Wal-Mart's European Business Strategy

Table Of Contents

1. Introduction

2.1 Wal-Mart History and Success Formula
2.2 Strategic Fit
2.3 Competition in Europe
2.3.1 Carrefour
2.3.2 Metro AG
2.3.3 Aldi
2.3.4 Ahold
2.4 Industry analysis using Porters five forces model
2.4.1 Internal Rivalry in European Retailing Industry
2.4.2 Barriers to entry
2.4.3 Supplier Power
2.4.4 Threat of Substitutes
2.4.5 Buyer Power
2.5 Conclusion
2.6 References
2.7 Bibliography
2.8 Appendix 1 –Learning reports

1. Introduction

How many retailers would one expect to be in the top ten of the global fortune 500? There is one, and it has a firm second position, leaving behind mammoth companies such as Ford and General Motors (www.fortune500.com). Wal-Mart is the world’s largest retailer with 195 billion dollars in revenue in the year 2000, with operations mainly concentrated in the United States. Renowned in the United States for their discount centres, they have diversified into wholesaling to sustain the explosive growth of the seventies and eighties. Making use of acquired knowledge in distribution and inventory management technology, these new formulas proved to be profitable as well. However, the United States of America were not big enough to satisfy the needs of such a giant company, and international expansion was inevitable. After entry in South-America and Asia, Europe is the next market to be penetrated by Wal-Mart. The time seems right, as extensive liberalization has opened up the European Union and far-reaching economic integration between member states have created a huge common market, offering scale economies in purchasing and distribution similar to U.S. operations. Wal-Mart can use experience from previous foreign expansions to implement the correct strategy for Europe. This paper analyses Wal-Mart’s European strategy, the rational behind its move to Europe and implications for its European competitors. It explains the following problem statement:

Wal-Mart’s entry into the European market was a strategic move rather than the pursuit of a growth opportunity.

A brief review of Wal-Mart’s history will be followed by the factors explaining their success in the United States, coming together in a concept called “strategic fit”. After a short summary of their foreign expansion into South-America to stress the importance of the transferability of the concept of strategic fit, a description of the European retail industry will be given. Then the European retail industry is analysed with the help of the generic five forces model from Porter. The paper ends with a conclusion hinting at the future of the European retail market.

2.1 Wal-Mart History and Success Formula

On the heels of supermarkets, discount stores emerged in the 1950s in the U.S. Sam Walton recognized the opportunity of locating discount retail stores in relatively rural cities and opened his first Wal-Mart store in 1962 in the town of Rogers, Arkansas. From the beginning Wal-Mart stores have been offering low prices combined with a wide selection of merchandise and individual, friendly service (www.american.edu, May 16, 2001). Supermarkets had educated consumers about self-service and many were ready to try cheaper self-service retailers. Total discount retail sales grew at a compound annual rate of 25 percent from $2 billion in 1960 to $19 billion in 1970. An illustration of Wal-Mart’s success is the fact that not one single competitor from the early years existed as of 1993. King’s Corvette, Mammoth Mart, and Zavre failed over Wal-Mart. According to Ghemawat (1999), Wal-Mart’s success was founded on three main pillars.

First, by locating many of its stores in relatively rural cities, Wal-Mart provided a much-needed service to customers who lived in or near these cities (Barney, 1997). Sam Walton said: “our key strategy was to put good sized stores into little one-horse towns everybody else was ignoring. If we offer prices as good or better in cities that were four hours away by car, people would shop at home.” (Ghemawat, 1999) These one-horse towns, inhabiting between 5,000 and 25,000 inhabitants, were only large enough to support one large discount retail operation and therefore able to charge prices that were up to six percent higher than Wal-Mart prices in more rural areas. (Barney, 1997)

The second pillar has been Wal-Mart’s focus on technological innovation. Throughout the company’s history, Wal-Mart has been the first to introduce new systems improving inventory management, leading to cost reductions and the ability to undercut competitor prices (Michael Lawless, 2001). One can think of systems such as point-of-sale Uniform Product Codes (UPC) scanning, registering product sales and immediately replenishing them through an automated ordering system, intra-store radio frequency (RF) transmission of product UPC and pricing information between central store inventory systems and personnel with scanners on the store shelves. Their most valuable infrastructure investments were made at a higher level. A satellite system connecting all stores was initially installed in 1983, and grew into a complex communication network that included all stores, headquarters, and distribution centers, as well suppliers. This system has enabled a just-in-time process of inventory management thought to be impossible in general merchandise retailing, allowing rapid responses to inventory needs and reduces the amount of safety stock needed.

In distribution, Wal-Mart has been on the cutting edge of technological progress. Given the company’s geographical dispersion throughout the entire U.S., huge benefits in distribution were to be gained. To this end, a network of innovative hubs was established, using “cross-docking” to minimize distribution center inventory and to facilitate the need-based inventory system enabled by the satellite network. Basically, this system unloads merchandise delivered by suppliers on one end of the warehouse to immediately compose complete shipments encompassing a variety of products from different suppliers on the other end of warehouse/ terminal. As shipments arrive at the warehouse, merchandise is moved directly to the trucks carrying the outbound shipments to specific stores. In many cases, the same trucks can even be used for inbound and outbound shipments, including those carrying new merchandise to stores and those carrying returned, outdated, or unneeded merchandise from stores, thus minimizing round-trip shipping costs (Coyle, Bardi, Langley, 1996)

These operational efficiencies combined with close ties to their suppliers (Procter& Gamble, Colgate-Palmolive) provided Wal-Mart with a cost advantage approximately 7 percent over their competitors (Ghemawat, 1999).

The third factor according to Ghemawat explaining Wal-Mart’s success was the organizational culture created by Sam Walton, embracing ‘associates’ (employees) to strive for the ultimate goal of customer satisfaction. According to Sam Walton: “the customer is number one, but our associates are the key to success (Wal-Mart Germany Press Releases, 2001).

Founder Sam Walton realized that friendly and helpful staff is what really counts in the retail business. This is why his business concept has always included very specific rules of conduct for the associates. Calling sales assistants ‘associates’ and store managers ‘servant leaders’ is all part of the rule dealing with ‘respect for the individual’. This rules also included agreements on how to give feedback to each other and how to welcome new associates into the team. Other rules teach associates that their individual effort and attitude has its reflection on the atmosphere in the store, on the functioning of the team and of the company. Associates are encouraged to share their feelings with managers on whatever levels. A rule that has existed from the beginning is the so-called ‘ten-foot rule’. It involves three steps for the associates and always applies when a customer comes within a ten feet radius of them. First: look at the customer. Second: give a friendly greeting. Third: ask politely whether assistance is required. Two things implemented to make customers feel comfortable that can be seen immediately when entering a Wal-Mart store are the width of the aisles and, even more special, the ‘people greeter’. This is an associate that welcomes customers at the entrance. Team spirit helps a lot when you want your employees to appear happy with their jobs.

The “Wal-Mart Cheer“ is a means for associates to demonstrate a special kind of team spirit. Every morning, the associates and the store manager meet to discuss the previous day’s sales and the objectives for the coming day. Afterwards, they all join in the Wal-Mart Cheer, which, as mentioned before, ends with the words “Who is number one?“ – “The customer!” (Wal-Mart Germany Press Release, 2001).

2.2 Strategic Fit

The three key attributes of Wal-Mart’s success in the United States- focus on rural areas, technological innovation, corporate-culture- seem a simple decomposition of Wal-Mart’s strategy. Hence, one would suspect that the sustainability of Wal-Mart’s competitive advantage to be limited. Competitors such as Kmart and Target can basically walk into any Wal-Mart store and copy the successful attributes of their strategy, or can they? In fact, they cannot. Wal-Mart’s strategy almost perfectly ‘fits’ its goals and values, its external environment, its resources and capabilities (Grant, 1998). This phenomenon is known as ‘Strategic Fit’ and is demonstrated through the fact that Wal-Mart shoppers return to the shop twice as much than Kmart shoppers do. Doing so, 49% of Wal-Mart customers actually drive past a Kmart store (Pearce and Robinson, 1997).

In the next section the motivation of Wal-Mart’s geographical expansion and a brief history of Wal-Mart’s internationalization are given. The transferability of the strategic fit will be emphasized.

2.3. Expansion Motivation & History

In the eighties Wal-Mart sought formulas to sustain their impressive growth of the previous decades, as by then all of rural United States was served by a Wal-Mart. Diversification into grocery (Wal-Mart Supercenters), and membership warehouse clubs (SAM'S Clubs), created greater opportunities for growth. After capitalizing on these new ventures, geographical expansion was the next threshold to pass. The first foreign store was opened in Mexico in 1991, followed by expansion into Canada. Wal-Mart currently operates 176 stores of different sizes in Canada – 120 of which were bought from Woolworth Corp. in 1994 – and 509 of them in Mexico, 390 of which were bought in 1997 from Cifra SA (Wal-Mart Germany Press Release, May 22, 2001) (Simchi-Levi et al., 2000). Business in these two countries has always been relatively good.

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