Wal-Mart

Wal-Mart

Yun Heng (Lisa) Huang

Fen Liu

Samantha Peel

Stephen YeeBUS 188-Kwan

24 Nov. 2004

Table of Contents

1. Industry Background...3

2. Wal-Marts Background..53. Current Status..84. Porters Competitive Forces Model115. Strategies.146. SWOT Analysis..177. References...20Industry Background

By: Samantha Peel

Wal-Mart belongs to the Variety Stores and All Other General Merchandise Stores industry according to the United States SIC and NAICS Code(s). They are also known as discount variety stores, general merchandise discount stores, mass merchandisers, full-line discounters, or discount houses. Today the Big Three discount retailers are the Wal-Mart, Target and Kmart chains. In addition to the Big Three there are several smaller regional discount retailers, all operating a low-cost differentiation strategy.

Though there have been discount sales for eons, the discount variety store industry expanded following WWII due to the increased demand for consumer goods. By the early 1960s the discount verity store industry had established industry leaders and a clear standard format. The largest stores at this time were the following: the Dayton Company which began the Target chain, the Kmart chain part of S. S. Kresge, the W.F. Woolworth Companys Woolco stores and Sam Waltons Wal-Mart stores. During the late 1960s and early 1970s there were several mergers and acquisitions in the industry as well as several Chapter 11 filings. During this time Kmart acquired 300 stores and became the industrys leader and along with Woolco grew into national companies. Wal-Mart and Target, on the other hand, remained regional providers in the Southwest and Midwest respectively.

During the 1970s many discount retailers began implementing new advanced technologies, such as the use of computers, electronic registers, UPS bar coding systems, point-of-sale (POS) scanning and satellites communication systems. Wal-Mart in particular implemented a computer system that aided in automating its distribution centers, tracking inventory, increase checkout speed and efficiency and reordering. During this ten-year period Wal-Mart had enormous growth and increased its number of stores from 18 to 270 as a result of the technology implementation.

During the 1980s Kmart, Target and Wal-Mart became the industry leaders. Other chains, however, faced hard times and had to file Chapter 11, including the national Woolco and several regional providers. A handful of regional providers did experience some success and remained industry players.

During the 1990s in a battle for market share the discount retailers began several new initiatives. First, they began to focus and market to specific ethnic groups by hiring bilingual clerks, advertising in other languages, and stocking certain ethnic goods. Secondly, many began environmental awareness programs to attract environmentally conscious consumers, including advertising recyclable and environmentally friendly goods, using recycled paper for advertisements, and other programs. Specifically, Wal-Mart opened an environmental demonstration store; Kmart implemented a recycling program for cassette tapes, tires, and batteries; and Target started an environmental youth program called Kids for Saving the Earth. During the late 1990s and early 2000s the industry began to focus on brand names, partnering, and proprietary brands as the industry continued to grow. Additionally, however, the industry faced further bankruptcy, mergers and acquisitions.

Throughout its history, the discount variety store industry has continued to grow and adapt to the changing consumer business environment, whether through the adoption of new technologies, tapping into new consumer target markets, or following consumer preference trends. Additionally the dominant players have also grown and adapted, becoming huge international companies, lead by the Big Three whose combined sales have exceeded $125 billion. The industry itself has grown from a $2 billion industry in 1960 into a $200 billion industry today.

Wal-Marts Background

By: Lisa Huang

The first Wal-Mart was opened in Rogers, Arkansas in 1962 by the Walton brothers (Sam Walton and Bud Walton). Previously the Walton brother used to own nine Ben Franklin franchises in the late 1950s. In the early 1960s, Sam Walton traveled around the country to study the retail market. He believed that a small town population would welcome, and make profitable, large discount shopping stores. So Sam Walton went to the Ben Franklin franchise owners with his proposal to slash prices significantly and operate at a high volume, but they were not willing to let him reduce merchandise as low as he insisted it had to go. By the end of the 1960s, the Walton bothers had opened 18 Wal-Mart stores, while sill owning 15 Ben Franklin franchises in other states, such as Arkansas, Missouri, Kansas, and Oklahoma. Wal-Marts stock went public in 1970 and it was listed on the New York Stock Exchange. By 1976, Walton bothers decided to close their Ben Franklin stores so they could concentrate on operating the Wal-Mart stores. In 1978, Wal-Mart began to have its own pharmacy, auto service center, and jewelry divisions. By 1979, there were 276 Wal-Mart stores in 11 states and the sales had increased from $44 million to $1.25 billion.

The company opened its first three Sams Wholesale Club in 1983 and began to expand into larger city markets. (Today it is called the Sams Club) In 1988, the company opened the first Wal-Mart Supercenter in Washington, Missouri, which featured a large selection of merchandise and offered better-stocked grocery sections. In 1991, Wal-Mart began to introduce its own store brand, Sams American Choice; the first products were beverages such as colas and fruit juices. The companys plan was to have more products of their own brand to be able to match the quality of national brands, and still be offered at a low price.

Wal-Marts foreign expansion started in 1991, when the company opened a Sams Club near Mexico City. In 1992, the year Sam Walton died, Wal-Mart entered into a joint venture with Cifra, S.A. de C.V., Mexicos largest retailer. The venture developed a price-club store called Club Aurrera and it required shoppers to obtain an annual membership. The expansion of Wal-Mart continued, and it entered into other NAFTA markets and foreign countries in just a few years, such as Argentina, Brazil, Canada, China, Germany, Korea, Mexico, Puerto Rico, and United Kingdom. The international sales had reached $7.5 billion in the year of 1998. In the 2002 fiscal year, Wal-Mart International announced that sales reached $35.4 billion and the operating profit rose to $1.4 billion.

In late 1998, Wal-Mart began to develop and test a new kind of store, the Wal-Mart Neighborhood Market, a store type more similar to a traditional supermarket. The new store offered deli foods, fresh meats, grocery items, limited selections of general merchandise, and it also featured a drive-through pharmacy.

After the bankruptcy and closure of the Montgomery Ward department store chain in 2001, Wal-Mart offered to replace Wards customers credit cards with Wal-Mart branded cards. Wal-Mart also formed an alliance with American Online in order to offer Internet access and launched its No Boundaries private-label cosmetics for pre-teens and teenagers. In 2002, Wal-Mart was labeled as Americans largest corporation by Fortune magazine. In the same year, Wal-Mart took a 36% stake in one of Japans top retailers, Seiyu. By the end of 2002, Wal-Mart had opened 178 Supercenters, 33 discounted stores, 25 Sams Club stores, and 107 international units.

During 2004, the company is planning to open at least 220 new Supercenters, while reducing its discount store by a net of about 90 units. The Neighborhood Market chain is estimated to grow between 25 and 30 units. In addition Wal-Mart is also planning to add about 15 more Sams Club. Wal-Mart International plans to open 130 to 140 units in existing markets and expand new operating units in other countries. It is clear that Wal-Mart is trying to hold on its position as the largest retailer of all time.

S. Robson Walton is the son of the Wal-Mart founder, Sam Walton. He graduated from the University of Arkansas in 1966 with a Bachelor of Science degree in business administration. He also got a Juris Doctor degree in 1969 from the Columbia University School of Law in New York. Before his employment at Wal-Mart, Walton used to have private law practice. After Walton joined Wal-Mart in 1969, he has held the positions of senior vice president; secretary and general counsel; and vice chairman. Today, S. Robson Walton is the chairman of the board of Wal-Mart Store, Inc. since 1992.

H. Lee Scott, Jr. graduated from Pittsburgh State University with a Bachelors degree in business. He served as the President and Chief Executive Officer of Wal-Mart Stores, Inc. since January 2000. When Lee first joined Wal-Mart, he worked in the companys logistics and transportation area. Lee made improvements in the logistics and transportation departments as well as improving Wal-Marts inventory level and merchandise flow in the store.

Current Status

By: Stephen Yee

From 2003 to 2004, Wal-Mart has consistently increased its financial assets in order to alleviate its share of the market. Its net sales increased 11.6% to a total of $256.3 billion dollars. Internationally, Wal-Mart has seen an increase in operating profit of 18.6% and increase in sales of 16.6% when compared to fiscal 2003. Its total assets also increased 10.7% for a total of $104.9 billion dollars. One of the ways the company did this was by selling one of its subsidiaries, McLane Company, Inc., for $1.5 billion dollars. A $151 million dollar after-tax gain was procured from this sale that translates to about three cents per share. Its assets include 2460 Discount Stores, 1728 Supercenters, 618 Sams Club stores and 100 neighborhood markets located in eight other countries besides the U.S. and Puerto Rico.

Wal-Mart has always worked hard at building lasting relationships with their suppliers. Frey Farms Produce Company started doing business with Wal-Mart back in 1995 when their president convinced Wal-Mart to let them supply produce to about 400 Wal-Mart stores in the Midwest. The Frey Farms president was only 19 years old at the time of the deal and yet was able to convince the Wal-Mart franchise about the esthetic value of locally grown produce and the importance to its customers. Wal-Mart also aids companies such as Orange Glo into further expansion into the U.S. and other countries. They provided them with guidance in updating Orange Glos logistics and information systems. Today, Orange Glo enjoys improved cost controls, demand forecasting and supply chain management and its products are sold in Wal-Mart stores around the world.

Wal-Mart caters to a variety of customers who all want an enjoyable and comfortable lifestyle that wont drain their checkbook. Their entire inventory is priced to compete with other discount stores in their market. However, its not only the low prices that entice customers; its also the convenience of having almost everything in one place. For a shopper that has to buy food, household items, toys and clothes, and doesnt have a lot of time to do it, Wal-Mart is there. By stocking a variety of items, Wal-Mart can attract its customers to buy more things by making it easy and convenient. Customers who want the ease of one-stop-shopping can do so at these stores. Wal-Mart also makes the effort to go the extra mile when it comes to making people feel comfortable and creating a friendly environment. Customers who shop at Wal-Mart are given a sense of well-being and treated as individuals, not just as a faceless shopper. From the moment they walk in and are greeted to the time they walk out, Wal-Mart strives to be a familiarity in their customers everyday lives.

Customers also enjoy the fact that Wal-Mart helps the community wherever it goes. In 2003, Wal-Mart contributed more than $150 million dollars to local communities and nonprofit organizations. In their Words Are Your Wheels program, Wal-Mart has given over $10 million dollars to nonprofit organization to battle illiteracy. Theyve also raise funds to help Give Kids the World Village, a nonprofit organization that maintains a resort for children with life-threatening illnesses. Individuals that benefit from these programs feel very grateful towards Wal-Mart for their generosity and hospitality.

One of Wal-Marts biggest competitors is Target. While also in the discount store market, Target differs from Wal-Mart in several ways. Target doesnt have greeters, nor do they have as many items as Wal-Mart. Such as fruits and vegetables that some of the Wal-Mart Supercenters have begun to carry. Target also doesnt carry the generic brands of clothing that can be found in Wal-Mart. Instead they try to attract customers by carrying a number of name brands and making those brands exclusive only to Target customers. Currently Target offers such brands as Sonia Kashuk and Michael Graves and will soon offer new materials from Isaac Mizrahi, Liz Lange and Amy Coe. Target believes that it is this distinction that gives them a competitive advantage over all the discount stores. As illustrated in their slogan Expect More. Pay Less Target wants its customers to expect better quality in their items while still paying discount store prices.

Porters Competitive Forces Model

By: Fen Liu

Wal-Mart has become the largest company in the world due to their cost leadership strategy. However, they still need to be aware of the competitive forces from their competitors, threat of substitutes, threat of New Entrants, suppliers and customers.

One of the rival retailers to Wal-Mart is Target. Although Target doesnt sell things at a lower price as Wal-Mart does, Target attracts customers by creating a better shopping atmosphere and more types of products. Most of the time when people walk into Wal-Mart, they encounter a crowded and noise store atmosphere. Also, there are too many products in Wal-Mart and some categories of products are not very clear. Therefore it takes time for customers to locate the products they want. In contrast, Target stores are clean and colorful. Typically, there are not too many customers, and different products are categorize by different color which is easier for customer to see and makes the stores look nice. Recently, while Wal-Mart is being blamed for driving the work opportunities to third world countries, Target has built its good reputation by treating their employees better than Wal-Mart. Even though Target only has one fifth of the sale and profits that Wal-Mart has, according to a retail analyst, Target will have a steeper growth curve over the next few years.

Since Wal-Mart needs such a large store space and a large parking lot, Wal-Mart stores are usually located in rural areas, not in the center of the city or close to a neighborhood. Thus, the convenient stores such as Albertson, Longs and Walgreens become the threat of substitutes for Wal-Mart. In these convenience stores, people take less time to find what they need. In the past convenience stores were only open 6 days a week, and people had to go to Wal-Mart to shop for their needs on Sunday. However, now, because of the competition between businesses, these convenience stores are open 7 days and have longer business days. More over, the convenience store offers several special low priced products to attract customers every week. Sometimes, people can buy fresher and better quality products at lower prices in these kinds of stores.

Wal-Mart has guaranteed low prices every day, but actually the cost of products are high. The suppliers in the U.S. have to pay employees at least $6.75 minimum wage, so it is difficult to reach the low cost standard that Wal-Mart needs. Therefore, in order to get lower cost products, Wal-Mart imports lots of products from third world countries where labor cost is very low. To survive in the price demand of Wal-Mart, some suppliers have to lay off employees to lower the product cost. Wal-Mart has the power to squeeze the cost and maximize its profit. On the other hand, Wal-Mart makes more and more suppliers look for outsourcing products oversea creating less job opportunities in the U.S. Moreover, some suppliers in the third world countries make their employees become slave labor for Wal-Marts low price demand, an issue that has been noticed by most of the country.

Most customers of Wal-Mart are poor or between poor and middle class. It is good to find a bargain in Wal-Mart for this certain group of customers. However, Wal-Mart pays their employees lower wages in order to lower costs, and thus drives job opportunities out of the U.S. When customers recognize these facts, they probably wont shop happily at Wal-Mart. Some customers believe that the way Wal-Mart is doing business is hurting their community and are not willing to buy Wal-Marts products. For example, Wal-Mart was boycotted by Canada.

New entrants always tried to compete with Wal-Mart in the same way (low cost leadership), but most of them went into bankruptcy. Wal-Mart is very successful in utilizing cost leadership. However, if new entrants compete with Wal-Mart by different ways such as differentiation strategy or alliance strategies then this would be a threat for Wal-Mart.Strategies

Cost Leadership

By: Samantha Peel

As previously stated, during the 1960s the discount variety store has established and there was a clear standard format for business competing with a cost leadership strategy. Wal-Mart was among those original companies in this industry. In order to implement and achieve a low-cost leadership strategy firms must have unique capabilities. In particular, according to Pearce and Robinson, a firm must be a dominant market share holder, excel at cost reductions, maximize economies of scale, implement cost-cutting technologies, and use volume sales techniques in order to achieve a successful cost-leadership strategy. Through accomplishing these requirements, firms can use its cost advantage to charge lower prices to its consumers and gain market share from competitors based on price.

Wal-Mart has been incredible effective at cost reductions, achieving economies of scale, and implementing cost-cutting technologies in order to gain market share and achieve corporate growth. From Wal-Marts inception, Sam Walton has adamantly adhered to a discounting pricing philosophy. Early in his career he learned that reducing price to increase volume sales is often more profitable in the long term than increasing price to have a high profit margin per item. This philosophy has remained the key element in Wal-Marts culture, philosophy and strategy throughout its roughly forty years in business. Many retailers utilize an occasional discount-pricing scheme as a way to attract consumers. Sam Walton realized that in order to achieve a sustainable competitive price advantage Wal-Mart had to offer low price at all times. Under this belief system the Every Day Low Price (EDLP) philosophy was implemented. Wal-Mart committed to pass savings on to the consumer thereby lowering their Every Day Low Prices. In order to achieve this Wal-Mart continually strives to lower its costs in order to lower its prices and therefore increase its volume sales.

IT/IS and use of RFID tracking systems

By: Lisa Huang

Wal-Mart invested in most of the retail information technology systems earlier and more aggressively than its competitors. It was among the first retail companies who used computers to track inventory in the year of 1969, and also it was one of the first to adopt bar codes in 1980. Wal-Mart also used EDI for better coordination with its suppliers in the year of 1985, and wireless scanning guns in late 1980s. Wal-Mart stores used data mining applications to track retail product sales at its individual stores (1997). These investments allowed Wal-Mart to reduce its inventory significantly, save more money, and boost its capital and labor productivity.

Wal-Mart has its own secret of being so successful. The company focused its IT investment on applications that will directly enhance its core value proposition of low prices. Wal-Mart also invested on Retail Link program (2002). This program captures sales data and gives the vendors real-time stock quotes and increases the flow of information. This program is aimed at increasing sales through micro merchandising and cutting the chance of getting out of stocks. Wal-Mart built an elaborate satellite network to link the point-of-sale terminals in all of its stores. The network was designed to provide managers, customers and its sales force with real-time sales and inventory status information. It also improved Wal-Marts store management, purchase of product and inventory control. Therefore, Wal-Mart uses such information systems to offer better-quality products and services, lower cost, and to differentiate itself from its competitors.

Recently, in 2004, Wal-Mart announced that they are going to expand their plan regarding its electronic product code (EPC) initiative using RFID (radio frequency identification) technology. They have discussed this implementation plan with 200 of their top suppliers. The RFID labels cost around 25 to 50 cents. It allows Wal-Mart to track the movement of shipments from their suppliers to distribution center, and to the back rooms of a store. Wal-Mart will install tag readers at the dock doors of its distribution centers and at the back rooms of its stores. These readers will communicate with the RFID tags on the boxes and cases, and it will only take seconds to read all the information about the products being moved. Therefore, the company no longer needs its workers to scan every case of inventory. The process will all be done automatically (if things go smoothly) by the time when the case moves in (with the tag reader installed). The company expects that the initial EPC adoption will benefit the consumer because of better merchandise availability. Wal-Mart hopes that they will be able to save time and improve their supply chain management.

SWOT AnalysisInternal Analysis

By: Stephen Yee

Wal-Mart has a large amount of brand equity here in the U.S. People know that when they shop at Wal-Mart they can expect low prices and a friendly environment. Wal-Mart also has captured about 10% of the retail market in the U.S. and continues to expand. Wal-Mart stores continue to open all over the country making Wal-Mart a household name. Wal-Mart has also been widely acknowledged for its social responsibility actions. The company has donated to a variety of charitable organizations and has been accredited for bringing jobs and wealth to less developed communities.

Wal-Mart has faced a lot of bad publicity in the recent years. In June 2001 a case was brought on behalf of all former and present female employees against Wal-Mart. They accused the company of discrimination regarding wages and promotions. Other individuals allege that Wal-Mart forced them to work off the clock and failed to provide work breaks. The California Department of Labor Standards Enforcement has just recently begun an investigation into Wal-Marts suspected failures to follow California wage-and-hour laws. Wal-Mart hate sites can be found throughout the Internet telling of more atrocities and customer service nightmares. This can be tied to another weakness that is the apparent lack of customer service and their stores overall cleanliness. Wal-Mart customers often complain about the messy and unorganized aisles. They also find it frustrating when sales associates cant answer their questions.

External Analysis

By: Fen Liu

Wal-Marts oversea stores have experienced significant growth. According to their financial analysis, Wal-Mart International sales in 2004 have reached $47.5 billion, a 16.6% increase over the previous year. Furthermore, the operating profit rose to $2.3 billion which is 18.6% over the prior year. Wal-Mart can continue to expand into international markets. Population is growing fast in Asia and Wal-Mart can get lower cost products there, so Asia will be a large potential market. Also, North America, Latin America and Europe are the international markets that Wal-Mart has opened and should continue to develop.

While Wal-Mart is doing business in other countries, it will always face competitors that are native to those countries. Also, how to fit in to those countries culture and make people accept the way they do the business and the products is challenging. In addition, Wal-Mart has lots of issues about labors. Wal-Mart doesnt give their laborers good or reasonable benefits. For example, Canada filed to sue Wal-Mart because of a labor issue. These passive issues will affect Wal-Marts prestige.

Future Outlook

By: Stephen Yee

With regards to the future, Wal-Mart definitely still has room to grow since they have only captured about 10% of the U.S. retail market and even less in the international market. Next year alone Wal-Mart plans to open more than 50 million square feet of space to be used in their retail business. They also plan to construct 5 new distribution centers to service these developments. Ever since their infancy in the mid 1960s, Wal-Mart has strived to number one choice among those who shop at discount stores. Hopefully with their implementation of RFID tracking technologies within their supply chain, Wal-Mart will continue to expand and grow as a business.

References

Samantha Peel:

"Variety Stores." Encyclopedia of American Industries. Online Edition. Gale, 2004. Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2004. http://galenet.galegroup.com/servlet/BCRC"Wal-Mart Stores, Inc." International Directory of Company Histories, Vol.63. St. James Press, 2004. Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2004. http://galenet.galegroup.com/servlet/BCRCWal-Mart. 14 November 2004. Wal-Mart Stores Inc. http://www/walmart.comPearce II, John A. Richard Robinson, Jr. Strategic Management: Formulation, Implementation and Control. New York: McGraw-Hill. 2003.

Stephen Yee

Wal-Mart Annual Report 2003, p. 2, 8-13, 18-21, 26, 48, 49, 55

Target Annual Report 2003, p. 4-5

Seay, Gregory. Wal-Marts debut may shake up state retail scene; Wal-Mart debut adds more competition to states shifting retail landscape. Hartford Courant January 3, 1993, A Edition, p. D.12004 Annual Report. Wal-Mart Stores Inc., 2004, p. 2, 8-13, 18-21, 26, 48, 49, 55

2003 Annual Report. Target Brands Inc., 2003, p. 4-5 Seay, Gregory.

Wal-Marts debut may shake up state retail scene; Wal-Mart debut adds more competition to states shifting retail landscape. Hartford Courant January 3, 1993, A Edition, p. D.1

Lisa Huang

Garry, Michael. Wal-Mart Expand RFID/EPC Program. Supermarket News Retrieved: Nov. 1, 2004 (June 28, 2004) p53

Hartman, Lauren R. Let the RFID revolution begin! Wal-Mart, the mega retailer, says its top suppliers will be able to meet its RFID deadline as it begins long-awaited trails of RFID tags and EPC codes. Packaging Digest 0030-9117, Retrieved: Nov. 2, 2004 (July 2004) v41 i7 p36(1)

Johnson, Bradford C. Retail: The Wal-Mart effect; Information technology isnt the whole story behind productivity. The McKinsey Quarterly 0047-5394, Retrieved: Nov. 1, 2004 (Winter 2002) p40 (5)

Kaplan, Andrew. Ready or not, here it comes: Wal-Marts deadline for RFID tagging approaches, and with it case-loads of concerns. Beverage World 0098-2318, Retrieved: Nov. 1, 2004 (Oct 15, 2004) v123 i10 p58(2)

Worldlabel.com Nov.17, 2004

OBrien, James A. Management Information Systems: Managing Information Technology in the Business Enterprise. (pp. 44-45) New York, NY: McGraw-Hill/Irwin, 2004

Fen Liu

FAST COMPANY. The Wal-Mart You Dont Know By Charles Fishman Nov. 2004 http://www.fastcompany.com/magazine/77/walmart.htmlIN THESE TIMES The Wal-Mart Effect By David Moberg NOV. 2004http://www.inthesetimes.com/site/main/article/the_wal_mart_effect/ Wal-Mart 2003 Annual Report, p.48

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