Section A1 – Group 12
Peter De Boeck
1. Define Wal-Mart’s strategy
Traditionally, Wal-Mart has essentially had a low-cost, high volume strategy. The strategy aims at
customer satisfaction through low prices and relatively good customer service. Here are the basic details.
• Low cost: Wal-Mart has lower operating expenses than the industry average. The primary cost
advantage is Wal-Mart’s superior distribution capability (location of stores, inside-out growth patterns,
cross-docking, superior information management). Quantitative details on cost advantage are set forth in
Section 3 below.
• High Volume: Industry analysts watch Wal-Mart’s growth of sales figure very closely. Wal-
Mart’s prices are low by the industry standard, which, combined with its lower costs, indicates a strategy
that aims at growth in volume through grabbing increased market share (cf. Dell).
• Customer Satisfaction: Low prices, advanced data management and extremely motivated
employees (“10 ft rule”, “sundown rule”) means a better customer experience than at other discount
retailers, even though Wal-Mart remains a self-service retailer. In addition, the large size of the
traditional Wal-Mart stores adds convenience by offering a one-stop solution by offering a wide range of
In the words of Sam Walton, “Wal-Mart’s aims at creating a loyal customer base by lowering their
cost of living through offering quality and other products at significantly lower prices, while surprising
them on the convenience and service level side.”
It’s worth mentioning that Wal-Mart acquired volume through a careful consideration of locations,
away from competition. Today, however, Wal-Mart is experimenting with extending its original strategy.
There are three avenues being considered: internationalization, different formats (neighborhood stores)
and expanding the product range to offer more complete “customer solutions” like travel, insurance and
banking services. These growth options are discussed in Section 6. Still, in terms of strategy, we can say
here that the “internationalization” option is essentially an extension of Wal-Mart’s traditional strategy to
different countries (which is no doubt why Wal-Mart is pursuing it so aggressively), whereas the other two
options are new ground for Wal-Mart (which explains why they are being much more tentative in those
2. Evaluate the attractiveness of the discount retailing industry
We have analyzed the market attractiveness from the perspective of an existing player in the discount
retailing industry (as opposed to from the perspective of an entrant). We conclude that, for the average
retailer, the industry is unattractive principally because of the intense internal rivalry among the principal
retailers and the low switching cost for end-customers.
• Suppliers: weak power
The suppliers are the consumer goods manufacturers (both food and durables) and they have little power.
In the first place, with very few exceptions, the consumer goods are commodities (or at least, acceptable
substitutes are readily available, both from other manufacturers and from in-house private labels). The
availability of alternative suppliers puts the retailers in a strong position. In addition, retailers have high
power of negotiation due to the high volumes purchased (and the projected growth of the discount
market). Who wants to put off a retailer who supplies 15% of a growing market? The limited number of
big discount retailers also creates an imbalance in the importance of the accounts for the retailers and the
suppliers. A Wal-Mart or Target account is enormously important to a supplier, but Wal-Mart can easily
live without this or that supplier. (Of course, the suppliers have more power vs. smaller or newer
• Buyers: average power
The end-consumer has significant power, because of (a) the ready availability of substitutes (for the most
part you can shop elsewhere), (b) the ease of switching between different stores (customers are not locked-
in) and (c) the lack of real differentiation among the retailers. Since all the retailers explicitly compete on
value, shoppers can easily compare the offerings. The transparency of any price advantages on what are
generally commodity products decreases consumer loyalty. As a result, any retailer that underperforms on
day 1 (being out of stock on milk for example) can find himself losing customers on day 2.
• Internal rivalry: strong
Of the 15 top discount stores shown in Exhibit 3 to the 1993 case, three were in Chapter 11 proceedings in
1993 and at least one more has declared bankruptcy since then (Kmart). Enough said? Obviously,
competition is fierce among discount retailers. The reasons are (a) the lack of differentiation in product
offerings, (b) low switching costs for end consumers and (c) volume-driven strategies that aim at grabbing
market-share at the expense of profitability (which creates a potential for price wars). The heavy pressure
for increases in volume arises because only volume allow the retailer to generate cost efficiencies, which
can then be passed on to the consumer in the form of price discounts, thereby creating even more volume
in terms of both basket size and visit frequency. Launching yourself into this upward virtuous spiral is an
essential ingredient of success for a discount retailer.
• Substitutes: moderate
A number of substitutes are available for consumers, principally from retailers having different formats:
food-supermarkets, local grocery stores, department stores, specialty stores, etc. Generally speaking,
these other formats offer more convenience at higher prices. Discount retailers have to keep track that
their price discounts remain sufficiently large to justify the extra effort for consumers to come to them.
An interesting second substitute is the direct sales channel. Manufacturers like Dell who sell
directly to the consumer may be a growing rival for discount retailers. As consumers become more used
to purchasing relatively large items over the internet (the sort of items for which the price savings offered
by a discount retailer would have justified the effort of making the trip), online sellers will be an
increasing threat to the traditional discount retailers. However, of course, none of these online sellers
can offer the one-stop convenience of a discount retailer: none of them will be able to offer a comparable
range of products in the immediate future.
• Barriers to entry: high
As explained above, volume is essential to survive as a discount retailer. A new entrant must achieve
substantial market share to reach minimum efficient scale. Ingredients for volume selling are (a) a
complex and expensive distribution network, (b) a base number of stores to justify the distribution
network, and (c) a data management system matching supply and demand. High capital expenditures are
therefore a prerequisite. Even if this money can be raised (which is unlikely given the overall
unattractiveness of the industry), there is a scarcity of desirable property, at least in the U.S.: the country
is already carpeted with large retail discount centers (Wal-mart itself has run out of space) and so it is hard
to find locations without head to head competition with one or more incumbents. As a result, incumbents
will almost inevitably retaliate and attempt to squeeze out the entrant through price wars (which the
entrant will lose because of its lack of economies of scale). (An additional reason for retaliation is the
large exit barriers for the current players created by the enormous amount of capital tied up for them in
their existing operations.)
3. What are Wal-Mart’s competitive advantages? Please clearly articulate how Wal-Mart activities
translate into competitive advantages, and to the extent possible, quantify these effects.
We believe that Wal-Mart has five distinct competitive advantages, which are set forth in the table below.
In each case, the activities that implement that competitive advantage are listed. Under fit and scope, we
list how we believe these activities implement the basic strategy of Wal-Mart described in Section 1 (low
cost, high volume, customer satisfaction). It can be seen that the competitive advantages always fit with
the strategy and are also mutually supportive.
Competitive Activities Fit and Scope Trade-Offs
Distribution Efficient distribution; - Economies of scale match - Expense
capabilities1 e.g. cross-docking, volume-based strategy - Requires partnership
predominance of Wal- - Cost savings from lower inventory relationship with suppliers
mart’s own distribution levels - Requires sophisticated
centers, and “inside-out” - Cost-savings can translate into IT
location strategy lower prices and more customer
Partnership Wal-Mart integrates - Improves supply chain and lowers - Relatively high cost of
relationship suppliers via IT and distribution costs goods sold
One could argue that Wal-Mart’s distribution capabilities are not a competitive advantage, though merely an
activity that, for now, is being executed better than that of its competitors
with treats them well in terms - Additional cost savings from - Requires integrated IT
suppliers of pricing; they are more elimination of manufacturer reps - Access to sales and
partners than “value inventory info for third
Advanced Active collection and - Useful data for suppliers Expense and time
data-mining usage of customer - Improves customer satisfaction
purchase behavior info through more accurate forecasting
- Lower costs through reduced
inventory and shrinkage
- Improved matching of supply and
demand creates superior sales/ sq ft
Workforce Customer-oriented - Good customer service is not - Expensive in terms of
culture workforce motivated compromised by self-service and benefits (profit sharing)
through generous low cost structure, thereby - Requires strong
monetary participation improving customer loyalty corporate culture (need
and belief in Wal-Mart - Stores can respond more quickly/ proxy for Sam Walton)
culture flexibly to changing demand - Requires employee
- Continuous improvement mindset enablement from
(employees are hired with
EDLP2 Maintenance of “every
- Improves customer satisfaction - Only possible so long as
day low prices”
through low prices you really have the lowest
- Matches volume-driven strategy prices
- Drives down costs through less
- Steady prices improve stability of
To supplement the qualitative analysis below, we have analyzed Wal-Mart’s cost structure vs. the
competition in the chart below:
- 1 9 9 3 : c o s t s tru c tu re (% o f s a le s )
100 +2 ,3
9 7 ,4 -0 ,6 +0 ,2
98 -0 ,3
-1 ,1 -0 ,3
94 9 3 ,2
92 -4 ,4
What the chart shows is that Wal-Mart overall has a 4.2% cost advantage over its average competitor
(based on percentages of net sales), which breaks down as follows:
COGS are actually higher at Wal-Mart. This is consistent with Wal-Mart’s partnership relations
with suppliers that are aimed not at squeezing suppliers but at producing cost reductions in distribution
from improved cooperation and IT integration.
Advertising expenses are lower given the EDLP strategy: no promotion folders need to be
composed and distributed. In addition Wal-Mart probably realizes economies of scale through nation-wide
Rent per square meter is actually higher for Wal-Mart ($8,8/sq.ft. vs. $4,4/sq.ft) though this better
locations apparently pay-off as Wal-Mart has lower rent expenses as % of sales.
Inbound logistics: Cross-docking and other distribution improvements result in cost savings of
1.1% of net sales.
IT costs are higher than those of Wal-Mart’s competitors. However, these additional costs are
offset by benefits on many fronts: (a) higher sales/sq.ft through better forecasting of demand, (b) (b) lower
supply chain costs through integration with suppliers, (c) more effective communication both internally
and externally, and (d) lower shrinkage costs (due to improved tracing)
A portion of the cost savings, which the chart above identifies as “other operating costs” remain
unallocable to specific categories. We believe that these additional cost savings are principally due to
economies of scale in Wal-Mart’s distribution system that simply dwarfs those of its competitors. In
addition, we suspect that staffing at Wal-Mart stores is leaner than those of its competitors, so that
employee costs are relatively low at Wal-Mart (on a per square foot basis), even taking into account the
generous benefit schemes.
The costs do not tell the complete story. A sales/sq.ft. comparison shows that the combination of its
competitive advantages lead to higher sales ratios. We believe that this is merely the result of (a) its low
prices, (b) its corporate culture, and (c) its insight in purchasing behavior that allows them to eliminate
We consider ADLP as a competitive advantage as Wal-Mart is the only player able to offer lower prices than
competition in a sustainable matter (or in other words: without going bankrupt)
- 1993 : Sales/sq.ft. Comparison -
Discount Departments stores 397
4. How sustainable are those advantages in the U.S.?
The advantages are sustainable in the U.S.
Distribution capabilities. Wal-Mart’s distribution system is already in place. It is massive and very
difficult to replicate by competitors, in particular when you consider the electronic linkage of sales and
inventory information all around the country.
Partnership relationship with suppliers. The supplier partnerships also constitute a sustainable
advantage. This relationship is something that evolves over time and the more time that passes, the higher
the level of integration. Wal-Mart has already demonstrated its commitment and seriousness in their
operations so the relationships should prosper even more over time. Other competitors will lack the
volume of purchases that Wal-Mart can offer and will lack the years of relationship that Wal-Mart already
has with their suppliers. In addition, Wal-Mart beats the other discount retailers on compensation paid to
suppliers because it reaps cost savings in the operations area (as discussed above).
Advanced data-mining. Wal-Mart’s IT systems are very advanced and even though their competitors
will continue to copy them, they are always one step behind. The company has developed expertise in this
issue so it is able to constantly upgrade their systems. However, one would expect Wal-Mart’s
competitive advantage in this area to shrink over time.
Workforce culture. The advantage of having motivated and proactive employees can be replicated by
others, but it is not an overnight thing. Wal-Mart has created a corporate culture that is considered one of
the best in the U.S. and “matching” this by their competitors will take time. Creating a culture is an
everyday effort on the part of management and it involves careful focus on the interactions that occur in
the company. It is impossible for another discounter to replicate Wal Marts culture exactly but they can
follow the same idea. However, it is difficult to match the “best working place in the U.S.”
EDLP. You cannot replicate EDLP unless you can actually offer consistently low prices. Competitors
can only do this to the extent they are able to match Wal-Mart on cost. Given the other competitive
advantages of Wal-Mart that reduce its costs (IT and distribution), it is hard to imagine another
competitor matching Wal-Mart’s EDLP.
5. How transferable are those advantages as Wal-Mart moves into new formats and especially into
new international locations?
(A) New formats. Currently, Wal-Mart is considering “neighborhood stores” as a new format.
Accordingly we have used that format to analyze the transferability of Wal-Mart’s competitive
Advanced data mining. Wal-Mart’s IT capabilities can be easily adapted. Wal-Mart’s assortment
will be different in other formats, customer demand will be different, but all this will be easily manageable
by Wal-Mart’s existing IT.
EDLP. We have some doubt whether Wal-Mart’s cost structure for this new format will be good
enough to support EDLP for the new format. In particular, we expect rental costs/ sq ft to be higher given
the urban locations. Urban locations also create higher distribution costs (more frequent, smaller
deliveries, delivery problems due to traffic congestion). However, Wal-Mart may be able to partially
offset some of these costs through reduced inventory costs resulting from high inventory turnover
Workforce culture. The corporate culture can be transferred easily to new formats. New
employees are no harder to socialize at neighborhood stores than at supercenters.
Distribution capability. The neighborhood stores can benefit from the existing distribution
system. In fact, locations are chosen so that neighborhood stores can be served as part of runs to
supercenters. This is probably the biggest plus for the new format: the increased volume will generate
cost savings in distribution for both the existing formats and the new neighborhood stores.
Partnership relationship with vendors. The neighborhood market will use the current suppliers;
there are no transfer issues.
Our main concern about the neighborhood stores is therefore whether the same economics of the
successful supercenters are transferable to any new formats. The table below summarizes our concerns for
the neighborhood markets.
2002 Supercenter economics Neighborhood markets
# sg.ft. 180.000 45.000
Sales/sq.ft 366 422
Total sales($)/store 65.825.699 18.990.000
% COGS 75,10% 84%
Operating expenses 18,10% 18,10%
Operating profit (%) 6,80% -2,10%
Operating profit($)/sq.ft. 24,9 -8,9
The table shows that COGS represent 84% of sales, which leads to a 16% gross margin for
neighborhood markets (assuming the same price levels as Supercenters). Even assuming the same
operating expenses for neighborhood stores as for Supercenters, which is a generous assumption for the
neighborhood stores, we notice that the neighborhood markets would run at a loss3. The high COGS and
lower gross margin, we believe, reflect the fact that the product mix is more oriented towards food.
The table below summarizes the succesfactors of the supercenter format. Gross profit can be expressed as
(# of customers) x (visiting frequency) * (average $ in shopping basket) * average gross margin. Each
format adds to the successful mix of the supercenter:
FOOD (grocery supermarket) NON-FOOD (General Merchandise discount store)
- # of customers: the # of potential supercenter
- Visiting frequency: the frequency visit is high (weekly
customers is high given the high geographic span of
or bi-weekly) because supercenters offer food, and
Americans have the habit of weekly stocking the majority
of their food items - The average $ in shopping basket is high. The trip
to the supercenter is done to fill the basement with
food, but also to buy non-food items.
- The gross margin is relatively high: whereas food
drives traffic, general merchandise drives profit. The
floorplan shows that the food and non-food sections
are nicely separated to allow for a quick visit (in-
store-time-consumption is one of the drawbacks of
large supercenters). Though the intermediary section
between food and nonfood will typically be filled
with cheap non-food items to draw the customer into
the moneymaking non-food part of the supercenter.
Overall we now understand why supercenters are such money machines: the non-food section provides the
customer span and profit; the food section provides the frequency and low price image. In conclusion we
summarize that the competitive advantages are transferable, but that Wal-Mart should carefully consider
its price-level and assortment to make new formats profitable.
(B) Current formats in other countries.
Expanding the existing formats to other countries is intuitively appealing. A low cost volume-
based strategy offering superior customer satisfaction seems appealing anywhere we can identify a
sizeable middle class (or aspiring middle class) and decent population growth. Though when reviewing
the competitive advantages, one notices that Wal-Mart might prefer a mature and developed retail market
to realize its low-cost advantage on the one hand, but an underdeveloped, emerging slowly growing retail
market to have time to grow corporate culture perspective.
• Advanced data mining / customer insight
Technology advancement and trained employees are the key requirements for implementing the IT system
abroad. Though this is not a barrier to overcome, shopping and consumption habits differ across most
However, one should not jump to conclusions: (a) overall operating expenses can go down due to the economies
of scale (b) marginal distribution costs for the neighborhood stores are low as they are supplied on trips to
supercenters (c) prices will be higher at neighborhood markets given the added convenience of their location.
countries making it hard to build on the US data. Mature retail countries as Western Europe are
preferable over emerging modern-retail countries as China given (a) the countries’ availability of
technology/infrastructure and (b) its similar consumption habits to the US.
Despite the fact that Wal-Mart is the inventor, we see different retailers in different countries adopting an
EDLP strategy. We see little problem in copying this part of the strategy.
• Customer oriented workforce
The corporate culture is related to a number of factors:
- The entry strategy: if Wal-Mart grows organically in a new country, it can build its own corporate
culture. Though when it acquires a retailer, it has to convert the existing corporate culture, which
has proven to be difficult.
On the other side organic growth in an emerging country brings the major disadvantage that
volume grows slowly which limits the economies of scale.
- The culture of the country: the Wal-Mart culture is atypical and not all workforces might cope
with it given their nation’s culture
- The role of the partner: most retailers enter a new country through a partnership to increase the rate
of success. This requires a mutual understanding and a fit between the two corporate cultures to
work together effectively
In conclusion we see that organic growth is the preferred option to build a similar customer oriented
workforce. Though this may not be trivial if Wal-Mart needs to acquire volume fast.
• Distribution capability
The distribution network has to be build from scratch in a new country. This limits the optimal choice of a
- In order to get the competitive cost advantage, volume is needed. This means that acquisition is a
preferred tool from a cost perspective.
- A decent infrastructure is needed so all goods can be transported efficiently
- The country is preferably large so economies of scale can be attained. That means similar
assortments, and therefore similar consumer tastes, across large regions
So from a distribution point of view, a large developed retail market is the preferred choice.
• Partnership relationship with vendors
Wal-Mart can work with the same suppliers in other countries to the extent that:
- The assortment is affordable to the population and fits with the local taste. In clear terms this
means that western countries are preferable
- The supplier is present in these other countries and/or has the financial power to develop itself in
This means that from a supplier’s perspective, mature western oriented countries are preferable.
• Economics of the format
We already explained the economics of the supercenter format. This format has to fit with local
- Weekly stocking of items: Japanese consumers do not have the habit of stocking items on a weekly
basis. Wal-Mart’s existing formats as the supercenter may therefore clash with the local shopping
- Mobile population: the population has to be mobile, willing to travel to the Wal-Mart’s large stores
and able to transport large quantities of goods easily home. This may not be trivial: imagine
carrying 20 bags home using Singapore’s MRT.
Conclusion: we see that transferring the different competitive advantages puts different and sometimes
conflicting requirements on the country that Wal-Mart wants to enter. This is in line with their experience:
when acquiring the Wertkauf retail chain, they had large difficulties in converting the existing corporate
culture towards the customer-oriented culture (it took a while before German employees wanted to open
the day with shouting in group: “the customer is the king!”).
6. Attractive growth options for Wal-Mart.
(1) Continue converting discount formats to supercenters: we illustrated the success of the
supercenter format. Overall, we believe it will be difficult for Wal-Mart to find a similar golden egg
amongst its alternatives. Therefore it should pursue converting discount formats to supercenters to the
extent this is possible.
(2) New product categories and services. First, Wal-Mart can move up in the quality of its
products. Wal-Mart’s experience in the UK shows that consumer perceptions can be altered from a focus
on low-cost to providing high quality at value prices. Expanding its own higher-quality brands, such as the
‘George’ apparel line and increasing the selection of known brands (Levi Strauss jeans, etc.) are ways to
implement this strategy. Second, Wal-Mart can further expand its one-stop-solution by offering more
store-in-store specialty stores. For example, in 2002 Wal-Mart began to offer PC fix centers, but it can go
far beyond that to areas such as financial services (including residential brokerage), insurance, banking
and credit, entertainment, home and garden improvement, etc. All of these moves can drive improved
margins and, in the case of new services, create entirely new revenue sources. However, we are skeptical
about whether this is the right move for Wal-Mart. It is, at heart, a high-volume, low-cost retailer. If its
existing strategy were not working, it might be worth doing something else.
New store formats. Our concern with new formats is the preservation of Wal-Mart’s cost
structure and the profitable format economics. As discussed above in the context of the neighborhood
stores, all competitive advantages are transferable into other formats with the possible exception of EDLP;
so because of these synergies incremental investments stay relatively limited. Though Wal-Mart should
only do this to the extent they can assure making profits with these formats.
Internationalization. At some point in the not so distant future, Wal-Mart’s highest growth will be
generated in the international arena. It is our view that this is the most promising opportunity for Wal-
Mart. As discussed above in Section 5B, the overall strategy for Wal-Mart makes sense in other countries
too and for the most part Wal-Mart’s competitive advantages can be transferred abroad. It is therefore not
surprising that the number of Wal-Mart stores outside the U.S. has almost doubles to 1200 (compared to
1647 in the United States) in the past four years. Though we should also emphasize that some markets as
South Korea, China, and Japan have been less successful because of reasons we indicated: volume did not
come instantaneously because of the early stage of development of the retail market, local partnerships did
not fit Wal-Mart’s own culture, differences exist in consumer preferences requiring totally different
assortments, the countries’ infrastructure was rather underdeveloped, etc. Though we see that in more
developed and more western-like retail markets, Wal-Mart (despite some initial growing pains)
successfully gained market share and attained profitability.