Wal-Mart Finding New Ways to Win
June 6, 2006,
Wal-Mart is making more adaptations to bring its brand
of retailing to diverse
By Brent Felgner
If successful, Wal-Mart's current drive to reinvent itself will go a long way not only toward redefining large chunks of the way retailing is done, but also reshape the relationships between merchant and consumer, as well as merchant and vendor — likely straining the latter, at times, to the breaking point.
Make no mistake: successful or not, this effort will impact everything and everyone its path.
vice chairman John Menzer
At the supplier level, the die has been cast. Wal-Mart's never-ending demand for greater productivity and lower costs has led it to dig deeper into its suppliers' businesses. At times, that has resulted in burrowing to the raw materials level in order to assure supply and dampen pricing — such as its purchase last year of the entire output of a farm for one of its organic cotton apparel programs. More commonly, it has meant forsaking — often painfully — its U.S. manufacturer base.
"We will go to the best supplier we can find, and if we can go direct and save money, fine," vice chairman John Menzer told Home Textiles Today following April's media conference. "What's funny is how much we were importing [through U.S.-based vendors] and we didn't even know it -- adding cost to the consumer. So, where we see it's an area where we're focused and we can go direct for those items ... we will go direct, rather than pay someone another fee for doing what we can do ourselves."
Wal-Mart's vendor relations are a sensitive issue that even elicited comment from ceo Lee Scott during the conference when asked about Wal-Mart's size; it recorded $312 billion in sales last year.
"If we're so big and powerful," Scott offered, "why does P&G — you know, [Proctor & Gamble chairman Alan] Laffley is ceo of the year this year -- he's making 10% after taxes, we're making 3%.”
"We haven't driven the profit out of their business. In fact their profits have gone up as they've done business with Wal-Mart."
Just the same, as it shifts its sourcing, Wal-Mart will remain with vendors who bring something else to the table it can't — yet — find on its own. For example, Springs Global apparently found new life through its merger with Coteminas and the development of Wal-Mart's luxury home business, even as its original core business with Wal-Mart was being threatened.
Taken together, Wal-Mart's initiatives are part of a bold campaign quietly begun about two years ago when Scott and other senior executives determined they needed to shake the company out of its creeping lethargy. Many of Wal-Mart's domestic stores were aging poorly, their formats maturing, along with same store sales. The company determined it rightly "owned" the opening price point business in the United States, but little
more. That factor alone was limiting growth.
Since then, Scott has pieced together what he hopes is a marketing and merchandising, logistics and financial dream team.
Former Wal-Mart de México ceo Eduardo Castro-Wright, was moved up to ceo and point man for Wal-Mart Stores U.S. He is backed by John Fleming, executive vp, marketing, with John Degn and Claire Watts in merchandising. Vice chairman Mike Duke swapped responsibilities with Menzer for international and U.S. operations. Similar adjustments have been taking place up and down the organizational chart.
On the whole, the companywide changes "show a Wal-Mart in transformation," Scott told reporters gathering in Arkansas recently.
In broad strokes the changes, or at least their impact, may be slightly reminiscent of those Wal-Mart helped drive in the early '80s when it pushed relentlessly for the industry-wide adoption of UPC bar coding and front end scanning. Bentonville executives saw then — as they do now — that the mastery of logistics and new retail technologies held the key to immeasurable gains in productivity and, therefore, profits.
History proved them right then, and Scott & Company are betting the store they will be right now. Executive talent in place, the world's largest retailer has an ambitious agenda to drive change. It remains to be seen whether they can execute it to their own and, frankly, a multitude of observers' expectations. Everyone is watching: vendors, investors, the media and, most important, their customers.
One to one
Wal-Mart is diving deeper to reach more shoppers in a bid to get them to spend more on better goods. It sees wallet share to be gained from the Target-type customer already shopping its grocery aisles but little more. Simultaneously, it is fiercely protective of its opening price point customers. Its Stores of the Community may well individualize the shopping experience — at least on a neighborhood and demographic level.
Speaking of neighborhoods, Wal-Mart has identified 1,300 stores with a significant Hispanic customer base — a base that give it a 9% sales gain last year. By 2010, Scott noted, Hispanics will hold 10%—$1 trillion— in buying power. By 2020, it will more than double.
"Hispanics have a greater affinity for Wal-Mart than any other identifiable segment of the U.S. population, Scott said. Going forward, "Wal-Mart is very well positioned to capture a significant portion of this market."
Already, sales at the much ballyhooed "upscale" Plano, Texas store are running 42% ahead of plan in its first weeks of operation; some early merchandise successes there are being rolled out chainwide, according to Scott. That impact has been achieved, he told reporters, with only a 3% change in the skus carried. "We are seeing general merchandise outsell consumables — which is the exact trend we want to drive throughout our stores nationwide," Scott said. "Plano is teaching us a lot — and it will teach us much more in the future."
Changing the model
Wal-Mart is altering its assortment strategies, moving further than ever before from the essentially narrow and deep, good/better/best inventory configurations that defined the early days of discounting — and which over the years selectively ballooned. Today, the company has made it clear its logistics and inventory controls are enabling it to carry much broader selections at much shallower — and ostensibly more profitable — inventory depths, all while meeting in-stock demand.
Every retailer's dream of "just in time" replenishment may actually be within striking distance. Wal-Mart's Network Remix program, creating specialized distribution centers pushing targeted deliveries to the stores of just the fastest-moving skus in general merchandise and dry groceries, is being built out across the U.S. and should be completed next year.
At the same time, the company is seeking to empty out its backrooms, pushing merchandise directly from the back door to the store shelves. Its 8,000-truck private fleet claims a 99.79% on-time record.
In another means of pushing inventory upstream, it is leading the further development of RFID — Radio Frequency Identification — which in tests in the first 100 stores has reduced inventory ownership between 16% and 25% overall. By the end of this year, 1,000 stores will be RFID-enabled. Wal-Mart will push RFID to a total of 600 vendors by the end of 2007.
Indeed, cfo Tom Schoewe said he believes Wal-Mart can reach a point within a few years where sales growth can outstrip inventory growth by a factor of two times. Sales growth will likely surpass the inventory growth baseline next year, he said.
Success in all of this is by no means assured, despite Wal-Mart's seeming invincibility at times. Indeed, its track record in Germany and Japan, to date, has been less than sterling and the company admits a large number of errors in its still-growing operations in China.
Speaking about Germany specifically, Scott acknowledged it was the most difficult market Wal-Mart has entered, and despite reduced losses was not showing signs of turning a profit anytime soon. But in speaking about the challenges there, Scott's words almost seemed applicable to the larger tasks the Wal-Mart is undertaking.
"We're not going to win on every one of them — it is hard work. Over the long term, I do believe our model will win anywhere we go."
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