’s Club Web site or at store kiosks.” Anytime a company uses historical data privacy concerns are raised. “Some privacy advocates worry that customers are becoming too willing to allow corporations to gather and exploit their shopping histories. Most users of the data, Sam’s Club included, insist they have rigorous protocols to protect customer privacy.” Martin notes, however, that the practice is becoming more common throughout the retail sector. He continues:

“[Sam’s Club] eValues program is the latest iteration in the fast-growing field known as predictive analytics, which uses vast amounts of data to spot trends and anticipate consumer behavior. Two of the best-known users of applications of predictive analytics are baseball executives, who scour statistics to find overlooked superstars, and the online DVD rental service Netflix, which suggests movies its customers might like. The dating service eHarmony also uses the practice to match potential mates, and eLoyalty, which sells customer service technology, uses algorithms to analyze customer calls to make them more effective and efficient. For instance, based on a day’s worth of calls, eLoyalty can predict which customers are likely to cancel their accounts. Using that information, a company can then call back those customers to try to save their business and can use the initial call to train its employees to do better. … During the last decade or so, many retailers have amassed huge amounts of data through loyalty programs or membership cards, like those provided by Sam’s Club and its rival, Costco. But retailers have generally done little with the information, other than using the cards as a branding opportunity or to offer broad discounts.”

Martin indicates that it is too early to determine whether the eValues program will be successful, but customers seem to like it. But, as mentioned earlier, Walmart is looking abroad for major sources of growth [“As growth in U.S. slows, Wal-Mart puts more emphasis on foreign stores,” by Ylan Q. Mui, Washington Post, 8 June 2010]. Mui reports:

“The American consumer alone can no longer save the world, and nowhere is that more apparent than here inside the world’s largest retailer: Wal-Mart. The company that began as a five-and-dime in rural northwest Arkansas opened its annual shareholder meeting … with Bollywood-style dancers, Asian balancing acts and Brazilian martial artists representing some of the 14 foreign countries in which Wal-Mart operates. Last year, its international division topped $100 billion in sales for the first time and this year it is expected to surpass the United States in number of stores. This is the next phase of Wal-Mart domination. It built its business in small towns and suburbs across the United States, but now international sales are growing at almost nine times the rate of domestic sales. Wal-Mart already was facing stalled growth at home after saturating the market, and that has been exacerbated by the weak labor market and high gas prices, which have battered the chain’s core customers and depressed sales. That means the company has become increasingly reliant on the appetites of international shoppers to pick up the slack and drive growth, mirroring a broader global shift in purchasing power.”

Mui provides a brief history of Walmart’s international expansion:

“Wal-Mart opened its first international store in Mexico in 1991 and has grown both through acquisitions and its own innovation. At first glance, it might be difficult to spot a Wal-Mart in another country. Though it is synonymous with the big-box stores it helped pioneer in the United States, Wal-Mart has nine international store formats ranging from relatively tiny Bodega Aurrera Express stores in Mexico to a cash-and-carry warehouse in India to the traditional box in Canada. It operates under 55 different banners — Acuenta in Chile, Asda in the United Kingdom and Seiyu in Japan. But all the stores strictly adhere to a core Wal-Mart principle: always low prices.”

As I’ve asserted time and again in past posts, global economic growth relies on the emergence of a global middle class. “Economists have long predicted that consumers in emerging economies would not only manufacture most of the world’s goods,” Mui writes, “but also buy them.” She continues:

“China has surpassed the United States as the world’s largest auto market in number of vehicles sold. Foreign sales account for roughly 30 percent of revenue of S&P 500 companies, up from 20 percent a decade ago. By 2014, the International Monetary Fund forecasts, emerging economies will contribute more to the world economy than developed nations. For Wal-Mart, that means doubling-down on investment in its international stores. About 60 percent of the growth in Wal-Mart’s footprint came internationally last quarter. It announced plans to buy Danish competitor Netto last month and has been in acquisition talks with several Russian retailers over the past year in hopes of entering what could be a lucrative new market.”

Mui reports that “to keep prices low, Wal-Mart has instituted the same cultlike devotion to lowering costs that made it famous — or infamous — in the United States, only now it commands the purchasing power of a global giant.” She continues:

“The company recently created global merchandising centers in Britain, Mexico, Bentonville and New York City to oversee sourcing and pricing for staples, such as towels and candles, that can be sold throughout Wal-Mart’s more than 8,000 domestic and international stores. The growing influence of Wal-Mart’s international division is evident from the top brass on down. Chief Executive Mike Duke was previously vice chairman in charge of leading the company’s international strategy. The head of Wal-Mart’s U.S. division, Eduardo Castro-Wright, headed operations in Mexico, which analysts now estimate accounts for one-fifth of the company’s market value.”

Walmart’s global expansion is not only felt in the store but also in the field [“In India, Wal-Mart Goes to the Farm,” by Vikas Bajaj, New York Times, 12 April 2010]. Bajaj reports that in some India vegetable patches, farmers are now using “insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net.” He explains why:

“These are low-tech innovations, to be sure. But they are crucial to the goals of the benefactor — Wal-Mart — that supplied them. Two years after Wal-Mart came to India, it is trying to do to agriculture here what it has done to industries around the world: change business models by using its hyper-efficient practices to improve productivity and speed the flow of goods. Not everyone is happy about the company’s presence here. Many Indian activists and policy makers abhor big-box retailing, fearing that it will drive India’s millions of shopkeepers out of business. Some legislators are suspicious of the company’s motives. The government still does not allow Wal-Mart Stores and other foreign companies to sell directly to consumers. But Wal-Mart is persisting because its effort in India is critical to its global growth strategy. Confronted with saturated markets in the United States and other developed countries, the company needs to establish a bigger presence in emerging markets, like India, where modern stores make up just 5 percent of the country’s retail industry.”

As I noted in the post about Carrefour mentioned above, getting established in India is not easy for a foreign retailer despite some recent government reforms. Bajaj continues:

“Establishing good relations with farmers is a centerpiece of the company’s plans. Though Wal-Mart is pushing many of its traditional products in India, like clothes, electronics and home goods, perhaps none is as essential as food. Wal-Mart needs high-quality produce at low prices to draw customers in volume. The challenges are significant. Buying and transporting produce are difficult tasks because India has millions of small-scale farmers and an agriculture system riddled with middlemen. … In the bread basket state of Punjab, farmers who supply vegetables to Wal-Mart say they like working with the company. It typically pays them 5 to 7 percent more than they earn from local wholesale markets, they said. And they do not have to pay to transport produce because Wal-Mart picks it up from their fields.”

Despite advances, significant challenges remain. Bajaj explains that there are “numerous Gordian knots that hold back Indian agriculture: laws limit who can buy farmers’ crops, 35 percent of fruits and vegetables are wasted because of inefficient transportation and farmers earn too little to invest in their marginal farms.” He continues:

“‘Anybody who says they can revolutionize retail in this country in a short period of time’ is overestimating their abilities, said R. Gopalakrishnan, executive director of the Tata Group and chairman of Rallis India, a company that makes fertilizers, seeds and pesticides. Wal-Mart is also limited by New Delhi’s ban on foreign-owned retail chains that prevent it from selling directly to Indian consumers. … Right now Wal-Mart operates in India through a 50-50 joint venture with Bharti Enterprises, an Indian conglomerate that also owns the country’s largest cellphone company. Their partnership, known as Bharti Wal-Mart, supplies retail stores that are fully owned by Bharti and runs a wholesale store that sells to shopkeepers, hotels and other businesses. Wal-Mart executives would not say how much money the company has invested in India, but its operation is at the forefront of a second big push into emerging markets. In the 1990s, Wal-Mart set up shop in China, Mexico and Brazil and now has hundreds of stores there.”

Bajaj reports that “Wal-Mart has not waited for policy makers to effect changes.” He explains:

“It has spent the last two years building relationships with farmers and suppliers, and setting up its supply system. It is building a big distribution center outside New Delhi to supply Bharti stores, which are branded Easy Day, in and around the capital. Wal-Mart also has learned to adapt its operations to numerous challenges. For instance, because trucks move slowly on the country’s congested roads, Wal-Mart’s fruit and vegetable distribution center near Haider Nagar supplies retail stores only within 200 kilometers (124 miles) to keep produce fresh. By comparison, similar Wal-Mart facilities in China supply stores as far away as 400 kilometers. But that means the company will have to set up more distribution centers with expensive power generators, making it more difficult to make money in India.”

Walmart executives believe that if they can be successful in India, they can probably be successful anywhere. That’s because in India they face most of the challenges that they could encounter elsewhere. The company has already learned a lot from its U.S. and other foreign operations, but its executives understand that there is always more to learn. That’s how I know that Walmart isn’t resting on its past success.