Walmart Stores Discount Operations- Case Analysis

Group No. 3 Arun Kumar(ABM 11030), Nidhi(ABM11032), Mohammad Fuad(FPM15009), Asmita

Sachdeva(PGP30304), Ravali Harichandana(PGP30317), Preet Komal Singh(PGP30332)

Q1) What, in your view, are the sources of Wal-Mart's competitive advantage in discount retailing?
Q2) Do you think Walmart will be equally successful in the wholesale club format? Why (not)?
A1)
According to us, following are sources of Wal-Marts competitive advantage in discount retailing: Cost
efficiencies arising from purchases from vendors, low distribution costs, efficient inventory management
due to Information Technology integration and effective communication network

Location of Wal-Marts stores More than half of their stores were located in towns with
populations between 5000 to 25000 and not served by any competitors, thus providing barrier to
entry to other stores and commanding higher sales 10%-20% of total retail sales
Low cost of purchases from vendors Wal-Mart used to bargain very hard with the vendors and
thus purchase costs were low. Also Wal-Mart took no more than 1/5th of its volume from one vendor
and no vendor accounted for more than 2.8% of the total purchases. This resulted in low bargaining
power of vendors.
Low Distribution costs and increased responsiveness 80% of the inbound merchandise was
passed through the hub-and-spoke distribution network which utilized cross docking, catered to
multiple stores requirements reducing delivery times and transportation costs. Wal-Marts cost of
inbound logistics was 2% of sales which was half the industry average.
Choice of goods- Reduction in back-room storage requirements due to the distribution network,
inventory turns exceeded 4.5 in 1985, well above the other competitors. Focus on hard goods
(hardware, housewares, automobile supplies, small appliances) generated more sales per square
foot than soft goods (about $150 vs $125), built more traffic and required fewer markdowns.
Superior inventory management- IT played a pivotal role throughout- In 1971 a computerized
system was installed to track inventory, in 1985 each Wal-Mart store had a computer that tracked
sales and performed accounting functions and in 1986 a satellite network was planned to ease real
time communications between stores and headquarters. All of this provided superior reaction time
in adjusting inventory to customers requirements and reduced shrinkage to 1.3% of sales.

A2)
Yes, we think Wal-Mart would be equally successful in the Wholesale Club format. This is because the
wholesale club format is a related line of business where the companys resources, core competencies and
cost advantages (as mentioned above) can be utilized to reap economies of scale and scope. Also the
efficient inventory management and technology superiority can be leveraged in the wholesale club format.
Additionally:

Wholesale clubs had a limited margin to tune of 9%-10% (prices 20% below the conventional
discounters and supermarkets) and thus only those firms could be successful which had economies
of scale and cost advantages.
Since the warehouse clubs had high investment costs - $5million-$10million- to start, hence barriers
to entry were high and threat of new entrants low.
Market share of 60% was captured by Price company and Wal-Mart wholesale clubs, hence inter
firm rivalry is low. Also the market is expected to exceed $20billion by early 1990s.
Focus on soft goods was a differentiating factor for the wholesale clubs which was different from
their focus on hard goods in the discount stores
Since memberships could be a source of competitive advantage, the company was quick to offer
all Wal-Mart stockholders memberships to its wholesale clubs to broaden its customer base.
Increased customer traffic in markets where wholesale clubs operated side by side with Wal-Mart
discount stores, resulted in operating results above the market average. This model could be
replicated across other smaller areas (than competing warehouses) where Wal-Mart discount
stores were operating alone.