Wal-Mart Report

1. Introduction

Wal-Mart first began their operations in 1962 with their primary operations being retailing and wholesaling. It has blossomed from just a small chain of stores to a global company with more than 1.3 million associates worldwide. Wal-Mart carries a diversity of products many of which are market leaders1. Wal-Mart’s focus on a customer-centric model means it will continue to maintain low prices. Its ability to attract and retain customers may be attributed to its “everyday low prices”.

Illustrating Wal-Mart’s dominance

20 years ago, Wal-Mart almost single-handedly demanded that all suppliers it dealt with used the bar-code, making the bar-code ubiquitous as a result. This illustrates the dominance Wal-Mart has over its suppliers and this is an important factor which enables it to maintain the low prices it is well-known for. 20 years on, Wal-Mart still has the power to dominate its suppliers. In terms of market share, Wal-Mart controls a large and increasing share in United States (U.S.) consumer goods2. By the end of 2010, Wal-Mart’s market share in consumer staple goods in the U.S. will reach up to 50%. Quoting EMI Music North America Executive Vice-President Phil Quartararo, “You can’t have 100% impact when you are taking an artist to a mainstream audience if you don’t have the biggest player, Wal-Mart.” So how did a company which started out of Bentonville become so powerful? The answer is its promise of low prices to all customers. The “everyday low prices” which Wal-Mart is well-known for is a result of several factors, namely, their dominance in the market, costs saved from outsourcing operations, integrated supply chain management between supplier and Wal-Mart, and IT investment.

A. “Everyday low prices”- Integrated supply chain between Wal-Mart and supplier

To stay ahead of competition, Wal-Mart looks to improving its value chain by employing the “just-in-time” system. Wal-Mart does so by integrating its supply chain and that of the manufacturers. Since the 1980s, Wal-Mart had worked closely with consumer goods companies like Proctor and Gamble (P&G) on information sharing. The two companies constructed a supply chain software system linking both companies. The system focuses on data warehousing where inbound and outbound logistics for Wal-Mart are improved and order processing and shipping of products are done just-in-time via the software system. The system links up Wal-Mart’s distribution centre and the supply chain department of P&G, thus allowing the latter to monitor the level of inventory left on Wal-Mart shelves by sending information to P&G whenever their product is scanned at the cash register (i.e. a sale is made). With information transmitted by the minute, P&G will know when to ship products to Wal-Mart and there is no necessity to amass large amounts of inventory. With the system, invoicing and payments for inventory are also automated. P&G reduces both inventory and order-processing costs and thus it can afford to give Wal-Mart the low prices the company dictates.

B. “Everyday low prices”- IT investment

Wal-Mart is leading the retail industry by implementing Radio Frequency (RFID) product tracking. Consequently, it imposes high standards of quality and reliability on all products and sees that suppliers also comply by using high-end technology to meet RFID requirements of Wal-Mart. For instance, RedPrairie Corp. and Xterprise Inc. have jointly developed an off-the-shelf print-and-apply solution for RFID. The application is designed to provide a fully automated inline labeling system using Printronix’s printer/application systems to meet the RFID requirements of Wal-Mart. Such technology maintains the low prices by cost-savings through reducing labor costs.

With the RFID technology in place, there will be no need to manually scan the bar-codes of products. Instead, an electronic reader will scan products in a shopper’s trolley and automatically charge the cost of the shopping to the customer’s credit card. Retail analysts at Sanford C. Bernstein estimate that Wal-Mart could save US$8.35 billion annually by using RFID- mostly in labor costs. RFID can also assist in solving the retail industry’s two biggest issues: product loss due to theft or supply-chain inadequacy. Thefts can cost Wal-Mart an estimated $2 billion a year3. Although, RFID technology will cost Wal-Mart’s suppliers millions of dollars, suppliers are willing to implement this technology to secure the huge Wal-Mart account and ride on its dominance in the market.

C. “Everyday low prices” – Outsourcing Manufacturing Operations

One possible way to have an edge over your competitors would be by outsourcing your manufacturing operations to a third party. Defined as the procuring of services or products from a supplier or manufacturer in a bid to cut cost, outsourcing would not be foreign to most businesses and organizations in recent times. This applies even more to Wal-Mart, seemingly since it is a retail giant. Wal-Mart’s function is to fundamentally bridge the gap between manufacturer and consumers. When Wal-Mart first started operations, most of its products were acquired from local manufacturers such as Newell Rubbermaid, General Electric, Masterlock and Levi Strauss4. With Wal-Mart being one of the largest accounts to suppliers, an inability to keep manufacturing costs down will prove disastrous to the latter. Thus in an attempt to drive manufacturing costs down, Wal-Mart’s suppliers have turned to cheaper alternatives to produce their products – this includes outsourcing their manufacturing operations to countries such as China and Vietnam where labor costs are relatively lower in comparison to that in the U.S.. Such savings in cost will enable the suppliers to sell their products to Wal-Mart at lower prices, which in turn pass the cost savings to their customers thus maintaining “everyday low pricing”.

D. “Everyday low prices” – Bypassing middlemen, sourcing directly

In addition, Wal-Mart has also been bypassing middlemen and sourcing for raw materials and products from foreign manufacturers directly. In 2002, it was reported that close to US$12 billion worth of Chinese goods were brought in by Wal-Mart and this accounted for 10% of all U.S imports from China – this is an impressive feat considering Wal-Mart is in fact just one huge company. At Wal-Mart, it is evident that outsourcing is an extremely viable business option which allows the company to keep its word of having “everyday low prices”.

E. “Everyday low prices” – Wal-Mart’s influence on macro-economic issues

As a big company, Wal-Mart has the influence to oppose import tariffs, quotas and promote free-trade pacts with Third World countries, including the Southeast Asian countries that supply Wal-Mart with denim. As a result, Wal-Mart is able to source for products at a lower cost. The tax breaks and cost savings will be passed on to consumers resulting in “everyday low prices”.

With throngs of stores in the U.S., Wal-Mart employs a large number of people to run their supercenters. With its influence on the employment industry and anti-union stance, the company is able to offer employees lower wages in exchange for employment. Thus, costs are minimized for the company as well. When cost is minimized, it becomes more affordable for Wal-Mart to price their products low.

F. “Everyday low prices” – Wal-Mart’s retailing strategy leads to dominance

Wal-Mart is a model example of a company that engages in vertical integration; whereby it does both wholesaling and retailing. By engaging in both activities, it is able to influence supplier and consumer purchasing options in the market. Apart from the operational strategy adopted by Wal-Mart, the company serves to differentiate itself from its competitors through its retail strategy; thereby maintaining their dominance in the market. In house, Wal-Mart stocks many different categories of goods but carries a limited selection of goods in each category. Due to its self-service concept for retailing, the company is able to keep costs down. Furthermore with the large market share Wal-Mart commands, the company tend to force smaller supermarkets within its vicinity to close due to stiff competition and lack of sales. As such, the stronghold of Wal-Mart in the area expands as the reliance on its products and services increases.

In retrospect, Wal-Mart dominance in the market is due to the “everyday low prices” it can provide and the company’s enormous ability to expand its market.

2. Viability of Wal-Mart in Singapore

The team thinks that Wal-Mart’s concept of doing business is not viable in Singapore. No doubt Wal-Mart’s business model is a hugely successful one. However, Wal-Mart’s strengths lie in its value-chain and its aggressiveness in buying in quantity for less and expanding to other market areas. Its strategies in achieving “everyday low prices” for consumers have been successful in opening new markets and expanding old ones but it will not be the case in Singapore.

The Singapore retail environment for consumer goods is saturated with major supermarkets; Giant, NTUC and Carrefour. The Singapore market is in effect a small one and the entrant of a new retailer will intensify competition. Although, a new supermarket will be beneficial for consumers in the short run due to a wider range of products, but for the retailer Wal-Mart, it will be earning profits lower than expectations in the long run. This is because Wal-Mart relies on a large customer base which is not evident in Singapore as the Singapore market is small. Wal-Mart’s strategy in expansion in broader markets is thus undermined since it focuses on a customer-centric model. We foresee that Wal-Mart will not enjoy the economies of scales it does in the U.S. Moreover, the high costs (due to high rental) involved in doing business will weigh down the cost of its daily operations in Singapore. With higher costs, Wal-Mart will not be able to deliver the low prices it is known. This will greatly reduce economies of scales and ultimately its market share.

The company makes no scientific attempt to survey shoppers’ preferences accordingly and thus its products will not be catered to Singaporeans5. Wal-Mart selects products their own way, rather than to local standards. Wal-Mart, not involving the customers in the decision-making process will alienate the latter and the former will only lose sales and erode its brand name.

In conclusion, we think that a Wal-Mart-ish operation does not fit into the Singaporean market. Wal-Mart would do better in larger countries with big consumer base like the U.S. and China. The Singapore market does not allow Wal-Mart to enjoy economies of scales and accounts for limited expansion in the market.