Wal-Mart International Expansion

International Expansion (Wal-Mart)

Company Background

Wal-Mart Stores, Inc. is the prime retailer in the world, the world's second-largest company after Exxonmobil and the nation's leading nongovernmental company. Wal-Mart Stores, Inc. operates retail stores in a variety of retailing layouts in all 50 states in the United States. The Company's selling operations and functions serve its customers mainly through the operation of three segments. The Wal-Mart Stores segments comprise its discount stores, Supercenters, and locality Markets in the United States. The Sam's club segment comprises the warehouse membership clubs in the United States. The Company's subsidiary, McLane Company, Inc. gives products and allocation services to retail industry and institutional foodservice customers.

Layout plan

Industry Analysis

The Threat of New Entrants: The discount retailing market was dominated by large players, which by themselves served as substantial barriers to entry for new players. At the micro-level this was accomplished by:

A. Capital Requirements and Economies of scale: A typical Wal-mart store spanned almost 80,000 square feet compared to the average supermarket, which was typically 40,000 square feet. The sheer size of the stores and the variety of products that they carried thwarted any competition from small and mid-size retailers. Warehouse club stores were even larger, allowing for more economies of scale and lower costs.

B. Strategies: Firms focused on long-term strategies to compete against their rivals in the future. For example, Wal-Mart began opening stores only if it had the capacity to expand at a later date. Over the years, this excess capacity became a substantial deterrent for new market competitors.

C. Cost Advantages: Retailers gained absolute cost advantages by utilizing:

Reducing operating costs

Identifying markets with the least competition

Strengthening and exerting influence over vendor relationships

Promoting continuous improvement from the grass-roots level

Buying goods from countries where labor-costs were cheaper

D. Product differentiation: In an industry where product differentiation was minimal, retailers tried to position themselves as superior service providers. Wal-Mart on the other hand, built its brand name around superior service combined with low cost products. The company also used a motto of "Everyday Low Prices," which led consumers to think they were getting the lowest price, even if there was only a few cents difference between the pricing at a competitor's store.

E. Distribution: Firms built efficient distribution networks to reduce costs. Innovative techniques led to lower inventory costs, increased product availability and shorter lead-times.

2. Competition from Substitutes: Discount retail firms faced stiff competition from substitutes as the majority of their sales were generated from nationally advertised, branded products carried by a variety of retailers. However, discounters slowly introduced their own private labels that provided higher margins and exploited store loyalty they had built over the years. Major substitute retailers for Wal-Mart were Target, K-mart, Service Merchandise, Price Club, etc.

3. Bargaining power of Buyers: Intense competition among retailers led to a market where buyers had the option to purchase the same product from a number of retailers. As a result, buyers' decisions were made primarily on price, convenience and perceived image of the store. Accordingly, buyers had the strongest bargaining power in the model.

4. Bargaining power of suppliers: Firms benefited from strategic long-term relationships with their suppliers that allowed them to leverage significant discounts. Suppliers initially benefited from these relationships by receiving feedback on customer preferences, having stable demand for their products and lower inventory costs. Nevertheless, as the purchasing power of the discount retailers increased, the suppliers steadily lost their bargaining power.

Wal-mart's International Expansion Strategy

Since the end of the case study, the company created the Wal-Mart International Division and has expanded its operations into Sydney, Australia. As of fiscal year 2001, Wal-Mart has a total of 612 discount stores, 406 Supercenters and 53 Sam's Club's in the International Division. The company's current international strategy is to adapt its U.S.-based store layout and low-price offerings to new country cultures. Wal-Mart's strategic international expansion has proven successful in some markets and challenging in others due to differences in regional consumer demand and market requirements.

Wal-Mart's expansion strategy for Australian market is to dominate the market via acquisition and implementation of its U.S. based price-focused strategy. In the summer of 1999, the company made its largest acquisition to date by acquiring ASDA, the British supermarket chain. The ASDA acquisition has been very successful because ASDA's businesses model and pricing strategies were similar to Wal-Mart's. ASDA also had a "colleagues" program to reward employees, which was similar to Wal-Mart's "associate"...

The company acquired the Wertkauf and Interspar SB chains and quickly learned that its failure to adapt to the German consumer's needs would negatively impact its performance. According to Helen Sommerville of Dow Jones International News, "Wal-Mart's concept of outstanding customer service coupled with lower prices hasn't caught on in Germany, where customers are extremely price sensitive and less interested in customer care." In comparison with American consumers, Australian consumers have more brand loyalty and are less likely to switch to newer brands solely based on lower prices. Only cheaper prices on brand-name goods will receive the attention of Australian consumers.
Moreover, a few large companies tightly control the Australian market, which makes expansion into the country difficult. As a result of its difficult initial entry, Wal-Mart was forced to adjust its strategy to accommodate the Australian shopping culture. The adjustments proved to be successful and Wal-Mart is enjoying high sales volumes at their Karlsruhe store.

As Wal-Mart is the largest retailer in the world, it has the advantage of scale and has had a considerable impact on the Australian retailing industry. It elected to pursue an acquisition strategy for Australia in expectation of Europe's possible resistance to their stand-a-lone entry into the market. Moreover, they are pursuing additional acquisitions of Australian retailers in order to extend their market penetration.

Wal-Mart.com -- E-Business Strategy

Wal-mart's decision to go online was primarily market driven; one of its main competitors, Target, had already launched a web site. Wal-Mart recognized that in order to remain competitive, they would also need to move into the e-retailing marketplace. In 1996, they developed an online strategy "Wal-Mart Online." Realizing the benefits of technology partnering, the company formed a partnership with Accel Partners, a respected Internet venture capital firm in 2000. The partnership prompted a name change to "Wal-Mart.com" and the online operations were re-located from Arkansas to Silicon Valley.

According to an e-business forum article written by KPMG Consulting, "the biggest advantages that clicks-and-mortar retailers possess are the brand name and the customer base." Wal-Mart plans to capitalize on this advantage by taking Wal-Mart.com public, while giving Wal-Mart Stores Inc. majority ownership of the venture. The company also wants to ensure that the "online" store builds on the Wal-Mart brand and takes full advantage of the traditional bricks-and-mortar stores. In preparation for the 2000 Christmas season, Wal-Mart.com had five basic strategies for its online site. These strategies involved creating a user-friendly site, offering products that were not yet sold the company- but would supplement brick-and-mortar store inventory, and integrating its brick and mortar stores with the online stores.

Every new venture has its advantages and disadvantages and Wal-Mart.com made a costly mistake in replicating its bricks-and-mortar store on the web without conducting adequate consumer market research. Jeanne Jackson, CEO of Wal-Mart.com, noticed that several categories of traditional bestsellers at the stores, such as underwear, socks, and votive candles, failed to sell online. Moreover, the company also realized that Internet advertising was not a cost-effective way to attract customers and thus decided to rely on its brick-and-mortar stores to direct shoppers to its site.

Simplifying its web site was a good idea because online shoppers prefer simplicity over complexity when looking for low-value items. Offering supplementary products that are not in its stores is key because Wal-Mart stores are usually accessible to most shoppers. Moreover, selling large items like patio furniture that occupy too much in store space online will generate higher profit margins than offering traditional items like the aforementioned socks and candles. Therefore, products that complement limited store offerings should be used to target online shoppers.

The Future of Wal-Mart

The primary issue facing Wal-Mart is how to sustain its historic growth rates in a mature market. At least one thing is clear -- Wal-Mart has a significant competitive advantage relative to its rivals, all of whom are scrambling to find new sources of profits.

With its significant financial resources, Wal-Mart will be able to pursue various paths of diversification in either old economy or new economy segments, conceivably exploiting its established distribution networks. Despite comparative store sales inevitably dropping below the historic growth rate (32%), and return on assets and return on equity trending slightly downward, Wal-Mart should be able to maintain a competitive advantage relative to its rivals due to the cost advantages achieved from economies of scale and its cost savings focused infrastructure.

Therefore, I recommend that Wal-Mart use the Judo and Sumo Strategies together in order to maintain its competitive advantage, while continuing to cut costs and move rapidly to new markets at the same time. The uncontested ground can be another continent (International Strategy), another business (Diversification) or…