MBA 591

Business Strategy

Wal-Mart Stores’ Discount Operations

Case Analysis

Fatma Aydın
Hande Aydın
Alican Taşelmas
Onur Turna

30.06.2010

1) The industry seemed attractive due to two main reasons. The first reason for
the attractiveness is that the industry has not been saturated due to few market
players. There were few players dominant in the industry. The second reason for
the attractiveness is that there has been an increasing trend of customer
awareness towards retail shopping. Supermarkets, merchandises and TV means
have been important in the creation of this awareness. The industry analysis is as
the follows;

The Threat of Entry

There is high initial start-up investment cost for the potential entrants therefore
this hardens the entry to the industry. Another issue is the necessity for well-
established supply chain management, distribution channels and inventory
management since the existing players have already settled this. Especially,
Wal-Mart has created an excellent operations management. Finally, due to
existence in the industry for some time, they have developed good relations with
suppliers. In addition to that, due to having enough number of stores, they have
managed to benefit from economies of scale. Therefore, we can say that, there is
low threat of entry.

Bargaining Power of Buyers

Since the customers are price sensitive, they are looking for the lowest product.
This creates a sort of “price war” between the competitors. In addition to that,
they look for variety of products that is when they enter a store, they want to add
all the necessary items to their shopping bag. In addition to that, due to TV
advertisements, fliers distributed, inserts into newspapers and periodical catalogs
sent to the consumers, consumers have the access to the information and can
compare the prices even without going to the retailers. Finally, consumer
preferences can change over time and can show differences across different
regions. It is important for the existing players to arrange their operations flexible
enough for quick adaptation. Therefore, we can say that, there is high bargaining
power of buyers.

Bargaining Power of Suppliers

The bargaining power of suppliers is low. The reason for that is the agreement
done between the suppliers and retailers.

Threat of Substitutes

As mentioned before, the threat of entry is low. In addition to that, local markets
cannot be as cheap as these huge retailers due to agreements with suppliers,
economies of scale benefit, serving variety of products due to consumer
preferences. Therefore we can say that, the threat of substitutes is low.

Complementors

Complementors can be the additional stores opened in retailers such as tailor,

photo studios, and dry cleaning services. As people visit these stores and shop,
they may want to benefit these services in one time. Therefore, these
complementors can increase the number of customers visiting the retailers. In
addition to that they have to pay rent to the retailer which is an alternative way
to generate cash while attracting more consumers.

Industry Rivalry

The Retailers Industry is not a mature industry but a growing industry. The exit
from the industry is possible. When a retailer wants to exit, it has been acquired
by another retailer.

Wal-Mart managed to play the rules of the game and acted according to the
industry. With the slogan”We sell for less” and appropriate prices in accordance
with slogan made Wal-Mart the cost leader and industry leader. Wal-Mart
managed to do these with making differentiation and creating advantages over
the competitors. The competitive advantages of Wal-Mart are inventory
management, distribution channels and right locations, store layout, the
emphasis given to HRM and least price offered.

2) In most of the operations, Wal-Mart managed to create advantages over the

competitors. Wal-Mart used in-store terminals which are linked to the central
computer and through that to several vendors. This also implies that the IT
technology used by Wal-Mart is also different from the competitors. They
managed to get rid of some operations which can be named as “unnecessary”
with the usage of the technology. None of the vendors accounted for more than
%2.8 of total purchases. This reduces the dependency on the vendor and reduces
the bargaining power of suppliers. With the opening of distribution centers, Wal-
mart invested huge amounts of money. This is the situation at first glance.
However, for long-term, the distribution, transportation costs of Wal-Mart
decreased and quick replacement of lacking items was possible. In addition to
these, Wal-Mart carried less inventory compared to competitors in the stores and
organized the store layouts according to that. As a result of this, Wal-Mart has
more spaces to place products and display products, a more efficient layout.

Wal-Mart licensed some departments such as jewellery and set some quotas to
these licenses firms. They were responsible for the store-in-stores. When they
were not able to catch the quota, Wal-Mart intervened and cancelled the license.
This created savings for Wal-Mart in some operations. They collected fee, license
fee and labor cost and other operating costs were met by the licensed company.
It was mainly used in inventory management and Wal-Mart was the first retail
who has switched to computerized tracking system. In marketing operation, Wal-
Mart spent less money on advertising and promotion. While entering into a new
region, the purpose of promotion and advertising was limited to creating
awareness and forcing people to first trial. In HRM side, employees were
motivated and employee involvement was required. The slogan was “Our People
Make the Difference”

As a conclusion, Wal-Mart had four main competitive advantages and they are
cost leadership, customer orientation, logistics and IT.
3) In retailing business, there used to be some obstacles to the retailers and they
were differences in consumer behavior, local competitors’ advantage and
operation problems and suppliers. They couldn’t benefit from economies of
scale. But, the situation has changed with the use of IT, global sourcing and the
appearance of global consumer. Although these changes, Wal-Mart faced some
problems in some countries such as Japan and Germany and succeeded in UK,
Mexico and Canada.

Brazil

Wal-Mart entered Brazilian market with 2 formats; warehouse and supercenter in

1995.Wal-Mart formed a joint-venture with Lojas Americanas, the largest discount
store chain in the country. There was huge demand for especially warehouse
format store, since the way warehouse sells were perfect for huge sized Brazilian
families. They couldn’t forecast the demand and even some days, they had to
close the stores since there was nothing to sell. Moreover, Wal-Mart faced some
operational problems in Brazil in terms of relationships with suppliers. The
relationships between retailers and supplier were quite different in Brazil and
industry was characterized by oligopolies. In order to convince the retailers and
benefit from economies of scale, they used future growth potential. Therefore,
we can say that, Wal-Mart couldn’t carry its logistics and cost-leadership
competitive advantages.

Germany

Wal-Mart entered German market in 1997, with Wertkauf store chain with 21
stores. Then in 1998, Wal-Mart acquired additional 74 stores from another
retailing group. In Germany, Wal-Mart had some problems due to labor laws and
regulations. The reason for that hard struggle may be that, Wal-Mart hasn’t paid
enough attention to the macro environmental analysis before its entry. Due to
current labor laws in Germany, Wal-Mart was unable to practice the same
locational strategies and wage practices in US. Wal-Mart left :Germany in 2006.

Japan

Wal-Mart entered into Japanese market in 2002 with forming a strategic alliance
and purchased %34 shares of Seiyo, domestic supermarket chain. Wal-Mart’s
focus and strategy was low-price strategy but Wal-Mart did not consider that in
Japan, low-income households hold very small share and smaller market for low-
end products. In addition to that, in Wal-Mart stores, products were displayed in
bulk amounts. But Seiyu’s clients were middle aged and elderly customers who
were not impressed with low-cost display of bulk items. Moreover, Consumers
had not noticed price changes but they recognized lower prices in appealer
section, therefore people perceived Wal-Mart as low-priced and low-quality.
Mainly we can say that, Wal-Mart couldn’t carry the positive brand it formed to
Japan and couldn’t carry customer orientation advantage.
UK

Wal-Mart entered UK market in 1999 with acquiring ASDA, 3rd largest store chain
in UK. Compared to Germany, since both are European countries, UK success
came from the acquisition of larger store chain due to better settled service,
logistics, brand name and distribution channels.

Mexico

Wal-Mart entered into Mexico market in 1995, first expansion in overseas. Wal-
Mart formed joint-venture with Cifra, largest local retailer. Similar with Brasil, it
was easier for Wal-Mart to predict the consumption patterns of consumers and
there were similarities between the working class of US and Latin American
countries.

Canada

Wal-Mart entered into Canadian market in 1994 with acquiring Woolco with 122
stores and it became so successful that it acquired %25 of department store
market.

South Korea

Wal-Mart entered South Korea in late 1990s for its international expansion1;
however, Wal-Mart had critical shortfalls because of some problems in Korea.
Wal-Mart’s strategy fits well in US where consumers are willing to compromise
service and quality for low price. Wal-Mart’s low price offering is matched with
customers’ definition of value creating “value exchange” between Wal-Mart and
its customers2. Since the Korean customers have different preferences and
tastes, Wal-Mart had some critical problems in enabling this value exchange with
Korean customers.

Korean customers give importance to the freshness of food products and they
prefer buying in small amounts rather than in bulk amounts. So they make
frequent trips to the supermarkets and buy in small amounts. However, US
customers make fewer frequent trips to supermarkets and buy in bulk size
products for larger storage. Moreover, while Korean retail stores have live
seafood, local delicacies, and on-site packaging services that replicate the
features of traditional outdoor markets, and their merchandise mix is heavily
focused on food and beverages3; Wal-Mart gave importance to electronics and
clothing which is viewed by Koreans to be more Westernized than those of its
local competitors. Since, Korean consumers shop on a daily basis, they prefer the
location of the stores to be in metropolitans in walking distance; however, Wal-
1
Kim B. Renee, Wal-Mart Korea: Challenges of Entering a Foreign Market, Journal of Asia-
Pacific Business, Vol. 9(4) 2008, pg 344
2
Kim B. Renee, Wal-Mart Korea: Challenges of Entering a Foreign Market, Journal of Asia-
Pacific Business, Vol. 9(4) 2008, pg 346
3
Kim B. Renee, Wal-Mart Korea: Challenges of Entering a Foreign Market, Journal of Asia-
Pacific Business, Vol. 9(4) 2008, pg 347
Mart opened its retail stores outside of the center where people can go there by
transportation vehicles. They only have one store in metropolitan area, which
resulted with another shortfall for the Wal-Mart. Moreover, Wal-Mart entered the
Korean market without any local partner and implemented its original
merchandise mix from the US model which resulted again with shortfalls.

In US, consumers are price sensitive, so Wal-Mart’s EDLP (Everyday Low Price)
Strategy matched with customers’ definition of value, resulting with effective
value exchange between Wal-Mart. However, Korean customers respond more to
free products and promotional sales on some weeks and times. Moreover, they
give importance to quality of a product; expect more customer service, more
tailored retail environment and they are loyal to their brands, which in result with
less attraction to new brands. Moreover, in Korea, Wal-Mart lost its buyer power
since Korean vendors have a seller market power over retailers and they could
not obtain the control over logistics which resulted with additional costs.
Consequently, because of all these shortfalls, Wal-Mart had to leave the Korean
market in 2006.

REFERENCES

Wal-Mart Goes Abroad for Growth, Available at: http://www.businessweek.com

The entry of Wal-Mart in Brazil and the competitive responses of multinational

and domestic firms, Available at: http://www.emeraldinsight.com

Oligopoly and the structural paradox of retail TNCs: as assessment of Carrefour

and Wal-Marty in Japan, Available at: http: //joeg.oxfordjournals.org