Wal-Mart Strategic Analysis: Industry, Competition & Marketing

Industry Overview and Growth Potential

The Big Box Retailing industry, of which Wal-Mart is the most dominant participant, can be analyzed across several key dimensions: growth potential, industry profitability, degrees of risk, and how the industry is confronting current economic challenges in the retailing environment. As an industry, Big Box Retailing is considered to be in the mature phase of its product lifecycle (Sampson, 2008). Many research firms and the Department of Commerce consider the Big Box Retailing industry one of three industries that comprise the U.S. General Merchandise Stores Sector. According to industry analysts, real sector revenue increased 14.1% over the last five years. Of the three industries that comprise this sector, the Big Box Retailing industry generated the majority of growth, averaging a Compound Annual Growth Rate (CAGR) of 5.8% during this time period (Sampson, 2008).

Of the three industries that comprise the U.S. General Merchandise Stores Sector, only Big Box Retailing shows growth between 2008 and 2013, according to industry research services including IBIS World (Sampson, 2008). Industry analysts predict that Big Box Retailing will grow 3.6% per year from 2008 to 2013 (French, 2007). The growth of Big Box Retailing is seen as countercyclical to fuel pricing and the uncertainty consumers feel about gas prices, the broader economy, and their jobs. Growth of this sector overall — and Wal-Mart specifically — is being driven by the reliance of middle-class consumers, who live paycheck to paycheck, on these stores to help keep their budgets balanced (Birchall, 2008).

Big Box Retailing will support the revenue and profit growth of the U.S. General Merchandise Stores Sector during the 2008–2013 timeframe, due to the operational efficiencies Wal-Mart and its competitors are investing in. Foremost among these operational efficiencies is the increasing reliance on ERP systems, distributed order management, and the adoption of RFID throughout their supply chains (Boarnet, Crane, Chatman, & Manville, 2005). With revenues growing at 3.6% through 2013 and expenses staying relatively flat even with operational performance gains, the challenge of attaining industry profitability — including generating a Return on Assets of 8% and a consistent $180,000 in Sales Per Employee — remains significant. Long-term profitability in the Big Box Retailing industry is more reliant on operating efficiencies than on top-line revenue growth.

There are substantial risks associated with the Big Box Retailing industry, as it is heavily dependent on supply chains (Boarnet, Crane, Chatman, & Manville, 2005) and inventory turns to be successful (French, 2007). The risks of supply chain disruptions and inconsistent quality from suppliers could significantly and rapidly alter the profitability of this industry.

Big Box Retailers in general, and Wal-Mart specifically, have redefined retailing by concentrating on a low-price value proposition supported by exceptionally high levels of operating efficiency. For the Big Box Retailing industry to overcome the economic slowdown affecting most of the world's economies, operational efficiencies will be crucial to achieving consistent Return on Assets performance and sustainable profitability.

Competitor Analysis

Wal-Mart has three major competitors in the U.S.: Costco Wholesale Corporation with 20.2% market share, Meijer with 4.2% market share, and BJ's Wholesale Club with 2.7% market share, as of 2007. These figures reflect Wal-Mart's dominant position within the Big Box Retailing segment of the U.S. market (French, 2007; Sampson, 2008).

The most entrenched and effective competitor Wal-Mart faces is Costco. This competitor's supply chain, distribution channel, pricing, and location-based expansion strategies most closely resemble Wal-Mart's, making Costco the largest big box retailer competitor in the U.S.

The Costco supply chain management system is designed to support the company's prioritization of electronics as its most competitively important product area, followed by apparel and perishables. The Costco business model also supports Internet-based selling through Costco.com, which uses the same distributed order management system as the store network. The entire network is comprised of 537 warehouses, 393 of which are located throughout the U.S. in 40 different states and Puerto Rico. The company has also launched 19 stores throughout the UK, 75 in Canada, six in Japan, five in Taiwan, and 31 throughout Mexico. While other big box retailers, including Wal-Mart, concentrate on approximately 40,000 SKUs, Costco concentrates on just a tenth of that number — approximately 4,000 items (Sampson, 2008).

Costco is significantly different from Wal-Mart in that it is heavily dependent on its base in California — so much so that this concentration represents a logistics liability. Costs of transporting perishable products to central warehouses in California have been substantially increased by rising oil and fuel prices. Operations are also highly dependent on California's economic and logistical support networks for supply chain management and integration. In any given year, 31% of total sales are generated from California. This economic dependency is a continuing financial and operational challenge for the company over the long term.

In terms of distribution, Costco currently supports 31 warehouses throughout the U.S., expanding to over 50 by FY 2008, with the balance of growth coming from international expansion (Sampson, 2008). Costco also relies heavily on traditional logistics functions, including manually based Vendor Managed Inventory (VMI) and Direct Store Distribution (DSD) through third-party logistics (3PL) service providers. In addition, Costco relies intensively on bar coding and manually oriented technologies for managing inventories and optimizing inventory positions.

From a sales and marketing standpoint, Costco is heavily reliant on a low-cost leader strategy, choosing to compete primarily on price. This competitor also relies on event marketing focused on new warehouse openings and new partner announcements, conducts direct mail marketing to potential new members, and uses direct marketing to existing members to promote selected merchandise as part of its broad marketing strategy.

One key differentiator Costco uses against Wal-Mart is service. To capitalize on this differentiator, Costco has instituted one of the most comprehensive returns policies in the big box retailing industry, encompassing electronics within that policy. Costco also relies on an intensive distributed order management system and catalog that enables it to manage customer queries — both online and by phone — with greater accuracy than Wal-Mart has been able to achieve through its websites, including WalMart.com.

Costco's regional strength in the western U.S. and throughout the Pacific Northwest represents a potentially significant competitive threat to Wal-Mart nationally. To date, however, Costco has not been able to scale its operations nationally or globally.

Additional competitors include Target, which most often competes with Wal-Mart on loss-leader consumer electronics sales, and a variety of smaller retailers that concentrate on specific product lines Wal-Mart also carries. A prime example involves toy retailers, many of which have experienced gross margin degradation over time due to Wal-Mart's aggressive pricing strategy in the fourth calendar quarter of each year — the impact on Toys "R" Us being a notable case in point.

Wal-Mart also faces competition from global competitors including Carrefour and Tesco, both of which are actively increasing their sales presence in the U.S., Asia, and other regions where Wal-Mart also competes. These competitors are grouped into a tertiary competitive set: Carrefour, based in France, and Tesco, based in the UK. Both companies are actively entering the U.S. market and pursue a notably different strategy than Wal-Mart. Rather than focusing solely on supply chain efficiencies, these companies emphasize local market knowledge and understanding specifically what customers in each region are looking for. This approach enables them to create smaller but more focused and potentially more relevant product selections for consumers in the regional areas they are targeting with new marketing strategies. It also allows them to better understand the pricing dynamics of those areas.

The severity and intensity of competition is most acute with other big box retailers — particularly Costco on consumer packaged goods — and with Target on loss-leader electronics including flat-screen televisions. In these two categories, Wal-Mart faces its most formidable pricing and availability competitors. As brands and products in these areas become increasingly commoditized through Wal-Mart's pervasive distribution, competitors including Costco and Target rely on the same loss-leader pricing strategies that Wal-Mart itself uses during the holiday season on toys, for example.

Corporate Mission and Operating Segments

As the largest mass merchandiser in the world, Wal-Mart's work in supply chain execution, research, and policy defines best practices for the broader high-volume retailing industry worldwide. Wal-Mart is comprised of three operating segments: Wal-Mart Stores, Sam's Club, and International Stores. The typical Wal-Mart discount store has 50 departments or more, and a growing number offer groceries in addition to apparel, fabrics, stationery and books, shoes, housewares, hardware, electronics, home furnishings, small appliances, automotive accessories, gardening accessories, sporting goods, toys, and pet food. Wal-Mart moved into the SuperCenter retailing concept in the 1990s and, at the time of writing, operates approximately 1,700 SuperCenters worldwide (Sampson, 2008).

These SuperCenters range in size from slightly over 90,000 square feet to 261,000 square feet — substantially larger than its standard stores. Wal-Mart also runs smaller stores called Neighborhood Markets in Alabama, Arkansas, Florida, Kansas, Kentucky, Mississippi, Oklahoma, Tennessee, Texas, and Utah. In addition, Wal-Mart operates over 550 Sam's Clubs in 48 states. Sam's Clubs offer consumers bulk purchases of merchandise, groceries, sundries, and selected items under the Sam's Club Member's Mark store brand. Larger Sam's Clubs also include one-hour photo processing, pharmaceuticals, optical departments, and gasoline sales. Sam's Clubs are membership-only, cash-and-carry operations.

Wal-Mart's International segment is one of the fastest growing and is comprised of wholly owned operations in Argentina, Canada, Germany, China, South Korea, Puerto Rico, and the UK, as well as majority-owned subsidiaries in Brazil and Mexico. The company also owns joint ventures in China and holds a minority ownership interest in a retailer in Japan.