Reference no: EM133419048

Walmart Stores, Inc.

Walmart's History

Walmart was started in 1962 by Sam Walton. The discount retail industry was then in its infancy. Of the four new ventures in discount retailing started that year, Walmart seemed the least likely to succeed. Most Walmart stores were in northwestern Arkansas and adjacent areas of Oklahoma, Missouri, and Kansas. Walton had started his retailing career with Ben Franklin in small towns because his wife Helen did not want to live in any city with a population of more than 10,000 people. He had chosen northwestern Arkansas as a base because it allowed him to take advantage of the quail-hunting season in four states. Walmart was, in Sam Walton's words, "underfinanced and undercapitalized"in the beginning. Nevertheless, Walton sought to grow Walmart as fast as he could, because he feared new competitors would pre-empt growth opportunities if Walmart did not open stores in new towns. After five years, Walmart had 19 stores and sales of $9 million. In contrast, Kmart had 250 stores and $800 million in sales.

Walton retained many of the practices regarding customer service and satisfaction that he had learned in the variety stores business. The central focus of Walmart, however, was on price. Walton sought to make Walmart the low-priced provider of any product it sold. As Walton said,

What we were obsessed with was keeping our prices below everybody else's. Our dedication to that idea was total. Everybody worked like crazy to keep the expenses down. We didn't have systems. We didn't have ordering programs. We didn't have a basic merchandise assortment. We certainly didn't have any sort of computers. In fact, when I look at it today, I realize that so much of what we did in the beginning was really poorly done. But we managed to sell our merchandise as low as we possibly could and that kept us right-side up for the first ten years . . . . The idea was simple: when customers thought of Walmart, they should think of low prices and satisfaction guaranteed. They could be pretty sure they wouldn't find it any cheaper anywhere else, and if they didn't like it, they could bring it back.171

The other problem that plagued Walmart in its early years was finding a way to keep its costs down. Large vendors were reluctant to call on Walmart and, when they did do business with the company, they would dictate the price and quantity of what they sold. Walton described the situation, "I don't mind saying that we were the victims of a good bit of arrogance from a lot of vendors in those days. They didn't need us, and they acted that way."172Another problem that contributed to high costs was distribution. Distributors did not service Walmart with the same care that they did its larger competitors. Walton saw that "the only alternative was to build our own warehouse so we could buy in volume at attractive prices and store the merchandise."173

Walmart increased from 32 stores in 1970 to 859 stores 15 years later. For much of that time, Walmart retained its small-town focus. More than half its stores were in towns with populations of less than 25,000. Because of its small-town operations, Walmart was not highly visible to many others in the retail industry. By 1985, though, that had changed. Forbes named Sam Walton the richest man in America. Furthermore, Walmart had begun to expand from its small-town base in the South and had established a strong presence in several large cities. By the 1990s, it had spread throughout the United States in both large cities and small towns.

 

Walmart in 2013

By the beginning of 2013, Walmart's activities had spread beyond its historical roots in domestic discount centers. The number of domestic discount centers had declined to 561 from a high of 1,995 in 1996. Many discount centers had been converted to supercenters, which had increased to 3,158 stores. Walmart Supercenters combined full-line supermarkets and discount centers into one store. Walmart also operated 620 Sam's Clubs, which were warehouse membership clubs. In 1999, Walmart opened its first Neighborhood Markets, which were supermarkets, and it expanded to 286 in operation by 2013.

Operations

From its beginning, Walmart had focused on EDLP. EDLP saved on advertising costs and on labor costs because employees did not have to rearrange stock before and after sales. The company changed its traditional slogan, "Always the Lowest Price," in the 1990s to "Always Low Prices. Always." In late 2007, Walmart changed its tagline to "Save Money, Live Better." Despite the changes in slogan, however, Walmart continued to price goods lower than its competitors (see Exhibit 5). When faced with a decline in profits in the late 1990s, Walmart considered raising margins.174Instead of pricing 7 to 8 percent below competitors, some managers believed that pricing only about 6 percent below would raise gross margins without jeopardizing sales. Some managers and board members, however, were skeptical that price hikes would work at Walmart. They reasoned that Walmart's culture and identity were so closely attached to low prices that broad price increases would clash with the company's bedrock beliefs.

Another concern was that competitors might seize any opportunity to narrow the gap with Walmart. While the reason was unclear, it appeared that some narrowing on price was occurring by 2008. One study showed that the price gap between Walmart and Kroger had shrunk to 7.5 percent in 2007 from 15 percent a few years earlier.Some analysts worried that many shoppers would switch to other retailers as the gap narrowed.

Walmart's low prices were at least partly due to its aggressive use of technology. Walmart had pioneered the use of technology in retail operations for many years and still possessed significant advantages over its competitors. It was the leader in forging EDI links with suppliers. Its Retail Link technology gave over 3,200 vendors POS data and authorization to replace inventory for more than 3,000 stores.176Competitors had responded to Walmart's advantage in logistics and EDI by forming cooperative exchanges, but despite their efforts, a large gap remained between Walmart and its competitors.177 As a result, Walmart possessed a substantial advantage in information about supply and demand, which reduced both the number of items that were either overstocked or out of stock.

Technology was only one area where Walmart exploited advantages through its relationships with suppliers. Walmart's clout was clearly evident in the payment terms it had with its suppliers. Suppliers frequently offered two percent discounts to customers who paid their bills within 15 days. Walmart typically paid its bills at close to 30 days from the time of purchase but still usually received a two percent discount on the gross amount of an invoice rather than the net amount.178Several suppliers had attributed performance problems to Walmart's actions. Rubbermaid, for example, experienced higher raw materials costs in the 1990s that Walmart did not allow it to pass along in the form of higher prices. At the same time, Walmart gave more shelf space to Rubbermaid's lower-cost competitors. As a result, Rubbermaid's profits dropped by 30 percent and it was forced to cut its workforce by more than 1,000 employees.179 Besides pushing for low prices, the large discounters also required suppliers to pick up an increasing amount of inventory and merchandising costs. Walmart required large suppliers such as Procter & Gamble to place large contingents of employees at its Bentonville, Arkansas, headquarters in order to service its account.

Although several companies such as Rubbermaid and the pickle vendor Vlasic had experienced dramatic downfalls largely through being squeezed by Walmart, other companies suggested that their relationship with Walmart had made them much more efficient.180 Some critics suggested, however, that these extreme efficiency pressures had driven many suppliers to move production from the United States to nations such as China that had much lower wages. Walmart set standards for all of its suppliers in areas such as child labor and safety. A 2001 audit, however, revealed that as many as one-third of Walmart's international suppliers were in "serious violation" of the standards.181 Walmart pursued steps to help suppliers address the violations, but it was unclear how successful these efforts were.

A Fast Company article on Walmart interviewed several former suppliers of the company and concluded, "To a person, all those interviewed credit Walmart with a fundamental integrity in its dealings that's unusual in the world of consumer goods, retailing, and groceries. Walmart does not cheat its suppliers, it keeps its word, it pays its bills briskly. 'They are tough people but very honest; they treat you honestly,' says Peter Campanella, a former Corning manager."182

At the heart of Walmart's success was its distribution system. To a large extent, it had been born out of the necessity of servicing so many stores in small towns while trying to maintain low prices. Walmart used distribution centers to achieve efficiencies in logistics. Initially, distribution centers were large facilities-the first were 72,000 square feet-that served 80 to 100 Walmart stores within a 250-mile radius. Newer distribution centers were considerably larger than the early ones and in some cases served a wider geographical radius. Walmart had far more distribution centers than any of its competitors. Cross-docking was a particularly important practice of these centers.183 In cross-docking, goods were delivered to distribution centers and often simply loaded from one dock to another or even from one truck to another without ever sitting in inventory. Cross-docking reduced Walmart's cost of sales by 2 to 3 percent compared to competitors. Cross-docking was receiving a great deal of attention among retailers with most attempting to implement it for a greater proportion of goods. It was extremely difficult to manage, however, because of the close coordination and timing required between the store, manufacturer, and warehouse. As one supplier noted, "Everyone from the forklift driver on up to me, the CEO, knew we had to deliver on time. Not 10 minutes late. And not 45 minutes early, either . . . . The message came through clearly: you have this 30-second delivery window. Either you're there or you're out."184Because of the close coordination needed, cross-docking required an information system that effectively linked stores, warehouses, and manufacturers. Most major retailers were finding it difficult to duplicate Walmart's success at cross-docking.

Walmart's focus on logistics manifested itself in other ways. Before 2006, the company essentially employed two distribution networks, one for general merchandise and one for groceries. The company created High Velocity Distribution Centers in 2006 that distributed both grocery and general merchandise goods that needed more frequent replenishment. Walmart's logistics system also included a fleet of more than 2,000 company-owned trucks. It was able to routinely ship goods from distribution centers to stores within 48 hours of receiving an order. Store shelves were replenished twice a week on average in contrast to the industry average of once every two weeks.185

Walmart stores typically included many departments in areas such as soft goods, domestics, hard goods, stationery and candy, pharmaceuticals, records and electronics, sporting goods, toys, shoes, and jewelry. The selection of products varied from one region to another. Department managers and in some cases associates (or employees) had the authority to change prices in response to competitors. This was in stark contrast to the traditional practice of many chains where prices were centrally set at a company's headquarters. Walmart's use of technology was particularly useful in determining the mix of goods in each store. The company used historical selling data and complex models that included many variables such as local demographics to decide what items should be placed in each store.

Unlike many of its competitors, Walmart had no regional offices until 2006. Instead, regional vice presidents maintained their offices at company headquarters in Bentonville, Arkansas. The absence of regional offices was estimated to save Walmart as much as one percent of sales. Regional managers visited stores from Monday to Thursday of each week. Each Saturday at 7:30 a.m., regional vice presidents and a few hundred other managers and employees met with the firm's top managers to discuss the previous week's results and discuss different directions for the next week. Regional managers then conveyed information from the meeting to managers in the field via the videoconferencing links that were present in each store. In 2006, Walmart shifted this policy by requiring many of its 27 regional managers to live in the areas they supervised.

Aside from Walmart's impact on suppliers, it was frequently criticized for its employment practices, which critics characterized as being low in both wages and benefits. Charles Fishman acknowledged that Walmart saved customers $30 billion on groceries alone and possibly as much as $150 billion overall when its effect on competitor pricing was considered, but he estimated that while Walmart created 125,000 jobs in 2005, it destroyed 127,500.186Others agreed that Walmart's employment and supplier practices resulted in negative externalities on employees, communities, and taxpayers. Harvard professor Pankaj Ghemawat responded to Fishman by calculating that-based on Fishman's numbers-Walmart created customer savings ranging from $12 million to $60 million for each job lost.187 He also argued that, because Walmart operated more heavily in lower-income areas of the poorest one-third of the United States, low-income customers were much more likely to benefit from Walmart's lower prices. Another criticism of Walmart was that it consistently drove small local retailers out of business when it introduced new stores in small towns and that employees in such rural areas were increasingly at the mercy of Walmart, essentially redistributing wealth from these areas to Bentonville. Jack and Suzy Welch defended Walmart by pointing out that employees in these areas were better off after a Walmart opened:

In most small towns the storeowner drove the best car, lived in the fanciest house, and belonged to the country club. Meanwhile, employees weren't exactly sharing the wealth. They rarely had life insurance or health benefits and certainly did not receive much in the way of training or big salaries. And few of these storeowners had plans for growth or expansion. . . a killer for employees seeking life-changing careers.188

Sam's Club

A notable exception to Walmart's dominance in discount retailing was in the warehouse club segment. Despite significant efforts by Walmart's Sam's Club, Costco was the established leader. Sam's Club had almost exactly the same number of stores as Costco-620 to 622-yet, Costco still reported almost twice the sales-$105 billion versus $54 billion for Sam's. Costco stores averaged considerably more revenue per store than Sam's Club

To the casual observer, Costco and Sam's Clubs appeared to be very similar. Both charged small membership fees, and both were "warehouse" stores that sold goods from pallets. The goods were often packaged or bundled into larger quantities than typical retailers offered. Beneath these similarities, however, were important differences. Costco focused on more upscale small business owners and consumers while Sam's, following Walmart's pattern, had positioned itself more to the mass middle market. Relative to Costco, Sam's was also concentrated more in smaller cities.

Consistent with its more upscale strategy, Costco stocked more luxury and premium-branded items than Sam's Club had traditionally done. This changed somewhat when Sam's began to stock more high-end merchandise after the 1990s, but some questioned whether or not its typical customers demanded such items. Despite the focus on pricier goods, Costco still focused intensely on managing costs and keeping prices down. Costco set a goal of 10 percent margins and capped markups at 14 percent (compared with the usual 40 percent markup by department stores). Managers were discouraged from exceeding the margin goals.

Some analysts claimed that Sam's Club's lackluster performance was a result of a copycat strategy. Costco was the first of the two competitors to sell fresh meat, produce, and gasoline and to introduce a premium private label for many goods. In each case, Sam's followed suit two to four years later.

"By looking at what Costco did and trying to emulate it, Sam's didn't carve out its own unique strategy," says Michael Clayman, editor of the trade newsletter Warehouse Club Focus. And at least one of the "me too" moves made things worse. Soon after Costco and Price Club merged in 1993, Sam's bulked up by purchasing Pace warehouse clubs from Kmart. Many of the 91 stores were marginal operations in marginal locations. Analysts say that Sam's Club management became distracted as it tried to integrate the Pace stores into its system.189

To close the gap against Costco, Walmart in 2003 started to integrate the activities of Sam's Club and Walmart more. Buyers for the two coordinated their efforts to get better prices from suppliers.

Culture

Perhaps the most distinctive aspect of Walmart was its culture. To a large extent, Walmart's culture was an extension of Sam Walton's philosophy and was rooted in the early experiences and practices of Walmart. The Walmart culture emphasized values such as thriftiness, hard work, innovation, and continuous improvement. As Walton wrote,

Because wherever we've been, we've always tried to instill in our folks the idea that we at Walmart have our own way of doing things. It may be different and it may take some folks a while to adjust to it at first. But it's straight and honest and basically pretty simple to figure it out if you want to. And whether or not other folks want to accommodate us, we pretty much stick to what we believe in because it's proven to be very, very successful.190

Walmart's thriftiness was consistent with its obsession with controlling costs. One observer joked that, "the Walmart folks stay at Mo 3, where they don't even leave the light on for you."191 This was not, however, far from the truth. Walton told of early buying trips to New York where several Walmart managers shared the same hotel room and walked everywhere they went rather than use taxis. One of the early managers described how these early trips taught managers to work hard and keep costs low:

From the very beginning, Sam was always trying to instill in us that you just didn't go to New York and roll with the flow. We always walked everywhere. We never took cabs. And Sam had an equation for the trips: expenses should never exceed one percent of our purchases, so we would all crowd in these little hotel rooms somewhere down around Madison Square Garden. . . . We never finished up until about twelve-thirty at night, and we'd all go out for a beer except Mr. Walton. He'd say, "I'll meet you at breakfast at six o'clock." And we'd say, "Mr. Walton, there's no reason to meet that early. We can't even get into the buildings that early." And he'd just say, "We'll find something to do."192

The roots of Walmart's emphasis on innovation and continuous improvement can also be seen in Walton's example.

Walton emphasized always looking for ways to improve. Walmart managers were encouraged to critique their own operations. Managers met regularly to discuss their store operations. Lessons learned in one store were quickly spread to other stores. Walmart managers also carefully analyzed the activities of their competitors and tried to borrow practices that worked well. Walton stressed the importance of observing what other firms did well rather than what they did wrong. Another way in which Walmart had focused on improvement from its earliest days was in information and measurement. Long before Walmart had any computers, Walton would personally enter measures on several variables for each store into a ledger he carried with him. Information technology enabled Walmart to extend this emphasis on information and measurement.

International Operations

Walmart's entry into the international retail arena had been somewhat recent. As late as 1992, Walmart's entire international operations consisted of only 162,535 square feet of retail space in Mexico. By 2013, however, international sales contributed nearly 30 percent of the company's sales. With growth rates of 7.4 percent in sales and 8.3 percent in operating income, Walmart's international growth exceeded that of its domestic operations. Although it was the company's fastest-growing division-going from about $59 billion in sales in 2006 to more than $135 billion in 2013-Walmart's performance in international markets had been mixed, or as Forbes put it, "Overseas, Walmart has won some-and lost a lot."193 Only a few years earlier, more than 80 percent of Walmart's international revenue came from only three countries: Canada, Mexico, and the United Kingdom.

Walmart had tried a variety of approaches and faced a diverse set of challenges in the different countries it entered. Entry into international markets had ranged from greenfield development to franchising, joint ventures, and acquisitions. Each country that Walmart had entered had presented new and unique challenges. In China, Walmart had to deal with a backward supply chain. In Japan, it had to negotiate an environment that was hostile to large chains and protective of its small retailers. Strong foreign competitors were the problem in Brazil and Argentina. Labor unions had plagued Walmart's entry into Germany along with unforeseen difficulties in integrating acquisitions. Mistakes in choosing store locations had hampered the company in South Korea and Hong Kong.

Walmart approached international operations with much the same philosophy it had used in the United States. "We're still very young at this, we're still learning,"194 stated John Menzer, former chief executive of Walmart International. Menzer's approach was to have country presidents make decisions. His thinking was that it would facilitate the faster implementation of decisions. Each country president made decisions regarding his or her own sourcing, merchandising, and real estate. Menzer concluded, "Over time all you really have is speed. I think that's our most important asset."195

n most countries, entrenched competitors responded vigorously to Walmart's entry. For example, Tesco, the United Kingdom's biggest grocer, responded by opening supercenters. In China, Lianhua, and Huilan, the two largest retailers, merged in 2003 into one state-owned entity named the Bailan Group. Walmart was also not alone among major international retailers in seeking new growth in South America and Asia. One international competitor, the French retailer Carrefour, was already the leading retailer in Brazil and Argentina. Carrefour expanded into China in the late 1990s with a hypermarket in Shanghai. In Asia, Makro, a Dutch wholesale club retailer, was the regional leader. Both of the European firms were viewed as able, experienced competitors. The Japanese retailer, Yaohan, moved its headquarters from Tokyo to Hong Kong with the aim of becoming the world's largest retailer. Helped by the close relationship between Chairman Kazuo Wada and Mao's successor Deng Xiaoping, Yaohan was the first foreign retail firm to receive a license to operate in China and planned to open more than 1,000 stores there. Like Walmart, these international firms were motivated to expand internationally by slowing down growth in their own domestic markets. Some analysts feared that the pace of expansion by these major retailers was faster than the rate of growth in the market and could result in a price war. Like Walmart, these competitors had also found difficulty in moving into international markets and adapting to local differences. Both Carrefour and Makro had experienced visible failures in their international efforts. FolkertSchukken, chairman of Makro, noted this challenge, "We have trouble selling the same toilet paper in Belgium and Holland." The chairman of Carrefour, Daniel Bernard, agreed, "If people think that going international is a solution to their problems at home, they will learn by spilling their blood. Global retailing demands a huge investment and gives no guarantee of a return."196

Walmart sought aggressive growth in its international operations. The company added 497 units during 2013. Walmart's early activities in a country typically involved acquisitions, but it had emphasized organic growth more in recent years.

Looking Ahead

Walmart CEO Doug McMillon faced the daunting challenge of achieving the company's accustomed growth rates despite its enormous size. A five percent organic growth rate would require the firm to add the equivalent of a firm ranking 129th in the Fortune 500 each year. To put that into perspective, the company's growth in revenues would need to nearly equal the total sales of Nike and exceed the sales of companies as large as Xerox and Kimberly Clark. What strategic priorities would allow Walmart to achieve that amount of growth? Or would the company need to adjust its aspirations?