Walmart Stores Discount Operations- Case Analysis Group No. 3 – 3 – Arun Kumar(ABM 11030), Nidhi(ABM11032), Mohammad Fuad(FPM15009), Asmita Sachdeva(PGP30304), Ravali Harichandana(PGP30317), Preet Komal Singh(PGP30332)
Q1) What, in in you r view, are the sou rces of Wal-Mart's Wal-Mart's com petitive advantage in disco unt retailing? Q2) D o y o u t h i n k W a l m a r t w i l l b e e q u al a l l y s u c c e s s f u l i n t h e w h o l e s al al e c l u b f o r m a t ? W h y ( n o t )? )?
A1) According to us, following are ar e sources of Wal-Mart’s competitive advantage in discount retailing: Cost efficiencies arising from purchases from vendors, low distribution costs, efficient inventory management due to Information Technology integration and effective communication network
Location of Wal-Mart’s stores – More than half of their stores were located in towns with
populations between 5000 to 25000 and not served by any competitors, thus providing barrier to entry to other stores and commanding higher sales – 10%-20% of total retail sales Low cost of purchases from vendors – vendors – Wal-Mart used to bargain very hard with the vendors and thus purchase costs were low. Also Wal-Mar t took no more than 1/5th of its volume from one vendor and no vendor accounted for more than 2.8% of the total purchases. This result ed in low bargaining power of vendors. Low Distribution costs and increased responsiveness – responsiveness – 80% of the inbound merchandise was passed through the hub-and-spoke distribution network which utilized cross docking, catered to multiple stores requirements reducing delivery times and transportation costs. Wal- Mart’s cost of inbound logistics was 2% of sales which was half the industry average. Choice of goods- Reduction in back-room storage requirements due to the distribution network, inventory turns exceeded 4.5 in 1985, well above the other competitors. Focus on hard goods (hardware, housewares, automobile supplies, small appliances) generated more sales per square foot than soft goods (about $150 vs $125), built more traffic and required fewer markdowns. Superior inventory management - IT played a pivotal role throughout- In 1971 a computerized system was installed to track inventory, in 1985 each Wal-Mart store had a computer that tracked sales and performed accounting functions and in 1986 a satellite net work was planned to ease real time communications between stores and headquarters. All of this provided superior reaction time in adjusting inventory to customer’s requirements and reduced shrinkage to 1.3% of sales.
A2) Yes, we think Wal-Mart would be equally successful in the Wholesale Club format. This is because the wholesale club format is a related line of business where the company’s resources, core competencies and cost advantages (as mentioned above) can be utilized to reap economies of scale and scope. Also the efficient inventory management and technology superiority can be leveraged in the wholesale club format. Additionally:
Wholesale clubs had a limited margin to tune of 9%-10% (prices 20% below the conventional discounters and supermarkets) and thus only those firms could be successful which had economies of scale and cost advantages. Since the warehouse clubs had high investment costs costs - $5million-$10million- to start, hence barriers to entry were high and threat of new entrants low. Market share share of 60% was captured by Price company company and Wal-Mart wholesale clubs, hence inter firm rivalry is low. Also the market is expected to exceed $20billion by early 1990s. Focus on soft goods was a differentiating factor for the wholesale wholesale clubs which was different from their focus on hard goods in the discount stores Since memberships could be a source of competitive advantage, the company was quick quick to offer all Wal-Mart stockholders memberships to its wholesale clubs to broaden its customer base. Increased customer traffic in markets where wholesale clubs operated side by side with with Wal -Mart discount stores, resulted in operating results above the market average. This model could be replicated across other smaller areas (than competing warehouses) where Wal-Mart discount stores were operating alone.
