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Wal-Mart Retail Strategy Shift a Risk Warns Iowa State Researcher

Released: 9/10/2006 1:00 PM EDT
Source: Iowa State University

Newswise — Wal-Mart is abandoning its one-size-fits-all approach to retailing in an effort to increase sales
according to news reports Thursday. That is big news from the mega-chain according to an Iowa State
University business professor who has researched Wal-Mart's success.
"Wal-Mart officials are realizing that they need to broaden their low price platform in order to continue to
compete in more markets," said Bobby Martens, assistant professor of logistics and supply chain
management at Iowa State. "On the other hand, this could easily set them up to price discriminate, especially
to their 'rural' group."
Wal-Mart's merchandise will now reflect one of six demographic groups, including African-Americans,
affluent, empty-nesters, Hispanics, suburbanites and rural residents. The company also plans to renovate its
3,400 U.S. stores over the next year to reflect the needs of these six different groups, according to multiple
reports.
"This is risky for Wal-Mart," said Martens. "They're changing a supply chain that was developed on low-cost
efficiency for a fragmented customer relationship management-based chain. It's also interesting from a
standpoint of enabling price discrimination. They could potentially charge rural customers due to market
power, especially in grocery, which is characteristic of local markets."
While this strategy shift is a bold move for Wal-Mart, it shouldn't be viewed as a sign of desperation --
although Martens believes it could alter the retail giant's efficient supply chain management strategies that
have allowed it to offer lower prices to consumers. Wal-Mart is known for driving down prices throughout an
area, and driving out some local competition in the process.
"Wal-Mart built itself on being low cost and extremely efficient in supply chain management practices. And
they are that. They're the model for the world in terms of retail supply chain management," said Martens.
Martens points to Wal-Mart's exponential growth in the grocery business as one benefit to consumers. As the
chain progressed from selling no groceries in 1987 to becoming the No. 1 grocery retailer in the world today,
it's brought savings and convenience to consumers.
"There are projections that by 2010, Wal-Mart will control 35 percent of the U.S. food grocery market," he
said. "That growth has been brought on by supply chain and logistics advancements, the fact that consumers
are looking for one-stop shopping to buy other goods along with their food -- so the convenience factor -- and
the fact that consumers are going to grocery stores less often, but buying larger quantities. That is a function
of better packaging, the fact that they can go to these one-stop shops, and changing family demographics."
The families and their grocery purchasing habits aren't the only things that have changed with Wal-Mart's
penetration into the market. It has also forced other grocery chains to change the ways they do business in
order to keep up.
"Wal-Mart has completely changed the grocery playing field," Martens said. "So the traditional grocery
retailers like Kroger -- which is the No. 2 -- are very much changing how and what they stock. It's really
changing Kroger's life because they need to compete with this one-stop shopping concept, so they're
bringing more into their store."
"Another thing that's changing in the grocery industry is that the middle-sized stores are really exiting the
market, but there is a surge in the number of convenience stores (non gas station-related) in the United
States," he said. "Another opportunity we've been seeing for grocers is specialization -- for example,
excellent meat counters, cheese counters, specialty foods. Many of these smaller traditional grocery stores
that are surviving have that kind of a niche."
According to Martens, Wal-Mart is opening a number of new Supercenters near Cincinnati -- the home of
Kroger headquarters -- allowing the top two grocery retailers to go head-to-head.
But Kroger is not the only one that's changing to meet consumer demand. Wal-Mart is also trying to appeal
to a different clientele, Martens said.
"The typical Wal-Mart consumer is a lower-end consumer who immediately has to make budget tradeoffs
when energy costs go up (like they are now)," he said. "By introducing some higher-end product lines and
testing Sushi bars and organics, Wal-Mart is trying to capture more of a Super Target kind of shopper. Those
consumers typically have higher incomes, so they're not as hurt by exactly what's going on right now with
high energy costs."

According to Martens, Wal-Mart is on target to open 370 new stores in the United States this year, and a
company news release a few weeks ago reported that "in coming years" the retailer plans to open 1,500
additional stores.
Martens is working on two related papers from his data titled, "The Effect of Wal-Mart on Retail Grocery
Concentration" and "The Effect of Supercenters and Retail Stores on County Level Grocery Sales," which he
plans to publish in professional journals.
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Description
Wal-Mart is abandoning its one-size-fits-all approach to retailing in an effort to increase sales according to
news reports Thursday. That is big news from the mega-chain according to an Iowa State University business
professor who has researched Wal-Mart's success.

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