Walmart Case Study

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Walmart’s international expansion strategy and vision are incredible. In order to sustain the growth, Glass has to do more work to expand the sales revenue and cutting down the cost. Supercenters look like a great solution to help on both sales revenue and cutting down the cost by investing a better information technology, but the growth may not be sustainable. In order to expand a high sales revenue growth rate, Walmart decided to expand outside of the U.S. However, management was uncertain whether Walmart’s formats would be successful outside the U.S., thus, they started a joint venture with Mexico’s largest retailer, Cifra S.A. to test several retail formats in Mexico. It’s a perfect strategy to start with the local retailer and learn the local culture. After one year’s test water and learning, Walmart decided to open its first international market by late 1994 and plan more than 100 stores by end of 1995.

Food Sector Expansion

We think Walmart’s diversification into the food industry would be an effective strategy because of following reasons:

- Food industry would provide new growth opportunity

- Walmart’s existing infrastructure and store lineup was compatible with food industry retailing.

- Food industry would create synergy and result in additional lift in Walmart’s financial performance (sales growth and gross margin)

New growth opportunity for discounted retail giant

As described in the beginning of the case, the main concern stemmed from Walmart’s slowing growth in comparable store sales year-over-year. One reason behind slowing growth was over saturation in both discounted retail space and warehouse clubs. For the past five years, Walmart had been competing with same major competitors in Kmart, Target, Costco and other likes. Walmart demonstrated biggest YOY overall sales increase. However, the growth rate among all major players had been slowing down in past five years (Figures 1,2). Walmart even chose to open warehouse clubs near existing ones to eliminate potential competition, despite possible cannibalization.

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Given above observation, it’s fair to conclude that the saturation in existing industry sectors between discounted retail stores and warehouse clubs was curbing everyone’s growth rate; without expansion into new product sector, it would be difficult for Walmart to regain double digit growth momentum.

Walmart’s advantage in food industry retail

Comparing to discount retailing, competition among food industry is more fragmented, with likes in supermarkets, independent stores, and discount retailers. Walmart possessed unique advantage in logistics, store coverage, and buying power over major vendors while moving into a more fragmented sector, especially when major competitor in Kmart had no plan in expanding its food distribution network.

In addition, Walmart’s earlier investment in technology such as real-time sales and inventory tracking using satellite and EDI could help them better manage perishable goods and potentially reduce inventory cost and waste.

Last but not least, food sector had already become a major component in Walmart’s supercenters. Walmart had been consistently increasing its supercenter store number and geographic coverage, which could enable them ease into food sector.

Synergy and positive financial impact

Conceptually, food sector would stimulate sales because of additional traffic attracted to Walmart’s supercenters. Financial metric wise, it could improve Walmart’s revenue growth and gross margin.

- Revenue (sales) growth - Food industry retail has demonstrated consistent sales growth in past five years, as suggested by 5-year average sales growth in major supermarkets such as Kroger and Safeway. The five-year average growth ranged between 5% to 20%, which exceeded Walmart’s single digit growth rate. With significant expansion into food sector, in addition to established advantage in technology and logistics , Walmart is looking at potentially more rapid growth in food sales alone, which could lift its overall YOY sales growth.

- Higher gross margin in food retailing - As suggested in Figure 3, in past five years Walmart’s gross margin had been declining consistently into lower ~20% range; whereas supermarkets with food retailing as main staple had average gross margin in ~25% range. If Walmart could further leverage its buying power to reduce COGS, its gross margin in food sector could be even higher, which would improve its overall gross margin.

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