Expert answer:Memo for a case study

  

Solved by verified expert:in these, you assume the role of management, state your recommendation to the board, and provide a table of the pros and cons associated with implementing your recommendation. Keep in mind that boards set strategy, policy, and budget; thus your recommendation is actually a request that the board adopt a specific strategy, policy, or budget.
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For the exclusive use of Y. ALTARRAH, 2018.
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REV: MARCH 1, 2013
DAVID B. YOFFIE
RENEE KIM
Wal-Mart Update, 2011
In early 2011, Wal-Mart reigned as the world’s largest company. It boasted net sales of nearly $420
billion, managed more than 8,400 stores in 14 countries, and employed over 2 million people
worldwide. In addition to offering general discount merchandise and groceries, Wal-Mart had
ventured into e-commerce, online classified services, auto and tire maintenance, vacation planning,
and financial services. Now in its 49th year of operation, the retail giant served more than 200 million
customers and members around the world each week.1
Nonetheless, Wal-Mart struggled in its search for the right growth strategy, especially in the
United States, which accounted for 62% of total sales. Wal-Mart’s impressive historical growth rate of
routinely increasing sales by 10% or more per year had become harder and harder to sustain,
although it still outperformed Target, Wal-Mart’s main U.S. competitor, by a big margin (see Exhibits
1 and 2). In search of new growth opportunities, Wal-Mart tried pursuing different strategies, such as
dabbling in trendy fashions, offering organic foods, and remodeling stores to look more upscale, only
to have them backfire. As of May 2011, same-store sales in the U.S. had tumbled for eight consecutive
quarters, the worst U.S sales slump in Wal-Mart’s history.2 The retailer’s share price was losing
momentum as well (see Exhibits 3a and 3b).
To confront such challenges, Wal-Mart vowed to refocus on “Every Day Low Prices” again,
founder Sam Walton’s core strategy that drove the company to its initial success. The retailer also
announced plans to open new smaller stores in urban markets like Chicago. Yet Wal-Mart faced stiff
competition from general discount merchandisers, specialty discounters like dollar stores, and online
retailer giant, Amazon.com. In addition, Wal-Mart pushed for an aggressive—though occasionally
problematic—move into international markets as it found itself increasingly relying on overseas sales
to drive profit (see Exhibit 4).
Wal-Mart’s Priorities
Store Formats and Merchandising Strategies
Wal-Mart’s discount stores, which Sam Walton first opened in 1962, had long been central to the
company’s success. In 2011, the chain operated around 700 discount stores that averaged 108,000
square feet in size with about 225 associates.3 However, Wal-Mart had been replacing discount stores
with “supercenters” since the 1990s (see Exhibit 5). Introduced in 1988, supercenters added grocery
products and various new services to Wal-Mart’s traditional merchandise offerings. By 2011, there
were 2,900 supercenters, more than triple the number of supercenters Wal-Mart had in 2000.
________________________________________________________________________________________________________________
Professor David B. Yoffie and Research Associate Renee Kim prepared this case. This case was developed from published sources. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2011, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by YASEEN ALTARRAH in MKT 449 SU2018HY taught by JOY GRIFFIN, California State University – Northridge from May 2018 to Jul 2018.
For the exclusive use of Y. ALTARRAH, 2018.
711-546
Wal-Mart Update, 2011
On average, these stores featured 185,000 square feet of retail space and employed 350 or more
people. The most popular feature of supercenters was groceries (Wal-Mart had become the largest
U.S. grocer in 2003). It was the single biggest merchandising unit for Wal-Mart’s U.S. operations and
generated 54% of net sales. That was more than quadruple the amount of net sales generated by the
next biggest category, entertainment. Many supercenters also featured specialty shops, including
photo centers, vision centers, hair salons, banks, and even employment agencies.
The third major store format was Sam’s Club, a members-only warehouse store. Since opening the
first one in 1983, Wal-Mart had increased the number of Sam’s Clubs to 609. It averaged 132,000
square feet in size, employed around 175 people per unit, and accounted for 12% of Wal-Mart’s total
worldwide revenues. Like other U.S. Wal-Mart stores, groceries generated the most traffic in Sam’s
Club, followed by fuel-related categories, such as gas stations and tire and battery centers.
As Wal-Mart entered the 2000s, its traditional U.S. markets started running out of room to build
new supercenters. In addition, Wal-Mart faced a critical question of how to differentiate store
formats. One concept was to push for more Neighborhood Markets. These stores occupied a
relatively small footprint (averaging 42,000 square feet) and offered limited drug and grocery
merchandise. Since 1998, the company had opened 189 Neighborhood Markets. Wal-Mart also tested
small community grocery stores that offered fresh prepared meals, cheap wines, and fresh produce.
Wal-Mart was learning that scale had its disadvantages. It was estimated that every person in the
U.S. would have to spend an additional $10 at Wal-Mart stores to increase comparable-store sales by
1%.4 To attract new customers in the upper income bracket (households that earned over $100,000 a
year), Wal-Mart spent billions of dollars to remodel U.S. stores. The renovated stores looked cleaner
with less clutter in the aisles. “Action Alley,” a main corridor that usually featured pallets of fastselling items like diapers and bottled water, disappeared. Stores offered a leaner assortment of
merchandise, with around 10,000 items disappearing from the shelves.5 Shoppers found new trendy
clothes made under Wal-Mart’s own product lines. Some stores even offered organic groceries.
In contrast to most of its competitors, Wal-Mart had benefited from the U.S. recession, which
officially started in December 2007 and lasted for 18 months. Middle-class consumers “traded down”
to discount stores to buy basic supplies. In the company’s 2009 fiscal year, shoppers spent 13% more
on staple items (foods, pharmacy, and household goods) at Wal-Mart stores.6 Investors cheered and
Wal-Mart outperformed both rival Target and the S&P 500 index (see Exhibit 3c).
Wal-Mart’s recovery, however, was short-lived. Price-conscious consumers, still weary of the
fragile U.S. economy, started to question whether Wal-Mart really offered the lowest prices. A heavy
emphasis on “Rollbacks,” promotional discounts on selected products, meant that the retailer had
drifted away from offering low prices across the board. Wal-Mart’s core customers—households that
earned less than $70,000 a year—shunned the trendy apparels that came with higher price tags. WalMart found itself losing customers to dollar stores as well, which offered a convenient, quick stop for
basic household and food items like cereal, milk, and snacks. Family Dollar and Dollar General,
combined, had thousands more stores and a stronger presence in urban areas than Wal-Mart.
Mike Duke, who became CEO in 2009, launched a different approach to reverse the decline in
sales. Several key executives were shuffled and a new chief was appointed for U.S. stores. Urban
markets became a new target with the introduction of Wal-Mart Express stores. They would be
roughly a quarter the size of an average flagship supercenter and resemble convenience stores. As
many as 40 such stores were planned to open in 2011. For existing stores, Wal-Mart returned “Action
Alley,” rolled out a new nationwide ad campaign that emphasized its commitment to low prices, and
increased the number of products on shelves by 8,500 items, or 11%, in an average store.7
2
This document is authorized for use only by YASEEN ALTARRAH in MKT 449 SU2018HY taught by JOY GRIFFIN, California State University – Northridge from May 2018 to Jul 2018.
For the exclusive use of Y. ALTARRAH, 2018.
Wal-Mart Update, 2011
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Wal-Mart also viewed e-commerce as a big opportunity. With online retail sales rising 10% to $143
billion in 2010, Walmart.com wanted to capitalize on the fastest-growing retail segment in the U.S.8
Wal-Mart aggressively expanded online, moving into sales of music, books, appliances, and even
groceries online. Although it trailed significantly behind Amazon.com, Wal-Mart tried to take
advantage of its physical presence by offering same-day pickup for online orders, a service also
offered by Best Buy (the No. 1 consumer electronics store in the U.S.) and Sears.
Human Capital and Public Relations
Wal-Mart had often been ranked at the most admired company in the U.S. by Fortune magazine.
However, public criticism of Wal-Mart’s business practices had tarnished its image. Critics bashed
the company for paying low wages, employing too many part-time workers without healthcare
coverage and other benefits, and driving local mom-and-pop stores out of business. Human rights
groups claimed that Wal-Mart failed to enforce child-labor and worker-safety rules in its relations
with international suppliers. The retailer was also involved in the largest class action suit in U.S.
history over alleged discrimination against women in pay and promotions.
Wal-Mart aggressively moved to tackle its brand image. In 2005, Edelman, the largest U.S. public
relations firm, was hired to roll out a political-style “Candidate Wal-Mart” campaign that highlighted
Wal-Mart’s new low-cost generic drug product and its contributions to Hurricane Katrina relief. In
addition, Wal-Mart vowed to become an environmentally responsible, “green” company. It reduced
its global plastic bag consumption by over 16% in 2010 and made a strong commitment to reduce
greenhouse gas emissions.9 Wal-Mart also announced a five-year plan, encouraged by First Lady
Michelle Obama, to cut salt and sugar in its products, and to drop prices on healthier foods.
Separately, Wal-Mart continued its long-standing emphasis on gaining efficiencies through human
resources management and adopting new technologies for inventory management and scheduling.
International Operations
Wal-Mart had begun expanding into non-U.S. markets in 1991 with an initial foray into Mexico.
By 2011, it maintained over 4,500 units abroad, more than double the number of international stores
that Wal-Mart held five years earlier. Collectively, international stores generated 26% of Wal-Mart’s
net sales. The company aggressively sought to expand abroad amid difficulties in the U.S., such as by
trying to implement the “Every Day Low Prices” strategy across all borders, initiate multiple store
formats, and pursue e-commerce opportunities (see Exhibit 6).
Mexico
International growth took place through a combination of acquisition, partnership,
and go-it-alone ventures. In the Americas, Wal-Mart’s entry into Mexico started as a joint venture
with the country’s largest retailer, Cifra, in 1991. Wal-Mart eventually acquired a majority stake in
Cifra and changed the name to Wal-Mart de Mexico (“Walmex”) in 2000. As Mexico’s largest retailer
and private employer, Walmex’s sales growth averaged around 10% from 2000–2010. In addition to
general discount stores and supermarkets, Walmex operated restaurants, apparel stores, and banks.
Walmex undertook a major expansion outside Mexico in January 2010 when it acquired over 500
stores located in five Latin American countries (Guatemala, El Salvador, Honduras, Nicaragua, and
Costa Rica). The stores had been jointly owned by parent company Wal-Mart and local investors.
Argentina and Brazil
Wal-Mart Argentina started its operations in August 1995 with the
opening of a Sam’s Club in the greater Buenos Aires area. By 2011, Wal-Mart operated 27
supercenters and employed more than 10,000 associates across Argentina. Nearby in Brazil, Wal-Mart
had positioned itself as the third-largest retailer in the country. Growth had been fueled by the
3
This document is authorized for use only by YASEEN ALTARRAH in MKT 449 SU2018HY taught by JOY GRIFFIN, California State University – Northridge from May 2018 to Jul 2018.
For the exclusive use of Y. ALTARRAH, 2018.
711-546
Wal-Mart Update, 2011
acquisitions of Bompreco (a leading supermarket chain, with 118 units) in 2004 and Sonae stores (140
units) in December 2005. Wal-Mart operated multiple store formats in Brazil to adapt to local
customs, such as introducing a hybrid store that combined a neighborhood market with a Mexicanstyle grocery store.10
Canada and Britain Wal-Mart entered Canada in 1994 with the acquisition of 122 Woolco
stores. As one of the country’s biggest retailers, Wal-Mart expanded to emphasize supercenters. WalMart Canada also launched banking services in 2010, including credit cards. In Britain, Wal-Mart
purchased ASDA, a leading food and clothing superstore, in 1999. Under Wal-Mart, ASDA had
become Britain’s second-largest supermarket behind Tesco, most notably through aggressive
“Rollback” pricing strategies. ASDA was Wal-Mart’s largest non-U.S. business unit, accounting for
roughly a third of its international net sales. Yet in recent years, the chain had begun to struggle as
competing U.K. retailers closed their price gap with ASDA and as U.K. consumers’ shopping habits
moved up-market.11 In 2011, ASDA completed the acquisition of Netto Foodstores, a Dutch-owned
store chain. The deal marked ASDA’s first major entry into local convenience stores, in which rival
Tesco and Sainsbury already had established a strong presence.
Japan In Japan, Wal-Mart started with a partial investment in Seiyu, one of the largest local
supermarket chains, in 2002. Over a six-year period, Wal-Mart gradually gained full ownership but
retained the Seiyu brand name, partly because reportedly less than 20% of Japanese consumers had
heard of Wal-Mart at the time of market entry. Wal-Mart’s major challenge was figuring out how to
implement its usual across-the-board low-price strategy since Japanese shoppers usually equated low
prices with low quality. Wal-Mart had to aggressively market Seiyu as a low-cost leader that also
offered quality. The process required several adjustments on Wal-Mart’s end, such as re-designing
stores to make more space for food items, offering more basic apparels (vs. fashion items), and
upgrading the overall look of Seiyu stores. After seven consecutive years of losses, Seiyu finally
achieved positive same-store sales in 2010. But as of April 2011, Seiyu’s market share in Japan stood
at 2.6%.12
Germany and South Korea
Not all international ventures were successful, most notably in
Germany and South Korea. In 1998, Wal-Mart acquired two small German “hypermarket” chains. (A
hypermarket resembled a supercenter, but with a larger format.) Yet Wal-Mart ran into intense price
competition from German “hard discounters” and failed to achieve significant scale. Wal-Mart’s
German workers also resisted its American-style merchandising and workplace practices. In July
2006, Wal-Mart sold its 85 stores to German retailer Metro AG at an estimated pretax loss of $1
billion.13 South Korea was a similar story; Wal-Mart entered in 1998 but exited in 2006 by selling the
15 supercenters it owned to E-Mart, a local discount chain. Observers noted that Wal-Mart had failed
to cater to local tastes, such as offering more value-priced food and beverages, and friendly customer
service.
China
However, Wal-Mart had high hopes elsewhere in Asia. In particular, China, with a $1.7
trillion retail market, was viewed as “probably the country with the greatest growth opportunity
outside the U.S.”14 It was the world’s second-largest retail economy (larger than the rest of Asia
Pacific excluding Japan), and was expected to see a huge middle-class population boom over the next
decade. Wal-Mart’s first stores in China—a supercenter and a Sam’s Club in Shenzhen—opened in
1996. Growth heavily evolved around supercenters until 2006 when Wal-Mart bought a 35% stake in
Trust-Mart, a Taiwanese hypermarket chain that ran about 100 units in 20 mainland provinces. In the
2011 fiscal year, Wal-Mart’s China sales stood at $7.5 billion and were growing at a double-digit
rate.15 Yet retailing in China was challenging: a lack of logistics networks, a fragmented array of local
consumer tastes, and a culture in which bribery and kickbacks played a large role16 were all
4
This document is authorized for use only by YASEEN ALTARRAH in MKT 449 SU2018HY taught by JOY GRIFFIN, California State University – Northridge from May 2018 to Jul 2018.
For the exclusive use of Y. ALTARRAH, 2018.
Wal-Mart Update, 2011
711-546
challenges that Wal-Mart faced there. In addition, Wal-Mart had to allow labor unions in accordance
with local laws, contrary to the retailer’s usual practice.
India
Another big potential growth market was India. In November 2006, Wal-Mart entered a
joint venture with Bharti Enterprises, a local telecom company. Government restrictions on foreign
direct investment (FDI) meant that Bharti ran the retail stores while Wal-Mart performed wholesale
and back-end operations. Together, they managed 120 supermarkets, 10 hypermarkets, and 2
distribution centers as of early 2011.
Africa
Elsewhere in the world, Wal-Mart proposed a $2.4 billion merger with Massmart
Holdings, a South African retailer, in 2011. Massmart owned nearly 300 stores, primarily in South
Africa, coupled with operations in 13 other sub-Saharan countries. Despite resistance from local
unions and the government, the deal was approved in May 2011. It marked Wal-Mart’s secondbiggest overseas acquisition since buying ASDA in the United Kingdom.
Wal-Mart’s Competitors
Many established general discount retailers in the U.S., including Ames, Woolworth’s, and
Bradlees, had found it difficult to compete with Wal-Mart and had gone out of business in the 1990s.
Target, on the other hand, successfully established itself as the No. 2 discount retailer behind WalMart. Through its 1,750 stores in 49 states and online business site, Target attracted a more urban,
affluent clientele compared with Wal-Mart’s customer base. Target was known as an upscale
discounter that offered “cheap chic”—fashionable merchandise that was often designed exclusively
for Target by big-name designers. After being hit hard by the U.S. recession, Target tried to lure more
customers, such as by giving a 5% discount to Target cardholders. Target spent nearly $1 billion in
2010 to remodel stores and offer more groceries and fresh foods. In addition, Target bought leases to
some 220 Canadian discount stores with plans to start operations in Canada by 2013, which would
mark the retailer’s first entry abroad. Meanwhile, Kmart, another discount retailer, emerged from
bankruptcy in 2003 and then merged with department-store chain Sears in 2005. While the merger
struggled to translate into stronger in-store sales, Kmart (with around 1,325 stores) tried to push for a
greater presence in the online retail space.
The biggest, busiest online retailer was Amazon.com. The retail giant, either through its own
inventory or third-party sellers, was known for offering low prices. It attracted more than double the
number of monthly visitors than Walmart.com had in 2010.17 With $34 billion in sales, Amazon had
posted consecutive double-digit growth rates over the last decade. It offered a vast array of
merchandise acco …
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