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Some would equate the company behind this name with Ford, General Motors, General Electric, IBM - the great names of American commerce. For others, the name they link with Wal-Mart is Darth Vader…

Regardless of which characterization is accurate, Wal-Mart represents the single greatest story in American business today. The impact that it has had on other businesses is undeniable. For the supermarket industry alone, Wal-Mart represents the single greatest challenge, the single greatest influence, the single greatest threat. And that's putting it mildly.

To help us understand the great threat - and the great opportunity - that Wal-Mart presents, we decided to turn to Art Turock.

Through his speeches and strategic innovation consultations, Turock helps supermarket retailers and manufacturers to achieve sustainable sales growth - and he has now turned his attention to Wal-Mart. He is the author of a new study, Achieving Sales Growth When Wal-Mart Makes the Rules, which details the intricacies of Wal-Mart's unprecedented growth strategy as well as dozens of examples of exceptional retailers who are effectively Wal-Mart-proofing their stores.

MNB: It would seem to be a singular oddity of the American supermarket industry that even as the customer base became more diverse, mainstream supermarkets became more homogenized. Why do you think the marketplace has been unable or unwilling to embrace these differences?

Art Turock: We are witnessing a classic example of strategic convergence where the majority of supermarkets operate with the same strategic assumptions that influence their judgments and moves.

Two assumptions are most crippling to profitability. First, the assumption that shoppers overwhelmingly want low price, so strategies aim to maximize operational efficiency. Second, the targeting of the same customer - the middle to lower income family that lives within a 5-10 minute drive from the store and who shops for national brands at low price. Put the two together and what you get is what most supermarket strategies deliver as a differentiator: location convenience and low price.

So all it takes is a more efficient supercenter, club store, or limited assortment player to move in and these points of differentiation vanish.

The fundamental problem is the preponderance of copycat strategies and lack of innovative thinking and entrepreneurial risk taking. Every supermarket executive has heard the phrase, “Differentiate or die,” yet judging by the overwhelming move towards strategic convergence, many supermarkets are not opting to differentiate.

MNB: Some would argue – and we would be among them – that the mainstream supermarket business has missed an enormous opportunity for growth by taking such a singular approach to the business. But there is another argument that says that a homogeneous approach to marketing is what Americans want – and that Wal-Mart’s success is best evidence of that. How would you respond to these arguments?

Turock: There are two schools of strategic logic operating here and both can produce highly profitable businesses. One school says that you target customer segments and deliver highly customized products and services. Witness the success of West Point Market, which serves fine arts enthusiasts and gourmet shoppers with specialty products, or Whole Foods, which focuses on a health conscious shoppers.

The second school says to target a core value desired by the mainstream shopper, and deliver this value noticeably better than any rival.

Fundamentally, Wal-Mart solved a classic retailing compromise: “ We can give you highly customized products and services OR we can give you low prices. Pick one.” Wal-Mart refuses to live in an either-or world. For their massive target customer, they deliver the right product at the lowest price noticeably better than many supermarkets.

Wal-Mart encroached on the supermarket industry because of four leverageable conditions: 1) inelastic pricing, 2) fragmented, 3) high volume, and 4) inefficient distribution. In understanding what drives their growth strategy, it’s apparent Wal-Mart is not a retailer. They’re in the distribution business. Their competitive advantage is derived from superior logistical capabilities.

MNB This brings us back to the increasing importance of efficiency in the supermarket industry – which if I’m reading your report correctly, you believe has had the effect of making the customer irrelevant. Is it your contention that despite all the technology available to the industry, and all the investment made in efficiency initiatives, the industry has lost touch with the customer?

Turock: Certainly the industry has taken on a number of technology-based initiatives promising both cost savings and sales growth. But the results have been one-sided. Mergers produce cookie cutter stores, as the uniqueness of local stores erodes in favor of becoming more like the acquiring chains prototype format. Private label boosts margins over that available with national brands, but usually don’t deliver higher quality like Trader Joe’s or Costco’s Kirkland brand. Loyalty cards get shoppers to switch purchasing decisions based on a special discount, rather than establishing a true loyalty to the total retailer brand. From the start of concentrated ECR activities in 1991 through 1997, with an adjustment for inflation, income figures showed a glaring 17.2 percent decline in sales per square foot. Because of the predominant efficiency mindset, these technology-based initiatives produce lower costs but never approach the anticipated sales growth.

Meanwhile, this efficiency obsession left the market wide open for encroachment by “alternative formats” that introduced new value for consumers. C-stores provided longer hours and shorter checkout lines for quick trip shoppers. Supercenters provided one-stop shopping for bulk shopping trips. Category killers introduce highly customized product assortments and services, and offer superior product knowledge. Meal solutions favor the time conscious shopper who lacks time to prepare ingredients from scratch. Alternative formats were the first to solve these customer needs, while supermarkets worked on efficiencies and lost touch.

MNB: Still, Wal-Mart is clearly the most efficient, homogeneous retailer in the country. Is its success testament to the fact that and the end of the day, the perception of low price is always the most important thing?

Turock: One hundred million shoppers a week visit Wal-Mart stores, many attracted by the brand promise, “Always low prices—Always!” But don’t forget that a powerful secondary benefit of the Supercenter is the convenience of one-stop shop, as evidenced by Wal-Mart’s conversion of two-thirds of their general merchandise stores into supercenters.

The perception of low price is very important to Wal-Mart’s targeted customer. Because of the clear brand message, Wal-Mart is willing to lose sales from shoppers who place higher value on quality, customer service, distinctive shopping experience, etc.

The challenge for supermarket chains that need to drive high volumes is that they are likely to overlap Wal-Mart’s target customer, and they can’t be the low price leader without being the low cost operator. Wal-Mart-proofing means coming up with other points of differentiation for their distinctive target customers. Among segments who are not first and foremost shopping price are working women, two paycheck families, well-to-do elderly, get-in and-get-out-fast males, and health-conscious individuals. Most of these segments are expected to continue increasing in numbers.

MNB: When you write about Wal-Mart’s talent for mass customization, is it just customization of price and supply, as opposed to selection?

Turock: Mass customization is defined (by Dr. Joe Pine) as “the process of bringing down the costs of customization so each customer is provided with exactly what s/he wants at a price s/he is willing to pay.”

Wal-Mart’s mass customization is underestimated by most rivals. For instance, my wife, Haley, recently brought a Bissell rug cleaner at Fred Meyer. She later found out Wal-Mart also sold a Bissell for $50 less. After being upset at the apparent Fred Meyer rip-off, she noticed that the made for-Wal-Mart Bissell actually lacked a heating element for the water. For Haley, not having to take the time to heat the water is well worth it especially when she needs to promptly clean up the messes of our two dogs from white carpeting. But Wal-Mart’s targeted customers tolerate the lack of heating element for the extra $50.

While Wal-Mart is well known for its centralized headquarters buying offices, they also customize to individual stores (Store of the Community program) by using “trait modulars.” A single category can have 150 trait modules (or schematics), which correlate to demographics, geography (e.g., lake-area stores, resort-area stores), and community dynamics (e.g. college towns, retirement areas) . Rather than a buyer in Bentonville, the store manager and department manager have the option of validating the trait for their particular store.

MNB: The mainstream supermarket industry has kept making poor strategic choices...and then abandoning them when they didn’t prove to be a magic bullet. Why do you think the industry has been so myopic?

Turock: I actually think the industry has made too few strategic choices. Actually, they created a set of commonly accepted “beat Wal-Mart tactical” choices, such as:

  • Increasing checkout speed;

  • Creating dollar aisles;

  • Initiating a customer friendliness campaign;

  • Staying price competitive in specific high-traffic categories;

  • Increasing private label;

  • Improving the quality of perishables.

  • Sound familiar? But is it working? For the past five years, supermarket sales have reaped average growth of 3 percent, while Wal-Marts sales of groceries and drug related products increased 17 percent. Utilized as isolated moves without a coherent strategic plan, these tactics don’t deliver sustainable growth.

    Few supermarkets execute bold strategies that target minimally contested customer segments (like Basha’s creating dedicated formats for gourmet shoppers, Native Americans, and Hispanic), or deliver unique value (like Ukrop’s extensive meal solutions and integrating a whole health solution in its produce, pharmacy, and natural foods departments).

    To be an innovation leader (e.g., Ukrop’s was about nine years ahead of most supermarkets in meal solutions) requires a willingness to bite the bullet longer than competitors. If the innovation is substantial, it probably loses money at first. In a tight margin industry, few supermarket executives will take that chance.

    MNB: What core competencies do you think would serve the industry best at this time? And is it too late to avoid the Wal-Mart death spiral?

    Turock: The industry has developed many core competencies that serve operational efficiency. But to stimulate organic sales growth, the following competencies are needed: strategic planning, new product introduction, store branding, and data mining. Please notice who in the supply chain already possesses these core competencies? The supplier community. It’s time to rethink the supplier-retailer relationship to encourage strategic collaborations aimed at sales growth.

    Retail Forward predicts the demise of two supermarkets for every new Supercenter, meaning the loss of 2000 supermarkets over the next 4-5 years. After that period, the death toll could actually accelerate as the Neighborhood Markets become more prevalent and Wal-Mart’s presence becomes more saturated. Nevertheless, survival is likely for any supermarket that’s willing to make the tough strategic choices that introduce unique value innovations in their markets.

    MNB: There seems to be a feeling that if Wal-Mart’s role is to be diminished, it will be because it gets too big or too arrogant...not because anyone has stepped up to compete with it effectively.

    Turock: I agree. If Wal-Mart is going to be slowed down, it will not be because of brilliant competitor strategies. Wal-Mart has competitor-proofed its business from conventional supermarkets that play the low price game.

    The Bentonville megachain has unmatchable advantages in being low cost operator: non-union wages, food categories can be loss leaders in Supercenters, no trade promotion dollars or slotting fees, brand power that lowers advertising costs to .3 percent of sales, and a culture of cost containment.

    In addition to locking out competitors, Wal-Mart locks in customers with its low price brand image. In the mind of deal hungry shoppers is the threat—“If you didn’t buy it at Wal-Mart, you didn’t get the lowest price,” which creates a big cost to switching to another retailer.

    Wal-Mart is more likely to shoot itself in the foot in managing the ripple effects of enormous growth than to be derailed by a supermarket competitor or two.

    MNB: The four issues that some believe are the biggest threat to Wal-Mart are a) unions, b) international challenges, c) government intervention, and d) litigation from a wide variety of sources. Do you agree?

    Turock: Two other factors are more likely to thwart Wal-Mart’s unrestrained growth. First, brand erosion brought by negative media coverage. As Goliath bulks up both in size and global impact, the sling shot brigade grows in numbers.

    According to Progressive Grocer (October 13, 2003), Wal-Mart’s own “reputation research” shows that many Americans view it as a place of dead end jobs, and not a very good corporate citizen.

    The second factor is the challenge of recruiting and integrating thousands of new employees and managers into the Wal-Mart culture, to meet the labor demands of rapid expansion. About 44 percent of its 1.4 million employees will leave in 2003, meaning Wal-Mart will need to hire 616,000 workers just to stay even. In addition, from 2004 to 2008, the company wants to add 800,000 new positions, including 47,000 management slots. No wonder Tom Coughlin, head of retail operations, admits to losing sleep over this issue.

    MNB: Finally, do you think that Wal-Mart as a phenomenon is a good thing for American business and culture? Or long-term, does it foster a lowest-common-denominator approach to business and culture that diminishes this country?

    Turock: Judging Wal-Mart’s impact on America is not a black and white matter. Wal-Mart has a noble mission of making life’s necessities available to people of varying financial means. Toward this end, they have lowered prices to make national brand products affordable for millions of Americans. New England Consulting estimates Wal-Mart saved Americans $20 billion in 2003 alone. Factor in rival retailers price cuts to compete and the savings is $100 billion.

    Economic impact is also favorable. Four percent of the growth in the U.S. economy's productivity from 1995 to 1999 was due to Wal-Mart alone, researchers at the McKinsey Global Institute estimated last year. And economists credit Wal-Mart with curbing inflation.

    Wal-Mart’s growth comes with a price. One is the demise of small businesses. But isn’t this an outcome that inevitably comes with a competitive free enterprise system? Decades back, the supermarket was an alternative format that brought greater efficiency and assortment of national brands at lower prices (same winning formula as Wal-Mart), with the result being the demise of mom and pop groceries.

    However, if Wal-Mart’s competitive advantage comes from illegal or unethical means, then the company is a negative force in American business and culture. The rule of law and business ethics must take precedence over any savings benefits to consumers. If Wal-Mart is found guilty of significant charges of employment violations, like sex discrimination, employing illegal immigrants, failing to pay workers for overtime, then they’re not playing by the rules, and thereby tarnishing ethical business practices. And the jury is still out on these issues.
    KC's View:
    Art Turock's Achieving Sales Growth When Wal-Mart Makes the Rules is a terrific piece of scholarship that we think every retailer should read.

    To order an Executive Summary of the Report and information to purchase copies, call 800-473-8997 or e-mail him at .