Since 1985 Wal-Mart continued its explosive and unabated growth : sales increased an average of 32% a year , defying the recessionary econmic climate that affected many U.S. retailers in the early 1990’s. By 1993, Wal-Mart was the largest and most profitable retailer in the world, achieving a return on equity (ROE) of nearly 32% and a market valuation more than the times book value. The company had sales of $55.4 billion in the fiscal year that ended January 31,1993; net profits hit almost $2 billion. Wal-Mart had more than 2100stores in 43 states.
Wal-Mart achieved this growth by expanding its core business to further geographic locations and by modestly diversifying within the retail trade. While traditionally operating in small, Southern and Mid-Western locations, the company had been edging its expansion to the outskirts of large urban cities in the north and west. The challenge for Wal-Mart was to translate its friendly, belpful “down-home” image to a city environment Additionally, further expansionmeant facing the competition directly. In 1992, only 40% of Wal-Mart stores faced direct competition from their principal rivals, K mart and Target Yet, further geographic growth would undoubtedly increase the competition with other major retailers.
Espanded retail formats fueled some of Wal-Mart’s growth. The most significant new format was Sam’s Warehouse Clubs, which contributed $9.4 billion in sales in 1992. Wal-Mart also opened six Supercenters, with 14 planned for 1992. These scaled down hypermarkets ranged from 97,000 to 211,000 square feet, far larger than the typical 80,000 foot discount center. Supercenters allocated significant floor space to food. If this format proved successful, Supercenters in combination with Wal-Mart and Sam’s could become the largest distributor of food in the U.s. by the end of the decade.
Wal-Mart had experimented by building four huge Hypermarkets USA stores and creating 56 Bud’s Outlet Stores, which carry close-out, over run and damaged merchandise in the familiar Wal-Mart discount format. Bud’s was an effort to utilize empty buildings where the company was paying rent. Wal-Mart also owned the Phillips Chain of supermarkets, which was a wholly-owned subsidiary.
Creative human resourcd policies and significant investment in information systems were a significant component of Wal-Mart’s continued success. But perhaps Wal-Mart’s most dramatic steps since 1985 were in merchandising. In 1990 the company pioneered “manufacturing partnering” with Proctor & Gamble. Under this production specifically for Wal-Mart. The purpose of this move was to improve efficiency for both the retailer and manufacturer alike.
To further streamline operations, the company announced in 1992 that it would deal with independent brokers and intermediary merchandisers only if they had authority to make binding agreements. A typical independent broker could not commit the company he or she represented to firm delivery dates, quantity orders, etc.
Wal-Mart also expanded its own private label program. For many years, Wal-Mart promoted its own “Equate” brand for over-the-the-counter drugs. Wal-Mart extended the private label program to “Sam’s American Choice” for both grocery and health and beauty products. Gross margins for private label brands were significantly higher than branded products.
As Wal-Mark looked beyond 1992 for growth, some analysts looked to markets such as consumer electronics for future expansion. Others looked for Wal-Mart to continue its geographic growth, expanding even into international market. One thing remains probable: Wal-Mart would need to remain extremely active if it wanted to feed its ever expanding appetite for growth.
As Wal-Mark entered 1997, ti had clearly established itself as the largest, most profitable retailer in the world. With $104.8 billion in revenues, $3 billion in profit, and 734,000 associates working in 2,742 stores, Wal-Mart remained the envy of the industry. Yet four issues weighted heavily on Wal-Mart’s management: the emergence of new channels, the challenges of international expansion, declining growth rates, and a stock price that was flat for three years.
Declining growth rates and a flat stock price As Wal-Mark’s share of U.S. retail grew, its growth rate started to converge with the growth rate of U.S. retail: annual sales growth for Wal-Mart was only 11% in 1996, and same store sales grew at 4.6%. Domestically, the largest area of growth had been in Supercenters, with almost 200 established over the past three years(see Exhibit 1). While 11% totalgrowth was respectable for most retailers, it was disappointing to investors. Except for brief peaks reaching $28/share, stock prices had hovered in the low $20s since 1993.
Electronic commerce In the past, Wal-Mart had aggressively attacked altemative channels of distribution, such as warehouse clubs and supercenters. The newest threat perceived by management was electronic commerce over the intemet. Starting in 1994, the explosion of interest in the World Wide Web led retail companies to flock to the Web for itspotential in advertising and sales. Commercial sites had grown from 1,000 in April 1994 to over 110,000 in just 18 months. According to the Internet Society, this figure would double every month in 1997. To address the potential of electronic commerce, Wal-Mart went online in July 1996 With Web sites for Wal-Mark and SAM’s club. Working in cooperation with Microsoft to develop standard Web-retailing procedures, Wal-Mart oftered customers a simple site layout and shopping system that would be the same every time they visited the on-line retailer. The site featured “greeters,” “shopping carts,” guaranteed secure transactions, “customer favorites” and new products for Intemet users. By September 1996, Wal-Mart’s site ranked in the Top 25 shopping sites.
The size and profitability of electronic commerce, however, was uncertain. Estimates for total intemet commerce ranged widely, from$6.9 billion in 2000(from Forrester Research) to $150 billion(from International Data Corporation). To many, on-line shopping was to slow or lacked the tangibility(e.g., trying on clothing, seeing the actual size/color of an item) essential to the shopping experience. Fears about credit card security also kept shoppers at bay. Problems for on-line reaailers included the loss of customers to manufacturers offering product directly on the Web and the great expense of shipping low-value, low-margin, high-mass goods. Although brand name companies and well-recognized retailers had a distinct advantage over lesser-known competitors, many analysts warned that the Web was a tool for direct marketing, not mass marketing. Analysts estimated that the most successful companies, such as Amazon. com, Internet Shopping Network, and Virtual Vineyards, generated only $20 million to $25 million in revenues in 1996.
Globalization Foreseeing future saturation of the domestic market, Wal-Mart had been expanding globally sincd 1991. Over the previous six years, Wal-Mart built or bought almost 250 stores in seven countries in North and South America and in Asia(see Exhibit2). By January 31,1997, this expansion had turned profitable: the International division’s operating profit for the 1997 fiscal year had reached $24 million, compared to a loss of $16 million the fiscal year prior.
Wal-Mart began its global expansion by teaming up with Mexico’s largest retailer, Cifra S.A. The joint venture, Club Aurerra, began with two stores in the suburbs of Mexico City at the end of 199a,beating competitor Price Club by just a few months. BY 1997 Wal-Mart had 41 Wal-Mart and SAM’s Clubs stores in Mexico with an additional 89 retail outlets under separate brand names. SAM’s club Stores were geared primarily toward wholesalers who sold merchandise to smaller retailers. Although the 1995 economic crisis in Mexico had seriously affected Wal-Mart’s revenues, by 1996 the venture was turning a profit.
Wal-Mart expanded into Canada in 1994, purchasing 122 Woolco Stores from Woolwoth Corp. (18% of the Canadian discount market). By early 1996, the number of stores had grown to 133 units, giving Wal-Mart a 40% share of the Canadian discount market. The establishment of 5 additional stores was expected before year’s end. As in Mexico, the Canadian venture was posting profits in 1996.
Wal-Mart’s next target was Brazil. In early 1996 Wal-Mart entered into a Jv with Lojas Americanas S.A., Brazil’s largest discount chain, with Wal-Mart controlling 60% of the 5-store venture. The first few weeks of 1996 brought repeated sell-outs on many products in Wal-Mart stores. However, mulunational retailers with large operations in Brazil did not stand still: in retaliation for Wal-Mart’s aggressive pricing, France’s Carrefour and the Netherlands’ Makro launched a price war, leading to declining margins of less than 10% for Wal-Mart, and a $21 million loss for the first quarter of 1996. In January 1997 Wal-Mart announced a plan to lay off 300 of its 2,500 Brazilian workers. Nonetheless, Wal-Mart officials were optimistic about Wal-Mart’s future in Brazil and planned to open four hypermarkets over the next year. Executives were equally hopeful about the promise of their new operations in Argentina.
China Reflecting on the prospects of doing business around the world, Wal-Mart CEO David Glass told a group of students, “… learn two languages: Mandarin Chinese and Spanish.” By 1993, Wal-Mart decided it was time to test the waters outside of the Americas and look toward Asia. Its first step was to provide about $60 million in private label products for sale in Japan, Hong Kong, Malaysia, Thailand, Singapore, Indonesia, and the Philippines through agreements with Japanese retailers, Ito-Yokado and Yaohan. The second step was to set up operations in Hong Kong. In October 1994, Wal-Mart entered a joint venture with Ek Chor Distribution Systems, a subsidiary of Thai Agribusiness conglomerate Charoen Pokphand Group (C.P.), to build 3 outlet stores and a distribution center in Kowloon and the New Territories in Hong Kong. In Thailand, the C. P .Group operated a supermarket chain, 420 7-Eleven Stores, and a chain of 8 general merchandise stores with a European partner. C. P., with more than 55 joint ventures already in China, was expected to contribute its China expertise by helping to identify “locations, to build government relations, and to clarify import and export issues,” said Rob Walton, chairman of Wal-Mart.
Advertised as purveyors of “brand name quality goods at factory direct prices,” Value Clubs—as the joint venture outlets were christened – were Wal-Mart discount stores cum SAM’s Clubs hybrids. In-store merchandise of greater than 1,000 different branded products included dry groceries, frozen foods, health and beauty aids, home furniture, office supplies, houseware and hardware, frozen confectionaries and snacks, snacks, sporting goods, and beverages. Initially, the Hong Kong stores were to sell merchandise bought from Wal-Mart’s U.S. distribution centers, though there were plans to localize 30% of stock purchases within two months after opening.
Investment in the Hong Kong retail outlets ranged from US$2 million. Store sizes in the British Colony ranged from 10,000 to 20,000 square feet, in contrast to its U.S. counterpart whose measure, on average, exceeded 100,000 square feet. Nonetheless, Value Clubs were considered large within the local context. Competitors in the proximity, such as Watson’s pharmacies and supermarkets Park-n-Shop and Dairy Farms, occupied a fraction of the retail space. Value Club stores were spare with minimalist decorations and concrete floors. Goods were displayed, wherever possible, on warehouse racking. Located beyond the priciest retail estates of Hong Kong in the New Territory towns of Tsuen Wan, emporium connected with 10 bus lines and was served by water ferry; the Tuen Mun shop connected with 9 bus lines; while the Homatin store site was a station shop for 11 bus lines. Catering to the needs “for business and home,” Value Club individual memberships were purchased for HK $150 annually. Qlthough merchandise was already priced at 10% to 20% less than its competitors, membership granted a further 5% discount. Moreover, bulk purchasers, euphemistically titled “truckload sales,” enjoyed additional savings.
Responding to an interview question in 1994, Walton had noted that “the time line for going in there ﹝China﹞ is going to be pretty dam long. “ In 1995, Wal-Mart announced plans to build stores in Shenzhen (immediately across from Hong Kong’s border), Shenyang in the northeastem province of Liaoning, and Shanghai in the Pudong economic district. The Shanghai store opened in the spring of 1996, the Shenyang store in November of 1995, and the Shenzhen store in mid-1996; investment in each China outlet was estimated between US$20 million to US$25 million. However, Wal-Mart’s honeymoon with C.P. was short-lived. Disputes over management led Wal-Mart to dissolve the partnership with the C.P. Group in the spring of 1996. According to the agreement, Wal-Mart would retain rights to the SAM’s Club and Supercenter in Shenzhen, and the C.P. Group would retain the store developments in Shanghai and Shenyang, as well as the three Value Club stores in Hong Kong.
In august 1996, Wal-Mart proceeded on its own to open a SAM’s Club and Wal-Mart Supercenter in Shenzhen to rave reviews. In September, Wal-Mart suffered a brief spate of public relations problems (accusations ranging from intellectual) property rights’ infringement to false product-manutacturing information ), reportedly the result of a purposeful smear campaign by local competitors. Soon after, six main local retailers joined together to force Wal-Mart suppliers to sell them products at the same prices being offered to Wal-Mart. In addition, these retailers began copying Wal-Mart by adopting everything from floor layout to management style. Despite the competition, business continued to boom.
Indonesia Wal-Mart’s newest target in Asia was Indonesia. In August 1996 and January 1997, Wal-Mart had two stores up and running in a licensing deal with the Lippo Group. Under this arrangement, Lippo paid Wal-Mart a fee for services. The stores opened in two of the newest malls in the country with the slogan, “Harga murah selaiu” which translates as “Cheap prices always.” Like Wal-Mart’s start-up experiences in other countries, logistical problems, especially with middlemen in the distribution system, continued to plague the retailer. In addition, cultural differences impeded staff adoption of Wal-Mart’s corporate culture and management practices. Analysts commented that while the road ahead in Indonesia appeared promising, it was sure to be a long one.
