Case 1-3: Walmart Stores, Inc.

In November of 2013, Doug McMillon had just been named the CEO of Walmart Stores, Inc. effective February 1, 2014. McMillon had unique preparation for the job. He had held senior executive positions in Walmart's domestic operations and had presided over both the company's international operations and Sam's Club, Walmart's discount club chain. McMillon would likely need to draw upon his diverse experiences to successfully lead the company in the face of mounting challenges.

As recently as 1979, Walmart had been a regional retailer little known outside the South with 229 discount stores compared to the industry leader Kmart's 1,891 stores. In less than 25 years, Walmart had risen to become the largest U.S. corporation in sales. With more than $469 billion in revenues (seeExhibits 1 and 2), Walmart had far eclipsed not only Kmart but all retail competitors. Yet another measure of Walmart's dominance was that it accounted for approximately 45 percent of general merchandise, 30 percent of health and beauty aids, and 29 percent of non-food grocery sales1 in the United States.Forbesput Walmart's success into perspective:

. . . all that's left for Walmart is mop-up. It already sells more toys than Toys "R" Us, more clothes than the Gap and Limited combined, and more food than Kroger. If it were its own economy, Walmart Stores would rank 30th in the world, right behind Saudi Arabia. Growing at 11 percent a year, Walmart would hit half a trillion dollars in sales by early in the next decade.

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.12 Instead 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.13Some 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.14 Competitors 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.15 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.16 Several 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.17 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.18 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.19 Walmart pursued steps to help suppliers address the violations, but it was unclear how successful these efforts were.

AFast Companyarticle 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."20

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 facilitiesthe first were 72,000 square feetthat 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.21 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."22 Because 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.23

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 127,500.24Others 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 thatbased on Fishman's numbersWalmart created customer savings ranging from $12 million to $60 million for each job lost.25 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.26

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 Costco620 to 622yet, 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 (see Exhibit 6).

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 theFortune500 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.

Written analysis of the case with reference to the chapter text information covered. This written analysis MUST BE IN OUTLINE FORMAT covering:

I. What is the basic issue(s) facing the organization in the case?

II. What is A recommendation as to how to rectify the issue(s)?

III. Support your recommendation with analysis/criteria/support from chapter information.