3.2 Too Big To Trust? Walmart's Quest For Tough But Fair

Kmart came out of the blocks quickly and sprinted to a huge lead opening 17 stores in its first year. Within 4 years (1966), Kmart operated 162 stores. By the 1970s, the typical American consumer viewed Kmart's classic red-and-turquoise sign as the ubiquitous symbol of modern discount retail. Growth continued at a rapid pace as Blue-light Specials kept customers coming through the doors. In 1976 alone, Kmart opened a record 271 new stores. The 2000th store opened in 1981.2 The phrase "attention Kmart shoppers" soon entered into pop culture, appearing in such late 1980s Hollywood hits as Rain Man and Beetlejuice. During its run to prominence in the 1970s and 1980s, Kmart was the Darth Vader of retail, menacing rivals and strangling suppliers. Yet, Kmart's Blue-Light-Special marketing pitch, like the proverbial hare, ran out of energy. Kmart lost almost $1 BILLION in 1993 and never returned to sustained profitability. Target and Wal-Mart had run the rabbit down.

Although slower off the mark than Kmart, Target also benefitted from its parent's rich heritage. More important than money, Target was born with Dayton Hudson's DNA—it was the department store discounter. Target's focus, from day one, was on the style-conscious, upscale middle-class consumer who wanted to save money without having to endure the discount store hassle. Spacious stores, a quiet ambiance, and distinctive products sold at a low margin, but with crisp merchandizing attracted a younger, more affluent clientele than its discount rivals. Target reinforced this image of cool by entering into and promoting exclusive deals with designers such as Armani and Mossimo Giannuli. Where else can the upscale bargain hunter buy a Michael Graves toilet bowl brush? Target's investment in the customer experience hit the bull's eye.8 Its guests, as Target calls its customers, develop an emotional attachment for the company. They often refer to Target using the pseudo-French pronunciation "Tar-zhay" and many of them would never consider entering the cavernous boxes of a discount competitor. By delivering steady growth and profitability, such loyalty promises to keep Target in the race for years to come.

Lacking Kmart's ready financing and Target's cachet, Walmart looked like a non-starter as the retail race began. But, over time, Walmart developed a core identity all its own—everyday low prices. To keep its EDLP promise, Walmart invested in process technology and built strong relationships with suppliers. For example, Walmart made cross docking famous (see Figure). Specifically, Walmart built one-million-square-foot distribution centers (approximately 18 football fields under one roof) that use 5-12 miles of conveyor belts to move hundreds of thousands of cases through the facility every day.3 With cross docks, Walmart can buy product in full truck loads from different suppliers, mix and match it in the DC, and then deliver to its retail stores—again using full truck loads. Innovations like cross docking helped Walmart develop the efficiencies needed to keep its shelves full of low-priced products. Slowly, but surely sales grew. As Walmart grew, it bought product in larger lot sizes, enabling suppliers to take advantage of scale economies, pushing prices down even further. Powered by its EDLP strategy, Walmart took 16 years to catch Target and almost 30 years to overtake Kmart. Fortunately, Sam Walton had always believed that Walmart was running a marathon, not just a sprint.

Unfortunately, as Walmart grew, so did the criticism. As the new millennium began, Walmart reached an unprecedented $250 billion in annual sales, becoming the largest company in the world. Retail rivals, labor unions, and anti-Walmart activists argued that Walmart was too big. They claimed that Walmart exploited its enormous size and "excessive" buying power. Instead of being the hero of the everyday consumer, the media seemed to persistently portray Walmart as the foe of small business, an oppressive employer, and an abusive customer.

The persistent barrage of attacks on Walmart's business practices dismayed Gary. He reveled in working for Walmart—a company that had transformed retailing, making customers' lives better. Gary thought it was amazing that each week, more than 175 million customers walked into a Walmart store somewhere around the world, walking out with an average of almost $50 worth of goods.4

At a deeper level, Gary found the story of Walmart's rise from the tiny "Walton's Five and Dime" into the world's largest retailer inspiring. Challenging circumstances, strong will, and a quest for growth had forced Sam Walton to think differently as he built the Wal-Mart business model (read Sam Walton's Ten Rules for Building a Business). Walton had forged new relationships with his suppliers, bypassing the wholesalers that were prevalent in his day. He then started his own trucking unit to make sure that his stores, which were often located in the "middle of nowhere," could keep stock on their shelves—where customers expected to find it. And Walton passed the savings on to his customers. Gary mused, "These are achievements to celebrate—not condemn."

To prepare for the interview, Gary started to jot down some thoughts. He asked himself two questions:

1. "What are my key talking points?"

2. "Why am I proud of the Walmart way of working with suppliers?"

The second question seemed to provide a proactive—and very natural approach—to meeting the criticism head on. As Gary thought, "This is easy," he began to build a bullet-point list.

1. We Help Our Suppliers Grow. Walmart and its suppliers had grown the business together. As Walmart grows, its suppliers grow with it. More importantly, Walmart invests time and money helping suppliers get up to speed on technology systems and logistics practices.

Gary reached into his desk. Searching through a couple of file folders, Gary found what he was looking for: A file with letters from suppliers. A quote leapt off the page.

Gary dug a little deeper, spying the second letter he was looking for.

Gary smiled, thinking, "Of course we are. It's a tough market out there. If we don't get better, we die. Besides, we're personal trainers—it's our job to help our suppliers get better"

Gary decided it was time to move on.

2. We Share Information to Empower Suppliers. Walmart built Retail Link to share key decision-making information with suppliers. Via Retail Link a supplier could tell exactly what is selling anywhere in Walmart's network—on a real-time, store-by-store basis. Nobody else trusted suppliers with this kind of information. More importantly, Walmart empowers suppliers to use the data to make replenishment plans and suggest merchandising ideas. In a very real way, Walmart gave suppliers the information they needed to control their own destiny.

3. We Offer Win-Win Pricing. When suppliers lower their price to us, they know that we are going to pass the savings on to customers. We don't squeeze suppliers to fatten our margins. We roll back prices to keep customers coming through the door. If customers have confidence that they are really getting the lowest price every day, they will keep coming back. We really can't afford to give them a reason to check prices anywhere else.

Gary was confident that suppliers understood the dynamics. He remembered a recent negotiation he had sat in on. Terri, the Walmart buyer, had asked a simple question, "What price could you give me if I gave you an extra facing?" The account owner for the supplier ran the numbers quickly and came back with a price that was almost 10% lower. Walmart's reputation—and its volume—made a difference!

4. We Believe In An Open Door Policy. Walmart buyers don't always get things right. No team of 400 buyers will always make "fair" decisions. It's easy for a buyer who wields a pen that can sign a multi-hundred-million dollar contract to get a little carried away. But, if a buyer abuses that market power, we invite suppliers to come and talk to us. Our doors are always open and we always listen. Our suppliers know this! We've got the data. Surveys show that suppliers are confident that when a buyer makes a heavy-handed decision, buyers can take their concern to a DMM (divisional merchandise manager) or even a GMM (general merchandise manager) to seek resolution. The bottom line: Suppliers can count on us to re-evaluate decisions to see if a better approach can be found to build a win-win relationship.

As Gary quickly reviewed his bullet points, he mumbled, "I've been in this business almost 25 years. I don't know other major retailer that invests this much or goes this far to assure positive, proactive relationships with suppliers." After a brief pause, Gary acknowledged vocally, "Yes, we're tough. You have to be if you want to survive in this business. But, we are fair. What do we have to do in today's world of ‘gotcha' journalism and reality TV to make "tough, but fair" work?"