Questions:

Understanding the Unique proposition brought by Walmart

Viewing Walmart's strategy through Porter's Five Force Model

New Store to reach small-scale businesses & Neighborhoods alongside the international expansion

What pushes the company towards the upscaling

Comparison with the competitors 2019-2020

Upscaling's impact on value creation and firm's share

Benefits and Risks of upscaling

Walmart's competitive edge is sustainable.

Continuing Challenges In 2013, Doug McMillon became Walmart's new CEO, the youngest CEO since Walton first took the helm and only the fourth since Walton's death in 1992. McMillon had started out in a Walmart distribution center as a summer intern and had spent almost his entire career at the company. A tough-minded buyer for many years, McMillon assumed responsibility for Walmart's international business in 2009. When McMillon was appointed CEO, he led the largest retailer in the worldan international behemoth with 2.2 million associates (1.4 million employees in the United States alone) and $482 billion in annual sales (see Exhibits 8A and 8B).\" Walrnart revenues surpassed those of its top five competitors combined.22 As McMillon soon learned, the company's scale invited scrutiny, posing management challenges in two distinct areas; labor relations and community impact. LABOR RELATIONS Walmart had a long history of staunch opposition to labor unions. Rather than allowing its workforce to organize, the company preferred to restructure its operations to eliminate positions that could potentially be unionized. Although Walton had emphasized maintaining good relations between employees and management, the company's reputation as an employer grew increasingly negative. Many saw Walmart's culture as bullying and mean-spirited and believed the firm exploited its market power? Critics alleged that Walmart's wage policies kept employees below the poverty line. According to these estimates, a typical sales clerk earned $8.50 an hour, or about $14,000 a year, which was $1,000 below the poverty line for a family of three in 2003 (see Exhibit 9 for information on labor costs).24 Low wages, these critics argued, also prevented Walmart employees from participating in the company's health plan.25 Gender discrimination was another matter of contention. In a 2001 lawsuit, six Walmart employees claimed that women earned 5 (7015% less than men in similar positions Women also seemed less likely to be promoted. While two-thirds of Walmart's hourly employees were women, only one-third of salaried managers and 14% of the company's top managers were female. The company's competitors had about 20% more women in managerial positions. Walmart challenged the plaintiffs' statistical studies, arguing that female associates were less likely to apply for management positions.\" Reviewing the evidence, a federal judge certified the class in June 2004 and Walmart's stock fell by 1.6 percent on the day of the announcement.28 The Supreme Court ultimately sided with Walmart. But the suitand similar allegations in subsequent yearsindicated how costly the antagonistic labor relations had become. Poor labor relations also impacted operating costs; the turnover rate among Walmart associates was close to 50% each year, historically more than double that experienced at Costco and other retailers.29 COMMUNITY IMPACTS As the retail industry in the United States grew more concentrated (the average US county had 3.86 small retail stores in 1988, but this number fell by more than 10% in the following decade], Walmart's critics linked the rise of the discount retailer to deserted city centers and main streets. One independent academic study attributed at least 50% of the decline in the number of small stores to the rise of Walmart.an When Walmart opened a new store, it created 100 new jobs, but as small rivals unable to compete with the discOunter were forced to shut their businesses, 70% of Exhibit 4 Probability of Customers Shopping at Walmart The table reports the likelihood that a customer would shop at Walmart as a function of population density and customer distance. For example, a customer in an area with 10,000 people within a five-mile radius shops at Walmart with a probability of 61.5 percent if the closest store is five miles from home. Store Distance Population Density (miles (thousands of people within a 5-mile radius) 1 5 10 20 50 100 250 999 989 966 906 717 .496 236 .999 979 941 849 610 387 . 172 .997 962 .899 .767 .490 288 123 AU AWN- O .995 .933 .834 659 .372 .206 086 .989 883 739 .531 .268 . 142 .060 .978 .803 615 .398 . 184 .096 .041 10 570 160 .083 044 020 011 006 Source: Thomas J. Holmes, "The Diffusion of Wal-Mart and Economies of Density," Econometrica 79, no. 1 (January 2011): 253-302.Exhibit 5 Sam Walton Does the "Squiggly" in the Walmart Cheer Give me a W! Give me an A! Give me an L! Give me a squiggly! Give me an M! Give me an A! Give me an R! Give me a T! What's that spell? Wal-Mart! Whose Wal-Mart is it? It's my Wal-Mart! Who's number one? The customer! Always! Source: Company documents.Exhibit 6 Number of Walmart Stores, 1962-2020 14000 12000 100 00 80OD 6000 4000 2000 1962 1972 1982 1992 2002 2012 - - discount stores - super centers - sam's dub .* * * *. neighborhood markets - international = = = total Source: Walmart Stores, Inc. Annual Report. Exhibit 7 Estimated Net Present Value (NPV) per New Store, 2003 ($ millions) Type of Store Discount Store Supercenters Long-Run Operating Margin* 10% 7% 3% 9% Estimated NPV $16.3 $15.0 $19.0 $22.9 Notes: Discount stores are assumed to generate long-run sales of $39 million per year with an initial investment of $10.6 million, and supercenters are assumed to generate long-run sales of $75 million per year with an initial investment of $15.5 million. NPVs are net of these initial investments *Operating margin is assumed to ramp up to its long-run level in five years. Source: Pankaj Ghemawat, Stephen P. Bradley, and Ken Mark, Wal-Mart Stores in 2003 (Abridged Version) (Cambridge, MA: Harvard Business Publishing, 2003).Exhibit 8A Financials: Comparable Income Statements, 2019-2020 IN MILLIONS OF REPORTED CURRENCY (CONVERSION: HISTORICAL) Walmart Total (incl. rev Target Costco Kroger other ops) Last Twelve Months 12 months 12 months 12 months 12 months For the Fiscal Period Ending Jan-2020 Feb-2020 Sept-2019 Jan-2020 In Currency USD USD USD USD Total Revenue 523,964.0 78,112.0 152,703.0 122,286.0 Cost Of Goods Sold 394,605.0 54,864.0 132,886.0 95,294.0 Gross Profit 129,359.0 23,248.0 19,817.0 26,992.0 Selling General & Admin Exp. 108,791.0 18,590.0 15,080.0 24,741.0 Operating Income 20,568.0 4,658.0 4,737.0 2,251.0 Interest Exp. 452 468 17.0 123 EBT Excl Unusual Items Operating Profit Before Tax 20, 116.0 4, 190.0 4,720.0 2,128.0 EBT Incl. Unusual Items Income Tax Expense 4,915.0 921.0 1,061.0 469.0 Net Income 15,201.0 3,269.0 3,659.0 1,659.0 Profitability Return on Assets % 6.7% 7.8% 8.6% 3.6% Return on Capital % 10.9% 11.2% 16.5% 7.3% Return on Equity % 20.2% 18.4% 26.1% 19.9% Compound Annual Growth Rate Over Five Years Total Revenue 10.5% 11.1% 11.0% 6.3% Gross Profit 12.5% 12.2% 11.0% 4.0% EBITDA 11.3% 12.9% 9.6% -0.3% EBITA 10.8% 13.3% 9.4% -2.6% EBIT 10.8% 13.4% 9.4% -2.6% Earnings from Cont. Ops 10.5% 15.7% 10.9% -0.6% Net Income 9.9% 11.9% 10.9% -0.4% Source: S & P Capital IQ. Note: There are variations with regard to the month in which each company's accounting year ends.Exhibit 8B Segment Income Statements ($ billions) Consolidated Walmart US Walmart Int'l Sam's Club Net Sales 519.92 321.00 120.1 58.79 Operating Income 20.57 17.38 3.37 1.64 Total Assets 236.50 110.35 105.81 13.49 Depreciation 10.99 6.41 2.68 0.61 EBITDA 31.56 23.79 6.05 2.25 Capital Expenditures 10.71 6.32 2.80 0.53 Source: Walmart 2020 10-K report. Exhibit 9 Distribution of Labor Costs at Selected Walmart Locations Quartile Store Location Annual Payroll per Wages as Worker ($ Percent of Sales Minimum Pineville, MO 12,400 4.5 25 Litchfield, IL 19,300 7.0 50 Belleville, IL 21,000 7.6 75 Miami, FL 23,000 8.3 Maximum San Jose, CA 37,900 13.7 Source: Thomas J. Holmes, "The Diffusion of Wal-Mart and Economies of Density," Econometrica 79, no 1. (January 2011): 253-302).Exhibit 10 Walmart Same-Store Sales, 1987-2020 14 12 10 6 N -2 FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE 188 192 194 196 '98 "00 '02 04 '06 '08 '10 '12 "14 16 "18 '20 Vote: Comparable store sales are defined as sales in stores and clubs for those units which were open at least 12 months as of January 31 of the prior year; for example, 11 percent for 1993 is the comparable sales growth during 1993 for stores open as of January 31, 1992. Source: Financial summary notes from each year's Walmart Annual Report. Exhibit 11 Competitors' Same-Store Sales, January 2013-January 2015 Jan/13 Jan/14 Jan/15 Total US 2.4% 0.5% 0.5% Target 2.7% 0.4% 1.3% Costco US 7% 6% 5% Kroger 4.5% 3.3% 4.2% Dollar General 4.7% 3.3% 2.8% Dollar Tree 3.4% 2.4% 4.3% Family Dollar 4.7% 3.0% -2.1%Exhibit 12 Walmart Cannibalization Rates, 1998-2015 Year Rate 1998 0.62% 1999 0.87% 2000 0.55% 2001 0.67% 2002 1.28% 2003 1.38% 2004 1.43% 2005 1.27% 2006 1.00% 2007 1.00% 2008 1.50% 2009 1.10% 2010 0.60% 2011 0.80% 2012 0.80% 2013 0.70% 2014 0.80% 2015 0.90% Note: Cannibalization measures the reduction in same-store sales as a result of new store openings. For example, in 2003 same-store sales would have been 1.38 percent higher if Walmart had not opened any new stores. Source: Thomas J. Holmes, "The Diffusion of Wal-Mart and Economies of Density," Econometrica 79, no. 1 (January 2011): 253-302.Exhibit 13 Incremental Values of New Store Openings Part A: All Stores Incremental Distribution Center Distance (miles) Incremental Incremental Sales Operating Profit Average for All Stores 363 3.1 168.9 How Many Years After Walmart's Entry Into the State Did the Store Open? 1-2 years 38.0 3.5 343.3 3-5 years 39.5 3.5 202.2 6-10 years 37.6 3.3 160.? 11-15 years 36.1 2.9 142.1 16-20 years 32.9 2.8 113.7 21 or more years 29.5 2.4 90.2 Part B: New Supercenters Incremental Distribution Center Distance (miles) Incremental Incremental Sales Operating Profit Average for all Centers All Supercenters 40.2 3.6 137.0 How Many Years After Walmart's Entry Into the State Did the Store Open? 1-2 years 42.4 3.9 252.9 3-5 years 42.7 4.0 1?1.2 6-10 years 41.0 3.6 113.5 11-15 years 36.7 3.2 95.3 16-20 years 30.1 2.8 94.0 Source: Thomas J. Holmes. \"The Diffusion of Wal-Mart and Economies of Density,\" Econometrica 79, no. 1 (January 2011): 253-302. Exhibit 14 Top 10 US Companies, Ranked by Retail E-Commerce Sales Share, 2020 1. Amazon 38.7% 2. Walmart 5.3% 3. eBay 4.7% 4. Apple 3.7% 5. The Home Depot 1.7% 6. Wayfair 1.5% 7. Best Buy 1.3% 8. Target 1.2% 9. Costco 1.2% 10. Macy's 1.1% Source: eMarketerthe initial increase in local jobs was eventually lost.31 Everyday low prices, some argued, came at a significant social cost. As a result, the company found it increasingly difficult to develop new sites. Supported by unions and grassroots groups, towns used zoning laws and referenda to stymie the company's expansion plans. When citizens kept Walmart from opening stores in Inglewood, California, and Littleton, Colorado, the company's defeat was widely publicized, further encouraging Walmart's detractors. Strained community relations impeded not only store growth; when Walmart applied for a banking license so it could take deposits and make loans, there was massive public outcry. There were \"thousands of public comments and a letter from nearly 1001awmakers\" against approving Walmart's application.32 In 2007, the firm had to withdraw its bid. As the cost of sour community relations became more visible, Walmart began to soften its stance. Former CEO Lee Scott explained the evolution: No question, it has been a hard transition for us going from being the darling to being under attack. At first, we threw the sandbags up and got the machine guns out and believed anybody who criticized us was our enemy. But I think we're taking down those sandbags one at a time.33 The company's attempts to put on a friendlier face seemed to have paid off. Rather than trying to embarrass the retailer, unions started to work with the company on proposals for improved healthcare, for instance. David Nassar, executive director of Walmart Watch, a largely union- financed group that sought to shame the company with stinging newspaper advertisements and public pronouncements, noted \"It is fair to say we have been less in-your-face.\"34 Reecting the better relations, the company shut down the campaign-style war room created to battle the unions and disbanded \"Working Families for Walmart," a companysupported advocacy group. Seeking Fresh Opportunities for Growth Walmart's expansion began to falter in the mid-20005, and its stock price flattened. At the company's 2015 shareholders meeting, McMillon acknowledged that samestore sales had been negative in some quarters.35 The rate of increase in comparable store sales had slowed to virtually zero in 2014 and 2015 and had only grown 2.6% overall since 2009I (see Exhibit 10). Later in the decade, Walmart was able to increase its comparable store sales to 4.0 percent and 2.7 percent in 2019 and 2020, respectively.36 By comparison, Walmart's key competitor, Costco, posted gains of approximately 5% annually from 2015 to 2019.37 McMillon and his team faced a number of challenges as they sought further growth. One issue was sales cannibalization (see Exhibit 12). By 2006, 60% of the US population lived within five miles of a Walmart, and 96% lived within 20 miles of one. There were still some potential areas for expansion, such as California and New York, but the company acknowledged that "additional stores may take sales away from existing units."33 McMillon estimated that comparable store sales in fiscal years 2014 and 2015 were negatively impacted by the opening of new stores by approximately 1% each year {see Exhibit 13). 23 "Stop the Bullying, Wal-Mart," Bloomberg Business, April 2007, https://web.archive.org/web/20101027154612/http://www.businessweek.com/debateroom/archi ves/2007/04/stop the bullying wal-mart.html. 24 Steven Greenhouse, "Wal-Mart, Driving Workers and Supermarkets Crazy," New York Times, October 19, 2003, https://www.nytimes.com/2003/10/19/weekinreview/the-nation-wal-mart- driving-workers-and-supermarkets-crazy.html 25 William Selway, "Wal-Mart Loses to the Little Guy," Miami Herald, April 8, 2004. 26 Martin J. Jenkins, United States District Court for the Northern District of California, Betty Dukes et al. v. Wal-Mart Stores, Inc. (C 01-02252 MJJ), June 21, 2004, 29. 27 Betty Dukes et al. v. Wal-Mart Stores, Inc., 38. 28 Ann Zimmerman, "Judge Certifies Wal-Mart Suit as Class Action," Wall Street Journal, June 23, 2004. 29 Wayne Cascio, "Decency Means More than Always Low Prices: A Comparison of Costco to Wal-Mart's Sam's Club," Academy of Management Journal 20, no. 3 (August 2007). 30 Panle Jia, "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," (working paper, MIT, Cambridge, MA, July 2007), http://economics.mit.edu/files/7575. 31 Jia, "What Happens When Wal-Mart Comes to Town." 32 "Walmart Financial Services Hampered by Regulation," Seeking Alpha, March 23, 2015, https://seekingalpha.com/article/3021596-walmart-financial-services-hampered-by-regulation. 33 Brent Schlender, "Wal-Mart's $288 Billion Meeting," CNN Money, April 18, 2005, https:/money.cnn.com/magazines/fortune/fortune archive/2005/04/18/8257009/. 34 Michael Barbaro, "Wal-Mart's Detractors Come in from the Cold," New York Times, June 5, 2008, https://www.nytimes.com/2008/06/05/business/05walmart.html. 35 CuriousObserver, "Wal-Mart: Digging for Clues Behind the June 5th Shareholder Meeting," Seeking Alpha, June 12, 2015, http://seekingalpha.com/article/3255925-wal-mart-digging-for- clues-behind-the-june-5th-shareholders-meeting 36 Walmart, "Financial Information," https://stock.walmart.com/investors/financial- information/sec-filings/default.aspx, p.29 37 Costco, SEC Filing Details, September 1, 2019, https://investor.costco.com/sec-filings/sec- filing/10-k/0000909832-19-000019 38 Matthew Zook and Mark Graham, "Wal-Mart Nation: Mapping the Reach of a Retail Colossus," in Wal-Mart World: The World's Biggest Corporation in the Global Economy, ed. Stanley Brunn (London: Routledge, 2006), 20. 39 Financial data provided by Capital IQ from annual reports from Kroger Co. and Wal-Mart Stores, Inc. 40 Jack Hitt, "The Dollar-Store Economy," New York Times Magazine, August 18, 2011, https://www.nytimes.com/2011/08/21/magazine/the-dollar-store-economy.html. Lauren Debter, "Family Dollar Sales Rise Ahead of Dollar Tree Merger," Forbes, April 8, 2015, http://www.forbes.com/sites/laurengensler/2015/04/08/family-dollar-second-quarter-earnings/42 Hayley Peterson, "This Rapidly Expanding Grocery Chain Is Shockingly Cheaper than Wal- Mart," Business Insider, January 5, 2015, http://www.businessinsider.com/this-grocery-store-has- the-lowest-prices-2015-1#ixzz3hDC7COqv. 13 Euromonitor International, US Online Sales (Table 21), June 2015. 44 CuriousObserver, "Wal-Mart: Digging for Clues." 45 Brian O'Keefe, "The Chosen One," Fortune, June 15, 2015. 46 Walmart, "Walmart Completes Acquisition of Jet.com, Inc.," press release, September 9, 2016, https://corporate.walmart.comewsroom/2016/09/19/walmart-completes-acquisition-of-jet- com-inc. 47 Neil Stern, "Walmart Grounds Jet.com," Forbes, May 19, 2020, https://www.forbes.com/siteseilstern/2020/05/19/walmart-grounds-jetcom/#294e2da12ebc. 48 American Consumer Satisfaction Index (ACSI) Retail Report 2014, February 18, 2015, https://www.theacsi.orgews-and-resources/customer-satisfaction-reports/report-archive/acsi- retail-report-2014 49 Jennifer Reingold, "Target's Inner Circle," Fortune, March 31, 2008, https://money.cnn.com/2008/03/18ews/companies/reingold target.fortune/. 50 Target Corporation Form 10-K for the period ending 31 January 2015, https:/www.sec.gov/Archives/edgar/data/27419/000002741915000012/tgt-20150131x10k.htm. 51 Zimmerman, "After Misstep, Wal-Mart Revisits Fashion," https://www.wsj.com/articles/SB120899828876040063 62 Zimmerman, "After Misstep." 53 Matthew Boyle, "Wal-Mart Apparel Chief Leaves Duties after Split," Bloomberg Business, July 23, 2010, www.bloomberg.comews/articles/2010-07-23/wal-mart-apparel-chief-mattison- leaves-after-retailer-splits-job-duties. 54 Emily Scardino, "Wal-Mart's Fashion Sense Chain's Best Kept Secret," DSN Retailing Today, February 7, 2005. 5 Lauren Thomas, "Walmart Raises Starting Hourly Wage to $12 in 500 Stores, As Part of a Test," CNBC, January 24,2020, https://www.cnbc.com/2020/01/24/walmart-raises-starting- hourly-wage-to-12-in-500-stores.html#:~:text=Menu, Walmart%20raises%20starting%20hourly 20wage%20to%20%2412%20in%20500,as%20part%20of%20a%20test&text=In%20roughly%205 00%20stores%20%20Walmart,to%20a%20new%20workflow%20model. 56 "Wal-Mart Stores: No Light at the End of the Tunnel Yet," Barclays Equity Research, May 20, 2015. 57 Paul Ziobro and Eric Morath, "Wal-Mart Raising Wages as Market Gets Tighter," Wall Street Journal, February 19, 2015, https://www.wsj.com/articles/wal-mart-plans-to-boost-pay-of-u-s- workers-1424353742. 58 Elizabeth A. Harris and Stephanie Strom, "Walmart to Sell Organic Food, Undercutting Big Brands," New York Times, April 10, 2014, https://www.nytimes.com/2014/04/10/business/walmart-to-offer-organic-line-of-food-at-cut- rate-prices.html. 59 "Wal-Mart Turns Attention to Upscale Shopper," USA Today, March 22, 2006, http://usatoday30.usatoday.com/money/industries/retail/2006-03-22-walmart x.htm.Grocery margins were a second area of concern. The company remained the price leader in the food business, but supermarkets such as Kroger and Publix were beginning to close the gap. The innovations that Walmart had created in merchandising, logistics, and transportation had been well studied by its competitors and were being duplicated.\" Even more importantly, dollar stores and "deep discount\" grocers created enormous price pressure; during the Great Recession of 2009, even wealthier customers patronized such venues. Even though they were no-frills stores, people enjOyed shopping at them, especially for fill-in trips, because they were more centrally located and smaller than supercenters.4L1 In 2014, Dollar Tree announced it was taking over Family Dollar to create a chain with more than 13,000 stores and $18 billion in annual sales; competitor Dollar General had around 12,000 stores.41 Germany's Aldi and Lidl stood out among the discount grocersboth companies offered mainly private-label products, a far smaller number of SKUs, and a reduced store format of about 5,000 square feet filled with cut boxes and rudimentary shelf displays. As a result, Aldi's and Lidl's prices compared favorably to Walmart's. In some studies, consumers saved more than 20% by shopping at Aldi.42 Third, online sales were another headache. With a market share of 1.6% of US online sales, Walmart was lagging behind Amazon (12.1%), the largest e-retailer in the world.'13 Amazon didn't have brickandmortar stores and optimized its distribution to the particular needs of etailing. In contrast, Neil Ashe, CEO of Global eCommerce for Walmart, admitted at the company's 2015 shareholder meeting \"we're rebuilding the business from scratch.\"14 Walmart was investing heavily in online sales by improving its platform and opening new ecommerce distribution centers. To compete with Amazon's Prime, a popular service that offered customers free shipping and entertainment for an annual membership fee of $99, Walmart introduced unlimited free shipping for a $50 annual fee.45 In 2016, Walmart acquired Jet.com for $3.3 billion in order to compete more effectively with other online retailers.\" Jet was an ecommerce startup that offered a broad selection of merchandise. lt operated on a unique pricing scheme that found the true marginal cost of getting the product to the customer. Prices dropped when the customer purchased multiple items from the same distribution center, when the customer purchased multiple units of the same item, and when the customer waived their right to return the item. Despite continued efforts, however, Jet was never profitable and Walmart finally closed it down in 2020.47 Jet's demise was gradual. Walmart took several intermediate steps before closing it down. Walmart shifted much of its budget from Jet to Walmart.com starting in 2018. Jet's team was transferred to Walmart.com, including Jet cofounder Marc Lore who became the CEO of Walmart.com. Marc Lore introduced free two-day shipping for orders over $35 without a membership fee, a move that was a direct threat to Amazon Prime. Walmart's physical stores were a key advantage against Amazon, and it utilized the power of its store base to introduce two-hour express delivery. From 2016 to 2019, Walmartcom sales tripled and the company became the second biggest player in e-commerce but still lagged far behind Amazon (see Exhibit 14). Fourth, customer preferences appeared to have evolved in ways that hurt Walmart. Shoppers seemed to have become increasingly sensitive to the appearance, cleanliness, and convenience of the store environment. The allure of EDLP did not always overcome the minimal customer service, disheveled aisles, and aging physical spaces that could make a trip to Walmart exhausting and depressing. In the 2019' American Consumer Satisfaction Index, Walmart scored at the bottom, far behind competitors like Target, Sears, and Costco.43 Upscaling the Walmart Experience Walmart's competitors had long emphasized their superior products and a more pleasant shopping experience to compete with the company's low-price value proposition. Former Target President Bob Ulrich said, \"If Walmart was striving to be the king of logistics with enough muscle to force vendors to deliver on price, Target could deliver on a great store experience and a product that was exciting and unique.\"49 Ulrich made innovation, design, and quality the hallmarks of Target's offerings. He set up a trend-tracking department, founded a user-experience research center, and aggressively pursued design leaders to create unique products for Target stores. He launched fashion trendsetter Isaac Mizrahi's line of valuepriced women's clothing. Target's eyecatching TV and print ads suggested that shoppers could find joy in buying a broom or a toothbrush. Target's motto, \"Expect More, Pay Less," embodied its offeringsupscale products including Michael Graves's line of housewares, Todd Oldham's home decor and furniture, and Philippe Starck's kitchenware at discount prices. This positioning appeared to be a success; for a similar mix of merchandise, Target's prices exceeded those of Walmart by about 10%, but Target's same-store sales still grew more quickly.50 Lured by the attractive margins of products with a stylish designfashion clothing, for instance, had a 31 percent profit margin, compared to 20% for general merchandise and 4% for food5'Walrnart introduced branded clothing at higher price points beginning in 2000. To support these efforts, the company installed simulated wood floors and more dressing rooms in its stores, moved its office from Bentonville to a 40,000squarefoot space in New York City's Fashion District, and added more than 300 fashion merchandisers to the company's payroll. Walmart inked a series of deals to bring brand-name designer goods to its shoppers: surfer brand OP (Ocean Pacific) signed on to deveIOp a line of casual clothing, footwear, and accessories; junior jeans brand l.e.i. agreed to partner with Walmart; and designer Norma Kamali was tapped to create a new line of women's wear.52 These forays into the world of fashion had limited success, however, and the executive in charge resigned in 2010 due to \"slow growth in sales.\"53 One analyst commented: \"Without imagery, apparel just becomes a commodity business. Without the nuances of making a brand have an essence, as opposed to just a product, there is no additional sale."Ede Upscaling 2.0 Under McMillon's leadership, Walmart renewed its efforts to reposition the company. An important goal was to improve customers' instore experience. To increase the engagement of its associates, McMillon raised the hourly wage of 500,000 employees to $9 in early 2015, and to $12 in early 2020.55 The company also adjusted the pay bands for many full- and part-time workers, raising compensation for those making more than the starting wage. It added staff to shorten check-out lines and hired almost 8,000 department managers. McMillon introduced this new management tier hoping to improve the availability and presentation of products. In early 2015, in-stock positions were close to 95%.55 The company also developed new training programs. The estimated cost of all these initiatives was about $1 billion.\" To strengthen its grocery business, Walmart broadened its relationship with Wild Oats, a well- known label for organic products. In an aggressive move, the company promised to sell organic products at the same price as conventionally produced items. Competitors typically charged a 25% premium. \"We're removing the premium associated with organic groceries,\" said Jack L. Sinclair, executive vice president of Walmart's US grocery division.58 The company also worked on getting produce to its stores more quickly, and hoped to teach associates to cull fruit and vegetables more consistently to leave only high-quality produce on the oor. As Barclays analyst Meredith Adler remarked, these efforts were unlikely to produce quick results. \"Since produce is a seasonal business, it can take a year to train a produce clerk on exactly how to handle all the different kinds of fruits and vegetables.\" When Walmart announced its first quarter results for 2015, its share price fell by more than 4%. By early June, Walmart's valuation had declined by more than 10%. Adler noted: Perhaps investors were hoping that the many initiatives . . . would have benefited results this quarter. We don't think that view was realistic, since many initiatives are still being rolled out, and in most cases, the only communication to customers about the changes is coming via word of mouth. Others were more skeptical. Patricia Edwards, retail fund manager at Wentworth, Hauser and Violich, pointed out: \"The challenge that Walmart faces is value. An upper-end consumer defines value differently than a moderateincome shopper. If it was just price, they would drink the office coffee instead of going to Starbucks.\"59 Was moving upscale the right strategy for McMillon to pursue? \fExhibit 2 Sociodemographic Information by Store for Various Firms, 2006 Kmart Target Walmart Standard Standard Standard Mean Deviation Mean Deviation Mean Deviation Population in 2006 $2,254,909 $3,926,236 $3,523,082 $4,301, 172 $1,671,212 $2,993,719 Land area (in square miles) 3515.56 3795.6 4922.78 4200.67 3417.85 3719.22 Population density 513.46 634.61 700.23 717.17 371.05 495.78 Average household size 2.56 0.20 2.62 0.20 2.57 0.19 Median income $41,640.98 $7,578.02 $45,519.59 $7,475.11 $39,731.92 $8,038.29 Percentage urban population 0.76 0.20 0.86 0.13 0.70 0.23 Average weekly sales volume $241,942 $85,461 $670, 149 $184, 103 $991,846 $346, 157 Metropolitan statistical area 0.78 0.42 0.95 0.21 0.68 0.47 Micropolitan statistical area 0.17 0.38 0.04 0.20 0.19 0.39 Northeast 0.18 0.38 0.12 0.33 0.11 0.32 Midwest 0.31 0.46 0.28 0.45 0.25 0.43 South 0.33 0.47 0.34 0.47 0.49 0.50 West 0.18 0.39 0.26 0.44 0.15 0.36 Distance to HQ (in miles) 713.24 567.09 913.92 428.08 695.32 368.72 Distance to closest own DC 153.17 121.57 117.83 95.08 75.93 52.57 (in miles) Number of stores 1,362 1,443 3,345 Source: Paul B. Ellickson, Stephanie Houghton, and Christopher Timmins, "Estimating Network Economies in Retail Chains: A Revealed Preference Approach," RAND Journal of Economics 44, no. 2 (2013): 169-193. Page 13 | Walmart: In Search of Renewed Growth Columbia BY STEPHAN MEIER* AND FELIX OBERHOLZER-GEET CaseWorksExhibit 3 Diffusion of Walmart Stores and General Distribution Centers, 1970- 2005 1970 1975 1980 1985 1990 1995 2000 2005 Legend Wal-Mart Store General Distribution Center Source: Thomas J. Holmes, "The Diffusion of Wal-Mart and Economies of Density," Econometrica 79, no. 1 (January 2011): 253-302.$ Columbia Business School Columbia AT THE VERY CENTER OF BUSINESS casewarks |D#080408 CUZO PUBLISHED ON AUGUST 2|). 2020 Wal mart: In Search of Renewed Growth BY STEPHAN MEIER' AND FELIX O'BERHOLZER-GEEr Introduction In early 2020, 'I'lr'almart'I Stores, Inc., the world's largest retailer, faced several strategic challenges. The company had just been ranked number one on the Fortune 500 list, with samestore sales in the United States improving after many years of slow growth. However, international expansion had yielded uneven results, and competition in online sales remained fierce. Wall Street's support for Walmart was mixed: Market Realist reported in early 2019 that the firm's stock performance was \"minimal upside,\" noting that \"Target, Costco, and Walmart stock have risen 23.1 percent, 20 percent, and 5.3 percent, respectively for the year."1 See Exhibit 1. Finding new sources of growth would be no easy task. With more than 5,000 stores across the United States, the company had achieved broad geographic coverage.2 Cutting costs to boost financial performance seemed equally daunting. Walmart's laser-like focus on its famous "Everyday Low Prices" (EDLP) policy seemed to have wrung almost every conceivable expense from the firm's supply chain and operations. Competitive pressure from ultra-low-cost dollar store chains had increased substantially. As a result, the company found itself looking outside its traditional paths for growth opportunities. One option was to make a strategic shift toward a more upscale shopping experience. Target had already staked a claim to this positioning in discount retail, with its "Expect More, Pay Less\" message and exclusive deals with t0p designers. Could Walmart t0p Target? As CEO Doug i Wailman ofcially changed its name to Wahnart in 2018. Humble Beginnings In 1962, Sam Walton and his brother opened the first Wal-Mart Discount City store in Rogers, Arkansas. Walton was already an experienced retail manager, having worked both at]. C. Penney and as a franchise manager for the Ben Franklin chain. He had become intrigued by a growing trend in retailingdiscount stores. These new establishments combined the Iowmargin/Iow price strategy of supermarkets with the broader selection of merchandise often seen in department stores. Discount stores featured minimal decor, bare-bones staffing, and few services, rarely providing delivery or credit. By eliminating these costs and charging margins at least 10 to 15 percent lower than other retailers, discOunters were able to offer customers a wide variety of goods at sharply reduced prices. Top discounters such as Woolco, Korvettes, King's, Caldor, Two Guys, and Mammoth Mart were already prospering with this low-price, high-volume strategy. In 1962, Kmart and Target were also launched as discount retailers. Walton's idea was to bring the discount store concept and the benefits of lower prices to a neglected consumer demographic shoppers in rural America. He opened his first stores in small towns, in contrast to his competitors who were reluctant to do business in cities with populations below 50,000. By operating in locations that larger competitors shunned, Walmart found itself competing primarily against small, locally owned shopsjust the type of businesses Walton could challenge with his EDLP policy. The crux of EDLP was to sell goods at a lower price per item at all times, not just during holidays or special sales periods, and to reap profits by selling a larger volume of those goods. Walton described his strategy: Here is the simple lesson we learned . . . say I bought an item for 80 cents. I found that by pricing it at $1.00, I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater. Simple enough. But this is really the essence of \"discounting\" you can lower your markup but earn more because of the increased volume} To be successful, Walton paid close attention to costs, carefully monitored prices charged by each store's neighboring competitors, and invested heavily in operations and logistics. CONTROLLING COST Walmart's concern with controlling costs reached into every aspect of the business. To reduce expenses, Walton shunned bureaucracy and traditional marketing. Walmart housed its lean senior team in a nondescript building in rural Bentonville, Arkansas. When managers visited suppliers, they rented inexpensive cars, stayed in low-cost hotelsoften sharing a roomand walked instead of taking taxis. The Operational rule was to hold trip expenses to less than 1% of purchases. As Walmart grew, the company asked buyers to come to Bentonville, where negotiations were conducted in sparse rooms. Meetings with suppliers were set up via collect calls. In the early 1990s, in a move that was challenged and upheld in the courts, Walmart bypassed manufacturer representation altogether to deal directly with suppliers, thus saving 3 %4% on the cost of goods. PRICING PRACTICES While Walmart's competitors set prices at headquarters, Walton delegated pricing and merchandising decisions to store managers who often visited neighboring stores to observe their rivals' prices. Decentralization allowed the company to react quickly to local market conditions. For example, Walmart prices were approximately 1% lower when Walmart and Kmart were located next to each other. However, if a store had no immediate local competition, prices were about 6% higher than the company's average.'1 INFORMATION TECHNOLOGY Starting in the early 1980s, the company made large investments in technology. Walmart was an early adopter of electronic scanning, automated distribution systems, and satellite-supported electronic data interchange (EDI) with its suppliers. By the 19905, EDI supported inventory management throughout the company. At the same time, Walmart launched Retail Link, a private exchange that gave thousands of suppliers access to point-of-sale data and offered inventory information for the previous two years on a store-by-store basis. This wealth of data allowed store managers and suppliers to determine the specific traits of a Walmart location by indexing local demand against more than 1,000 other stores and market characteristics. Distribution Walmart's distribution strategy reected the isolated locations of many of its stores (see Exhibit 2 for sociodemographic information about Walmart and competitors). Walton said, \"We were in the boondocks, so we didn't have distributors falling over themselves to serve us . . . Our only alternative was to build our own warehouse so we could buy in volume at attractive prices and store the merchandise.\"5 The company's first warehouse served 18 stores. Suppliers delivered goods to the warehouse, but Walton used his own trucks to ship the merchandise to his stores. Walmart expanded its retail network by adding stores that were within one day's drive of each associated distribution center (see Exhibit 3). Professor Thomas ]. Holmes, an economist at the University of Minnesota who studied Walmart's distribution strategy, explained: Walmart started in a relatively central spot in the country and store openings radiated from the inside out. . . Walmart always placed new stores close to where it already had store density . . . When stores are packed close together, it is easier to set up a distribution network that keeps stores close to a distribution network . . . And when stores are close to a distribution center, Walmart can save on trucking costs.6 Walton's trucks were usually able to reach a store in time for shelves to be restocked within one day, a critical advantage over the weeklong delivery time historically experienced by Walmart's competitors. Over 80% of sales went through the company's own distribution centers. Walmart introduced cross dockingmoving merchandise items from one truck to another without ever storing them in a warehouse. Because the company owned its own fleet of trucks, it controlled all Endnotes 1 Amit Singh, "Is Kroger Losing to Walmart, Target, and Costco?" Market Realist, https://marketrealist.com/2019/04/is-kroger-losing-to-walmart-target-and-costco/. Walmart, "Location Facts," https://corporate.walmart.com/our-story/locations/united-states. Sam Walton and John Huey, Sam Walton: Made in America (New York: Doubleday, 1992). George C. Strachan, "The State of the Discount Store Industry," Goldman Sachs Report, April 6, 1994. 5 Walton and Huey, Sam Walton: Made in America. 6 Thomas J. Holmes, "The Diffusion of Wal-Mart and Economies of Density," Econometrica 79, no. 1 (January, 2011): 253-302), http://www.econ.umn.edu/~holmes/papers/ecta7699.pdf. A video of Holmes's interactive map charting the opening of US stores and distribution centers from 1962 to 2004 is available at http://www.youtube.com/watch?v=EGzHBtoVvpc. 7 Carol Wolf, Chris Burritt, and Matthew Boyle, "Why Wal-Mart Wants to Take the Driver's Seat," BusinessWeek, May 27, 2010, https://www.bloomberg.comews/articles/2010-05-27/why- wal-mart-wants-to-take-the-drivers-seat. $ Walmart, "10-Foot Rule," http:/walmartstores.com/AboutUs/285.aspx. See the Wal-Mart cheer performed by executives at the annual shareholders meeting (http:/www.youtube.com/watch?v=z48kITYSISs). 10 Brent Schlender, "Wal-Mart's $288 Billion Meeting," Fortune, April 18, 2005, https://money.cnn.com/magazines/fortune/fortune archive/2005/04/18/8257009/. " "PoweRanking Leaders Harness the Climatic Winds of Change for Growth in Retail Today . . . and Tomorrow," Kantar, https://consulting.kantar.com/growth-hub/poweranking-2019/. 12 Kantar Retail, PoweRanking 2013: Navigating the Storm. 13 Schlender, "Wal-Mart's $288 Billion Meeting." 14 Walmart, "Financial Information," https://stock.walmart.com/investors/financial- information/sec-filings/default.aspx, p. 76. 15 1999 Wal-Mart Stores, Inc. Annual Report, https:/www.annualreports.com/HostedData/AnnualReportArchive/w/NYSE WMT 1999.pdf. 16 Walmart.com, "Financial Information," https://stock.walmart.com/investors/financial- information/sec-filings/default.aspx, pp. 8-10. 17 "Wal-Mart Exits Korean Market," Los Angeles Times, May 23, 2006, https://www.latimes.com/archives/la-xpm-2006-may-23-fi-walmart23-story.html 18 David Macaray, "Why Did Walmart Leave Germany?" Huffington Post, August 29, 2011, http://www.huffingtonpost.com/david-macaray/why-did-walmart-leave-ger b 940542.html. 19 U.S. Securities and Exchange Commission, "Walmart Charged with FCPA Violations," press release no. 2019-102, June 20, 2019, https://www.sec.govews/press-release/2019-102 20 Laurie Burkitt, "Wal-Mart Says It Will Go Slow in China," Wall Street Journal, April 29, 2015, https://www.wsj.com/articles/wal-mart-to-open-115-stores-in-china-by-2017-1430270579. 21 2014 Wal-Mart Stores, Inc. Annual Report https://cdn.corporate.walmart.com/66/e5/9ff9a87445949173fde56316ac5f/2014-annual-report.pdf. 22 Top 100 Retailers," National Retail Federation, https:/rf.com/2015/top100-table