ADeloitteResearchViewpoint

RETAILTSUNAMI?

Wal*MartcomestoJapan

DeloitteResearch

EXECUTIVESUMMARY

Increasingly,theworldofretailingisbecomingWal*Mart’sworld.Itisoneofthemostglobalretailersintheworld,operatingin11differentcountries,withmultipleformats,alltiedtogetherbyastate-of-the-artretaildistributionsystemknownasRetailLink.ThisreportexaminesthesourcesofWal*Mart’scompetitiveadvantageandthechallengesitfacesingoingtoJapan.

Wal*Mart’sacquisitionofSeiyuwasagreatbuyandthefirststepinwhatwillbealongprocessoftransformingthecompanyandmostlikely,Japaneseretailing.Firstandforemost,theWal*Martisaconsolidatorofbothretailersandsuppliers.ThishashappenedintheUS,Mexico,CanadaandmostrecentlyintheU.K.AsWal*MartexpandsinJapanitwilldriveretail,wholesalerandsupplierconsolidationinthatcountry.

Wal*Martupgradestheretailingexperiencebyforcingbusinessestoimplementbetterpracticestostaycompetitive.Wal*Martcreatesbettersuppliersinamarketplacebecauseitfocusesondoingmorebusinesswithfewersuppliersandrequiressteadyimprovementintheperformancestandardsforallofitssuppliers.

DrivingpricesdowniskeytoWal*Mart’ssuccess.Theyachievethisobjectivebyhavinganallencompassingpassionfordrivingdowncostsinallaspectsoftheirbusinessinordertobecomethelowcostproviderinthemarket.Costadvantagesareobtainedinawidearrayofareasincluding:logistics,distribution,advertising,branding,merchandising,storedesign,pricingandsupplierstrategies.Wal*Martworkscloselywiththeirsupplierstoachieve

manyofthesecostreductions,thebenefitsofwhicharesharedwiththeirsuppliers.

Toplinegrowthisbeingdrivenbyexpansionandinnovationintheareasoffood,fashionandforeignacquisitions.

Wal*MarthasmovedaggressivelytoexpandoutsideoftheUS,openingstoresandmakingacquisitionsinNorthAmerica,Mexico,EuropeandAsia.Mexico,Canada,andtheUKaregreatsuccessstories.GermanyhasbeenproblematicwhileIndonesiawasanoutrightfailure.

ThebiggestbarrierstomarketentryinJapanarethemulti-tiereddistributionsystem,andrealestate,followedbythehighqualityandselectiondemandsoftheJapaneseconsumer.

Wal*MartwilllikelyacquireaJapanesewholesalerwhileworkingwithglobalsupplierstoimplementitsRetailLinksystems.CompleteimplementationofRetailLinkmaytakeuptoadecade.

SolvingtherealestatedilemmawillrequireatleastonemoreacquisitioninJapanandprobablymorethanthat.WithJapaneseretailingstrugglinginthecurrenteconomicenvironment,therearemanyacquisitioncandidatesfromwhichtochoose.

IngoingtoJapan,Wal*Martwillbecomeamajorcompetitorofretailers,wholesalersandsuppliers.TherewillnotbeaconsumerbusinessinJapanthatwillnothavetotakeWal*Martintoaccountinmakingtheirstrategicplans.

TABLEOFCONTENTS

Wal*Mart’sCompetitiveStrengths(andWeaknesses?)

1

Wal*MartasaLearningOrganization

1

TheWal*MartModel

2

ItBeginsWithEDLP

2

CostReduction:Logistics

3

CostReduction:Advertising

4

CostReduction:StoreDesign

4

CostReduction:SupplierStrategies

4

CostReduction:MerchandisingStrategy

6

PricingDiscipline:EveryDayLowPrices

6

CreatingaVirtuousCycle:LowCosts,

LowPricesandtheProductivityLoop

7

TopLineGrowth:FoodandFashion

7

Innovation:ManagingtheRetailLifecycle

9

Wal*Mart’sForeignExpansionTrackRecord

10

AdaptingtotheJapaneseMarket

12

Pricing

14

Merchandising

15

Wal*Mart’sGlobalExperience:TwoPossibleOutcomesforJapan

15

ImplicationsforJapaneseRetailers

16

ImplicationsforJapaneseSuppliers

17

ConclusionsandObservations

18

WillWeSeeWal*MartinJapan?

18

AboutDeloitteResearch

19

DeloitteResearch–RetailTsunami?1

RETAILTSUNAMI?

WAL*MARTCOMESTOJAPAN

Wal*Mart’sCompetitiveStrengths(andWeaknesses?)

Wal*Mart’scompetitiveadvantagebeginswiththebusinessphilosophyoffounder

SamWalton—aphilosophythatstilldrivestheorganizationandisperhapsbest

expressedinthisquote:

“There’sonlyoneboss—thecustomer.Hecanfireeveryoneinthecompany,

fromthechairmanondown,simplybyspendinghismoneysomewhereelse.”

SamWaltonusedtotalkaboutWal*Mart’sorganizationstructureasanupside-

downpyramid,withthecustomeratthebottom—andeverybodyinthe

organizationtheretoservehim.Andyougetthissensetheminuteyouwalkinto

thestorewhenyouarewelcomedbythenowfamousWal*Mart“greeter”,aretail

institutionthathasbeencopiedbymanyotherretailers.

WhileagreatdealofattentionhasbeenpaidtoWal*Mart’sRetailLinksystem,

Wal*Mart’scostadvantagedoesnotcomesolelyfromlogistics.Theentirebusiness

isfocusedonbeingthelowcostsupplierofbasicgoods.

Wal*MartasaLearningOrganization

Firstandforemost,Wal*Martisalearningorganization.ItisnotthatWal*Mart

nevermakesamistake.Overtime,theyhavemademanymistakes.What

Wal*Martrarelydoesismakethesamemistaketwice.Theyhavetheunique

abilitytotakelearningsfromonepartoftheirorganizationorfromonepartof

theworldandtransferitelsewhere.Forexample,whenWal*MartacquiredASDA

intheU.K.,theymovedquicklytoeliminateASDA’scustomerrewardprogram,

havingfoundsimilarprogramsineffectiveandcostlyinotherpartsoftheworld.

Atthesametime,Wal*MarttooktheGeorgeapparelbrandthatASDAhadand

broughtittotheU.S.

AnotherwayinwhichWal*Mart’sabilitytolearnshowsupisintheirabilityto

innovate.Innovationandsizeareveryoftennotcompatible.Whatdifferentiates

Wal*Martfromjustabouteveryotherlargebusinessorganizationisitscontinuing

abilityapplywhatitlearnsasanorganizationtotheprocessofinnovation.While

2DeloitteResearch–RetailTsunami?

alllargebusinesseswillpaylipservicetotheneedtoinnovate,Wal*Martisstillabletoconsistentlyinnovatedespiteitssize.

Wal*Martiswellknownforitsinnovationinsupplychainlogistics.ButWal*Martinnovatesinmanyotherareasofitsbusinessthatarelesswellknown,butjustascriticaltoWal*Mart’ssuccess.Wal*Marthasbeenaverysuccessfulincubatorofnewbusinessesbasedonverydifferentformats.ThiscapabilitywillbeofcriticalimportanceincomingtoJapanasrealestateconstraintswillforceWal*MarttobeinnovativewithrespecttostoresizeinexpandingtheirJapanesebusiness.

Wal*Martwasverysuccessfulinthe1990sindevelopingandrollingouttheirsupercenterconcept.Morerecently,theyhavebeeninnovatingwithamoretraditionalsupermarketformatcalledNeighborhoodMarket.Withjustover100ofthesestorestoday,Wal*Marthasplentyofgrowthpotentialleftinthisbusiness.TheyarealsoexperimentingwithaconveniencestoreconceptthattheyarelocatingintheparkinglotsofmanyoftheirSupercenters.Asmaller‘dollarstore’conceptthatis10-15,000squarefeetinsizeisalsorumoredtobeintheworks.

TheWal*MartModel

GointoanyWal*Martstoreintheworldtodayandwhatissoremarkableaboutthestoreisthatitissounremarkable.Thestoresareplain.Mostofthemerchandiseisundifferentiatedfromwhatissoldbytheircompetition.Whilethecheck-outprocessisusuallyefficient,onceyougetbeyondthestoregreeter,thelevelofstoreserviceisnothingspecial.

Inthelate-1980sandearly1990s,foreignretailersofallstripesmadeahomagetotheU.S.tovisitaWal*Martstore.MostleftshakingtheirheadsunabletograspthefactorsbehindWal*Mart’sstunningsuccess.AndWal*Mart’sglobalsuccessiseye-popping.Thecompanyisthemostsuccessfulpubliccompanyinthehistoryofcapitalism.Itwasthefirstglobalretailertohit$100billioninsalesin1996,afeatstillunmatcheddespitethepassageoftime.

ItBeginsWithEDLP

IfthereisonecompetitiveelementthatdifferentiatesWal*Martfromitscompetitors,itisEDLP,everydaylowpricing.Whilesimpleinitsconceptualization,EDLPisprobablyoneofthemostdifficultpricingstrategiesforanyretailbusinesstoexecute.Itrequiresalevelofdisciplinethatmostretailersdonothave.

TosuccessfullyexecuteEDLP,retailersmustgoagainstthecompetitivetideofusingpromotionalactivitytodrivetraffic.Trusthastobebuiltwiththeconsumeroveraperiodofyearsconvincingthemthatthebusinesswillnotpromoteandthattheconsumerisactuallybetteroff,day-in,day-out,receivingthelowestpriceforabasketofgoods.

Inordertodeliveronthispromiseoflowprice,anEDLPretaileralsohastobeeverydaylowcostretailerinthemarket.Wal*Martachievesthisobjectivebyhavinganallencompassingpassionfordrivingdowncostsinallaspectsoftheir

DeloitteResearch–RetailTsunami?3

business.Theirgoalistobethelowcostproviderinthemarket.Theirbasic

businessmodelisprobablybestillustratedbytheproductivityloop

EDLPoffersmanyoperationaladvantagesaswell.EDLPallowsformoreaccurate

forecastingandcombinedwithPOSdatasharingwithsuppliers,helpsreduce

inventorythroughoutWal*Mart’ssupplychain,improvinginventoryefficiency

forbothWal*Martandtheirsuppliers.AsecondcostadvantageofEDLPisthat

itdoesnotrequirethekindofcontinuousprice-itemadvertisingthathi-lopricing

retailersmustdo.

CostReduction:Logistics

TheeffectsoftheRetailLinkareapparentinalotofplacesinthecompany,but

perhapsnonemoredramaticthanininventory.Wal*Martturnsinventorymuch

fasterthanitscompetitors,andthegapbetweenthetwoisincreasing.

WhenWal*MartbegantodevelopRetailLink,oneofthefirstitemsputintothe

systemwasthedisposablediapers,Pampers.Atthattime,Wal*Martwasturning

Pampers25timesperyear,roughlytwiceamonth.AfterRetailLink,Pampers

inventorywasturned125timesperyear—orabouteverythreedays.This

dramaticimprovementininventoryproductivitycutscosts,notjustforWal*Mart

butforitssuppliers,aswell.

23

22

21

20

19

18

17

16

CHART1.WAL*MARTSG&AASA%OFSALES

1985

1980

1995

1990

2000

SOURCE:WAL*MARTANNUALREPORTS

Inmanyways,RetailLinkisajust-in-timeinventorysystemthatWal*Marthas

borrowedfromJapaneseautomanufacturerswhopioneeredJIT—andas

Wal*MartentersJapan,itwillreintroducejust-in-timeconceptsandmethods.

SupplierdirectiskeytoRetailLink—andthatwillbeachallengetothecompany

operatinginJapan,withitsmulti-tiereddistributionsystemmakingithardfor

retailerstoworkdirectlywithsuppliers.ItispossiblethatWal*Martwillhaveto

adaptitsRetailLinksystemtoworkwithwholesalersinJapan.Thisisnot

unheardofintheWal*Martsystem.Inacoupleofproductcategories,likemusic

CDsandbooks,Wal*MartintheU.S.workswithwholesalersinsteadofgoing

directlytothemanufacturers.

4DeloitteResearch–RetailTsunami?

8.58.07.57.06.56.05.55.04.5

4.0

CHART2.INVENTORYTURNS

COSTOFGOODSOLD/AVERAGEINVENTORY

Wal*Mart

RestoftheIndustry

1992

1994

1996

1998

2000

2002

SOURCE:RETAILFORWARDYEARBOOKDATABASE

CostReduction:Advertising

Wal*Mart’sadvertisingstrategyalsoprovidesacompetitivecostadvantage.Thecompanyspendslessthanonepercentofsalesonadvertising—dramaticallylessthanitsmaincompetitors,someofwhomspendsixorsevenpercent.Thisstrategyderivesfromthecompany’s“everydaylowpricing”philosophyandits“nodeal”merchandisingstrategy.Thisreducescostsinotherways.Promotionsputanenormousstrainonlogisticalanddistributionsystems,andWal*Martdoesn’thavethat,reducingcomplexityandtakingcostoutofthebusiness.

Wal*Mart’sadvertisingisimage-oriented,national,andfocusedonre-enforcingalow-priceimage.Itdoesnostorespecificadsorpromotions.YouwillnotfindanitemspecificflyerinyourlocalSundaynewspaperforWal*Martasisthecommonpracticeformostoftheircompetitors.

CostReduction:StoreDesign

Inthelate80swhenWal*Martbegantoshowuptheradarscreensofnon-U.S.retailers,EuropeanandAsianretailerswouldmakeapilgrimagetoWal*MartstoresexpectingaretailexperiencethatwasconsistentwiththedramaticincreasesinsalesthatWal*Martwasposting.InvirtuallyallcasestheycameawaypuzzledandevenshockedbytheausterityinWal*Mart’sstoredesign,construction,andsignage.Thatausterity,however,hasseveralpurposes.Itkeepscostsdownand,justasimportant,itsendsamessageofsavingstothecustomer.LowcoststoredesignisanotherwaythatWal*Martkeepspricesdownandconveysavaluemessagetoitscustomers.

CostReduction:SupplierStrategies

Wal*Martnotonlyworkscloselywithsuppliers,itfocusesonitsbestsuppliers.Thegoalinallcasesistosignificantlyreducesupplychaincomplexity.Wal*Martdoesthisbyrunninga“bestprice,nodeal”business:nomarkdowns,no

DeloitteResearch–RetailTsunami?5

allowances,nopromotionalmoney.ThisreductioninsupplychaincomplexityisacriticalcomponentinWal*Mart’sfocusonreducingthecostofdoingbusiness.Inventoryneverhastobebuiltupforaspecialpromotion.Storelayoutneednotbechangedforthesamereason.

TheRetailLinksystemenablesWal*Marttoshareinformationwiththeirsuppliersonareal-timebasis.Everyone—thecompany,itsmerchandisers,itsinventorymanagers,itssalespeople,anditssuppliers—arelookingatthesamedata,atthesametime.

Suppliersknowtheirinventorypositionineverystore,onanyday.Over70%ofthisinventoryisownedbythesupplier,whichgivesthemanaddedincentivetoimproveproductivityandsell-through.Thebenefittothesuppliersisthattheygetpaidassoonastheproductgetsscanned.Invoices,purchaseordersandotherdocumentationareprocessedthroughamorecommonlyusedElectronicDataInterchange(EDI)system.

Allthisrequiresasubstantialinvestmentintechnology—technologytoenablebothWal*Martandtheirsupplierstocapture,process,understandandactuponinformation.Attheendoftheday,RetailLinkisthekeytoWal*Mart’ssuccess.WithoutRetailLink,therewouldbenoWal*Martasweknowittoday.

Wal*Mart’scompetitivepositioninthemarketplacedoesnotdependonthemsqueezingtheirsupplierseverharder,formoreandmoreconcessions.Wal*Martrelationshipwiththeirbestsuppliersisawin-winforbothWal*Martandthesupplier.ByconformingtoWal*Mart’sstandardsfordoingbusiness,suppliersincreasetheirmarketshareandbecomebettersuppliers.

Procter&Gamble,Wal*Mart’slargestsupplier,isagreatexampleofthis.ByworkingcloselywithWal*Mart,ProcterandGamblehasgonethroughanaggressiveprocessofbrandandSKUreduction.TheresultforP&Ghasbeensustainedsalesgrowthandaneardoublingofmarginsoverthepasteightyears,notaneasytasktoaccomplishinamarketplacewherepricedeflationhasbeencommon.

ThroughRetailLink,

supplierscan:

■DownloadpurchaseordersfromWal*Mart.

■CheckthestatusoftheirinvoicestoWal*Mart.

■DeterminehowmanyoftheirproductsweresoldatWal*Martthepreviousday.

■Examinetheeffectsofmarkdownsorreturnsontheirinventory.

■Accessreportsonsalesoveraperiodofuptotwoyears.

■Accesssalesforecastsfortheirproductsforuptooneyear.

■UploadreportsandupdatesforWal*Mart.

COSTOPERATINGMARGINS:PROCTOR&GAMBLE

CHART3.

13%

12%

11%

10%

9%

8%

7%

6%

1994

1996

1999

2000

2002

SOURCE:PROCTOR&GAMBLEANNUALREPORTS

6DeloitteResearch–RetailTsunami?

Competitors

Wal*Mart

CostReduction:MerchandisingStrategy

WhatRetailLinkhasallowedWal*Marttodo,inaverycompetitiveenvironmentofdecreasingmargins,isbothslowlyraisemarginsandstillunder-pricethecompetition.Theyareabletodothisbyconsistentlypushingdownthecostofgoodssold.

Wal*Mart’smerchandisingstrategyisalsoalignedtoitssupplierstrategy,toRetailLink,andtothestoreformats.Wal*Martoffersabroadassortmentofmerchandise,butnodepth,asthestorescarryaverylimitednumberofbrands—usuallythenationalbestselleranditsownprivatelabel—withineachproductcategory.Indeed,Wal*Martisbecomingthebiggestcompetitortoitsownsupplierbase.

TheresultisapolarizationofsuppliersbetweenthosewhoworkwithWal*Martandthosewhodon’t.ThosewhoworkwithWal*MartshareitshighgrowthandbyadoptingWal*Martrequiredbusinessprocesses,becomebettersuppliers,andlikeProcter&Gambleareabletoraisemargins;theothersarethreatenedasWal*Martgainsmoremarketshareintheindustry.Thisbroadbutshallowmerchandisingstrategyreducessupplychaincomplexityalongwiththecostofdoingbusiness.

CHART4.GROSSMARGINS:

WAL*MARTVS.THEIRDIRECTCOMPETITORS

Percent

25.0%

24.0%

23.0%

22.0%

21.0%

20.0%

19.0%

1993

1995

1997

1999

2001

SOURCE:RETAILFORWARDYEARBOOKDATABASE

PricingDiscipline:EveryDayLowPrices

Wal*MarthaslongbeenknownfortheirEDLPstrategy.Theyareabletobetheeverydaylowpriceofferinthemarketbecausetheyaretheeverydaylowcostoperator.AnumberofretailersinthepasthavetriedtoemulateWal*Mart’sEDLPstrategyandallhavefailed.Consumers,accustomedtosalesattheseoncepromotionalretailers,simplystoppedshoppingtheminanticipationofthenextsale.

Wal*Martdoespricethesameproductdifferentlyfromstoretostore.TheRetailLinksystemdetailscustomerdemandonastore-by-storebasis.Ifonestore,because

DeloitteResearch–RetailTsunami?7

ofdemographics,competition,localeconomicsorsomeotherreason,consistently

sellsmoreofaproduct,thatproductwillbepricedalittlehigherinthatstore.

WhileWal*Marttriestobethelowpriceofferinthemarket,theydonothave

thelowestpriceoneveryiteminthestore.Instead,Wal*Martdoeshavethe

lowestpriceofferona“marketbasket”ofgoodsthattheyfeelisreflectiveof

whattheircorecustomersexpectofthestore.InJapan,Wal*Martiscurrently

studyingwhatthisright‘marketbasket’ofgoodsisforJapaneseconsumers.

CreatingaVirtuousCycle:LowCosts,LowPricesand

theProductivityLoop

Intheory,theproductivityloopisavirtuouscyclewhereinvestmentsin

technology,merchandisingsystems,alternativeapproachestoadvertising,and

focusedsupplierstrategies,reducesthecostofdoingbusiness,enablingthemto

lowerprices.Lowerpricesdrivegainsinmarketshareandsales.Highersales

translateintomoremargindollars,whichinturngivesthemmorecapitalto

investinfurthercostreduction.

Wal*Marthasimbeddedthisproductivityloopphilosophyintotheiroperating

strategy.WhileRetailLinkisapartofthiscostreductionstrategy,itisnotthe

entirestory.Beinganeverydaylowpriceretailerhasforcedthemintoanever

endingeffortofreducingcostsacrossawiderangeofbusinessprocesses:logistics,

merchandising,storedesign,advertising,humanresources.IfWal*Martcannot

bethelostcostproviderinamarketplace,theycannoteffectivelyexecutetheir

EDLPstrategy,ashasbeenthecasefortheminGermany.

ThepracticalapplicationofWal*Mart’sproductivityloopcanbeseeninthe

steadyreductioninsellingandgeneraladministrativeexpensesasapercentage

ofsales.Particularlyinthe1980s,thecompanywasveryaggressiveindriving

downcosts.Then,there’saplateauintheearly1990s,asitsglobalizationinitiatives

gainedmomentum.Astheseinitiativesbecomemorematureandthenew

businessesgetuptospeedinusingtheRetailLink,wewillseeSG&Aasa

percentageofsalesrenewitsdecline.

TopLineGrowth:FoodandFashion

Inafewkeyproductareas,Wal*Martistryingtoexpanditsofferingsandgrow

sales.Foodisone.Inlessthan10yearstime,Wal*Marthasgonefromsellingno

foodtobeingthelargestfoodretailerintheUS.TherealchallengeintheJapanese

marketisthequalityofthefoodWal*Martoffers;thefreshfood,inparticular,

fallsshortofthatfoundinJapanesegrocerystores.

Anothernewforayisfashion,somethingWal*Marthasnottraditionallybeen

knownfor.Overthepastfewyears,Wal*Marthasbeentryingtobreakoutof

thecommodityapparelbusiness,firstwithabrandcalledKathyLee,whichwas

popularintheUS.WiththeacquisitionofabrandcalledGeorgewhichcame

withthepurchaseofASDAintheUK,Wal*MartdroppedtheKathyLeebrand,

despitethefactthatitwasoneofthebestsellinglabelsintheUS.Thisisaclear

8DeloitteResearch–RetailTsunami?

Wal*Mart

exampleofhowWal*Martinnovatestokeepitsleadershipposition.Georgewasseenasabrandthathadthepotentialofhavinginternationalappeal,whileKathyLeedidnot.

Wal*Mart’sfashionstrategyandthequalityoftheGeorgebrandhavebeenfavorablywrittenupinWomen’sWearDaily,theNewYorkTimes,andtheWallStreetJournal.WithGeorge,Wal*Martevenacquiredafashiondesignteamthatwillgivethemon-goingfashioninnovationforthefirsttime.

CHART5.REALESTATEPRODUCTIVITY

SalesPerStore

$

Millions

$60

$50

$40

$30

DiscountStoreMedian

$20

$10

$0

199619971998199920002001

SOURCE:RETAILFORWARDYEARBOOKDATABASE

Wal*Martgetsabetterpricefromitsbettercustomers,andyetitisstillthelow-priceretailerinitsmarket.Eachstoreisresponsibleforshoppingcompetitors’storesandcomparingmarket-basketprices.Thestoremanagerhastheauthoritytorollbackpricesifacompetitorisunder-sellingaproductonaday-in,day-outbasis.

Becauseofallthis—RetailLink,thepricingpolicies,thesupplierrelationships,andtheinventorymanagementsystems—Wal*Marthasveryhighrealestateproductivity.Thecompanyisnotonlygrowingthenumberofstores,itisalsogrowingsalesperstore.

DeloitteResearch–RetailTsunami?9

Development

Sales

IntroductionGrowthMaturityDecline

Profits

Innovation:ManagingtheRetailLifecycle

Inadditiontoproductivity,there’sasecondkeytoWal*Mart’scontinuedsuccess:

innovation.Oneplaceweseethisisinformats.Wal*Martisconsistentlyputting

newconceptsandideasintodevelopmentforfuturegrowth.Asoneformat

approachesmarketmaturity,thecompanyrollsoutanewone.Asaresult,the

companyresemblesaportfolioofbusinesses,whichalwaysincludesagrowth

vehicle.

CHART6.THERETAILLIFECYCLE

TIME

SalesProfitabilityPatronageCompetition

Low/growingNegativeto

B/EInnovatorsNone

RapidGrowthHighyieldSpecialneedLimited

SlowingHigh,decliningBroadmarket

Extensive

Declining

LowtoB/E

Specialneed

Intensive

SOURCE:WILLIAMDAVIDSON,ETAL,HARVARDBUSINESSREVIEW,NOV-DEC1976

Wal*Martstartedoutwithatraditional60-80thousandsquarefootdiscount

departmentstoreformat.Thecompanyrealizedthatformatwasbecominga

maturebusinessinthemid-1980sandbeganinnovatingwiththesupercenter

conceptwhichincludedgeneralmerchandiseandfood.Wal*Martstartedrolling

thatconceptoutintheearly1990s;andnow,asaresult,isthelargestgrocery

retailerintheworld.

Atthesametime,Wal*Martenteredthewarehouseclubbusiness.Now,that

businessisaging,andwe’reseeingtheemergenceofaneighborhoodmarket

fromWal*Mart,a35,000squarefoot,mostlyfood,format.Wal*Martisalso

gettingintothegasolineandconveniencestorebusinessand,lastbutnotleast,is

lookingtoexperimentwithdollarstoresof7,500-10,000squarefeet,the

equivalentof100yenstoresinJapan.Thesesmallstoresarepotentiallyas

productiveasthelargeones,butthey’reinanunconsolidatedmarketspacenot

knownforefficiencyoreconomyofscale.

Overthenextyear,Wal*Martplanstobuild48millionsquarefeetofadditional

space—theequivalentofthreeSearsTowers.Someofthatgrowthwillcome

fromforeignexpansion.

10DeloitteResearch–RetailTsunami?

Wal*Mart’sForeignExpansionTrackRecord

Overthepastsixyears,Wal*MarthasmovedaggressivelytoexpandoutsideoftheUS.ExpansioninAsia,coupledwithacquisitionsintheUKandGermanyhavebeenattheheartofthisexpansionprocess.Thepaceofnewstoregrowthslowedinthelate-1990s,particularlyinEurope.HerethestoresWal*Marthasalreadyacquiredneedtobebroughtuptospeedintheirtechnology,andneedtobemorecloselyalignedtotheRetailLinksystemandtotheWal*Martwayofdoingbusiness.

AmongthechallengescommontoallWal*Mart’sforeigninvestments,thebiggestiskeepinglocalmanagement.ThecompanyhadsomehighlyvisibleproblemsintheUKandGermanyinthisarea.Infact,theprobleminGermany,coupledwiththatcountry’sstronglaborunion,castssomedoubtaboutWal*Mart’sfutureinthatmarket.

Developingcountry-specificmerchandisehasalsobeenabigchallengeandwillprobablybesoinJapan.Forexample,oneofthereasonsforWal*Mart’sfailureinIndonesiawasitsfailureinadaptingitsmerchandisingmixandpracticestolocaltastesandcustoms.

Lastly,butprobablythemostimportantchallenge,isimplementingtheRetailLinkdistributionprocesses.ThoseprocessesarekeytoWal*Mart’ssuccess.

Wal*MartinMexico

ProbablythebiggestforeignsuccessWal*MarthashadisinMexico,althoughitwasn’talwaysthatway.ThisstartedoffasajointventurewithCifra,thelargestretailerinMexico.Wal*Martmadeasmallinvestment,spentsometimestudyingtheMexicanmarket,andthenwhenconfidentitcouldimplementRetailLink,acquiredCifraandbeganrollingoutWal*Martstores.IttookaboutsevenyearsbeforethestoresinMexico