5.1 Walmart Express: Fending Off Rivals to Grow the Business

From its inception in 1962, Target positioned itself as an up-scale, fashion-forward discounter. Target’s strategy was to attract affluent, educated, and discriminating customers. The pseudo-French pronunciation “Tar-zhay” emerged almost immediately. Already known for its cheap-chic cache, Target reinforced its upscale image in the early 2000s via exclusive deals with designers such as Michael Graves and Mossimo Giannulli.

Target’s success as the upscale discounter led to rapid growth in same-store sales, cementing Target’s position as “the hottest retailer in the world” and the darling of stock analysts during the mid-2000s. Using Target as a reference point, and focusing on year-to-year same-store sales growth, analysts began to openly criticize Wal-Mart’s strategy and performance. (Figures 4 and 5 compare Target’s and Wal-Mart’s comparable sales and stock prices, showing how closely these two financials track one another.) Retail experts argued that Wal-Mart’s stores had begun to look a “little tired” and that it had “nearly tapped out its middle-class base and must attract consumers who love Target and Costco but not Wal-Mart.”8

No longer able to avoid the comparisons to Target’s cache, clientele, and investor popularity, Wal-Mart leadership responded in 2006 with rather dramatic shifts in competitive focus. Wal-Mart tried to go upscale and appeal to a more affluent shopper. To do this, Wal-Mart undertook a multi-pronged approach. Specifically, Wal-Mart,

1. Brought in a new marketing team with more experience with affluent customers, fashion items, and promotional practices.

2. Sought to create a more pleasant shopping experience by renovating 1800 stores. Aisles were widened, shelving lowered, and thousands of stock-keeping units eliminated. The goal was to reduce clutter and mitigate the pedestrian feel of the classic Wal-Mart store.

3. Expanded its product line to include more electronics, upscale bed-and-bath items, and a range of fashion clothing including George, Metro 7, and No Boundaries lines.

4. Engaged focused groups of “selective shoppers” to define the upscale experience. With this insight in hand, Wal-Mart opened a test store in Plano, Texas “with an expanded selection of high-end electronics, more fine jewelry, hundreds of types of wine ranging up to $500 a bottle, and even a sushi bar.”9

However, did these efforts not only failed to entice a more affluent customer to frequent Wal-Mart they also alienated Wal-Mart’s core customer base. By the spring of 2011, after seven consecutive quarters of sales declines, Wal-Mart leadership launched a promotional campaign called, “It’s Back” to inform core customers that it had learned its lesson and was returning “heritage” merchandise back to the shelve.10 The gambit to drive growth by expanding Wal-Mart’s market had crashed and burned.

Unfortunately, Wal-Mart’s reputation as THE price leader had been damaged in its flirtation with well-healed shoppers. To increase margins, Wal-Mart had experimented with promotional pricing—advertising deals on certain items even as it quietly raised prices on other products. As Wal-Mart drifted away from its long-standing EDLP strategy, customers noticed! Wendy Liebman, a retail consultant, had surveyed 1,500 Wal-Mart shoppers and found that 86% no longer were confident that Wal-Mart always offered the lowest prices.11 Shoppers had discovered better deals at rivals like Aldi, Dollar General, Amazon.com, and even Target. With the aura of price leadership diminished, executives strongly encouraged store managers to be more vigilant in price checking neighboring retailers to ensure that Wal-Mart prices were lower. To further persuade shoppers that they can always count on Wal-Mart for the very best deals, Wal-Mart introduced a price-matching policy.12

In February 2006, Britain-based Tesco, the world’s third largest retailer behind America’s Wal-Mart and France’s Carrefour, announced it would soon enter the large and lucrative U.S. grocery market. Tesco’s reputation as an aggressive retailer guaranteed rivals would pay close attention to Tesco’s roll out. Speaking to Tesco’s tenacity, Retail guru Kevin Coupe warned, “There isn’t a place in the world where Tesco has gone one-on-one with Wal-Mart and Tesco hasn’t won.”13

By November 2007, Tesco began opening its innovative, small-format Fresh & Easy stores across Southern California, Nevada, and Arizona. Tesco’s expansion was expected to be quick. David McCarthy, head of equity research for Citigroup, estimated that by 2010, Tesco would have 500 stores with U.S. revenue of $5 billion.14 Bryan Roberts, research director at planetretail.net, was even more optimistic, forecasting that by 2020, Tesco could have 5,000 U.S. stores with sales of $60 billion.15

Tesco’s goal was to change the way Americans shop. To assure Tesco got the formula right, it hired a research firm to shadow 60 American families, filming their daily shopping, cooking, and dining behavior. The result: A 10,000 square foot store with low shelves, wide aisles, limited inventory (3,500 SKUs), fresh and natural products, and self-checkout. Not only was it convenient to shop at Fresh & Easy but prices were also up to 20-30% lower than rival grocers. Tim Mason, Fresh & Easy’s CEO, said, “We’ve created the 21st century market for the 21st century American16

Wal-Mart’s response was quick. Knowing that Tesco would bring a unique shopping experience to the U.S. market, Wal-Mart set up a “skunk works” team in San Francisco—home to Aldi’s highly successful specialty retailer Trader Joe’s and Whole Foods largest market.17 The mandate was to develop a new and innovative small-store format to go not only head-to-head with Fresh & Easy but also to succeed in the California market. The team was headed by David Wild, Senior Vice President of New Business Development, and was given autonomy, its own budget, and “license to fail.”

On October 4, 2008, Wal-Mart opened four Marketside neighborhood groceries in the Phoenix Metropolitan area. Marketside was Wal-Mart’s own small, upscale format offering fresh food and convenient shopping. The original plans called for additional test stores in Phoenix and San Diego as well as the introduction of a “Marketside” store brand of fresh, prepared food.

Although the store brand did launch in 2009, no additional stores ever opened. Marketside failed to hit key financial targets, friction developed between the “start up” and leadership back in Bentonville, and bad economic times led to improvements at Wal-Mart’s core business. Ultimately, the Marketside concept never caught on in Phoenix or in Bentonville and was shuttered in October 2011.

One additional fact may have led to Marketside’s demise: Despite the hype, deep market research, and intensive investment, Fresh & Easy got off to a stumbling start. Sales were so disappointing that by 2008, Tesco announced a delay in store openings. By 2009, Fresh & Easy had altered its ambitious strategy. The U.S. recession had battered the core geographic areas where Tesco had hoped to woo affluent consumers. To adjust, Fresh & Easy launched a budget store brand, Buxted, and introduced “Everything under $1” displays.18 By 2012, Fresh & Easy operated only 185 stores—far fewer than analysts had forecast. Fresh & Easy had not emerged as the existential threat Wal-Mart had feared.

If only temporarily, the “Great Recession” of 2007 changed retail rules, giving the deep discounters a chance to step onto the competitive stage as legitimate threats. Shoppers—constrained by a shrinking dollar—started to look for new options where they could buy the essentials. Often, their goal was to simply get by until the next paycheck. The dollar stores, led by Dollar General and Family Dollar, met this need by opening small stores with a limited, but deeply discounted product selection. Further, because the stores were built in local neighborhoods, they offered both convenience and an opportunity to save gas—a key advantage when gas prices bordered on $4.00 a gallon.19 In fact, analysis showed that the average round trip to a dollar store was just six mile versus 30 miles required to shop at Wal-Mart.20 The result: From 2000 to 2012, dollar store sales skyrocketed (3.8X at Dollar General; 3X at Family Dollar).

If increasing price pressure from the dollar stores were not enough, Aldi, Germany’s dominant deep discounter, seized on the economic downturn to entice shoppers into its U.S. outlets. Further, the deep discounter increased its U.S. investment, building stores at both a faster pace and in previously untouched markets like New York City. Such investments did not go unnoticed in Bentonville. After all, Aldi was an old Wal-Mart nemesis whose pricing prowess is so renowned that the Wall Street Journal described the chain as follows:

Indeed, market analysis has shown that Aldi’s prices are often 15-20% lower than Wal-Mart’s and 30-40% less than regional grocers.22 Such pricing strength comes from Aldi’s ability to pinch pennies—everywhere! Aldi’s 17,000 square foot stores are Spartan, but they are clean, well lit, and open. Shelving—except for refrigerated and frozen goods—is negligible, with most products displayed in the boxes they are shipped in. SKUs are kept to a minimum. The typical store may sell only 1,100 items. And shoppers provide much of the labor within the store. Specifically, although Aldi has cashiers, shoppers box their own groceries, often using empty boxes found in the store. Shoppers also rent their shopping carts and must return them to a rack located by the front door if they want to get their quarter back.

Aldi’s secret, however, is its reliance on store-brand merchandize. Ninety-five percent of the products Aldi sells are its own branded goods.23 By contrast, despite an increased presence of store brands on U.S. retailer shelves, store brands account for less than a quarter of sales. Thus, for most products, Aldi sells a single store-branded SKU. This reality enables Aldi to contract with high-quality, name-brand manufacturers to produce Aldi’s store brand in large volumes—and very low prices.

Much to their chagrin, Wal-Mart leadership knew they had no answer for the Aldi challenge. The “Great Recession” had brought more shoppers in Aldi’s doors and many discovered that they liked the Aldi experience. Indeed, if a customer is looking for one of the 1,000 SKUs Aldi sells and is willing to live with a high-quality, store-branded product, Aldi’s business model is very tough be beat.

Wal-Mart’s existing efforts to drive growth focused on the question, “Who else could Wal-Mart attract to its stores?” Such a question was typical when companies sought to grow or extend their brand. However, in Wal-Mart’s case, nearly 180 million shoppers (about half the U.S. population) already visited Wal-Mart every week. The nation’s wealthy were the only viable demographic / psychographic segment not already served by Wal-Mart. Of course, stock analysts had frequently reminded Wal-Mart leadership of this fact every time they compared Wal-Mart to Target. Thus, efforts to move Wal-Mart upstream and lure new, more affluent customers to the stores had already been put in play. The team needed to look elsewhere.

Because efforts to attract affluent shoppers to Wal-Mart had required entry into new product categories like high-end electronics and fashion clothing, the team naturally asked, “What other product categories might drive substantial new growth?” A wide range of items like specialty meats, organic foods, and autos were all evaluated. However, after assessing market size and growth potentials, evaluating competitive intensity, and studying Wal-Mart’s own capacities, the team had determined that no product category could meet the established growth and profitability targets.

Having performed far-reaching analysis without finding a growth driver, the team turned to the map to see if opportunities to build supercenters had been overlooked. Figure 6 shows the location of all Wal-Mart supercenters and the geographic reach of each store. Supercenters already dotted the nation. The only white space left tended to be places like the deserts of Nevada or the high plains of Montana. Regrettably, population densities and distances found in “white-space” areas made supercenters infeasible. The team quickly realized that there was nowhere to go—at least not in a way to drive big growth. Expansion via supercenters was destined to slow. Moreover, each new supercenter would cannibalize sales at existing stores at a higher rate, decrementing return on invested capital.

Then, the team experienced an epiphany. What would the map look like if they focused on population density instead of geography? Figure 7 depicts what the team saw when they “flipped” the map. When the team dug a little deeper, looking at retail footage per capita, it was clear that a variety of large markets were dramatically underserved. The team identified 15 cities that were “grocery deserts.” That is, these 15 urban settings provided consumers little access to wide selections of affordable, healthful foods. They also happened to be cities where Wal-Mart had minimal presence.

This realization was critical to making the business case for targeting cities like Boston, Chicago, Detroit, Los Angeles, Philadelphia, and Washington D.C. Across all 15 cities, Wal-Mart owned an average market share of only three percent. This compared to about an 11 percent share across the rest of the country. The delta between three and eleven percent meant that $80 billion of growth potential was open for development. The team had found the solution to its growth dilemma.

The team quickly realized, however, that good reasons existed for why Wal-Mart had only a three percent share of these urban markets. That is, it wasn’t as if Wal-Mart hadn’t tried to enter some of these markets previously. Three issues had kept Wal-Mart out of these markets.

1. Land Availability. Land in each of these urban centers was not just scarce but it was also very expensive. On average real estate costs across the 15 urban centers would be six times higher than Wal-Mart’s average (the range was 3X to 100X in Manhattan). Indeed, in cities like Chicago and New York, individual drivers were often willing to pay $15,000 a year for a downtown parking spot. Even if Wal-Mart could find 20 acres on which to build a supercenter, the building costs would completely undermine Wal-Mart’s EDLP advantage.

2. Political Opposition. The need for more affordable and healthier foods in these 15 urban settings was widely recognized. For example, in New York, city officials were gravely concerned with high obesity rates, but were stymied in their efforts to bring weights down. Consumers simply did not have access to affordable food. One city official remarked, “When a candy bar costs less than a banana, what are you going to do?” Therefore, some city officials greeted Wal-Mart with open arms saying, We can support 100 more groceries right here in Queens.”

   However, not all decision makers were equally welcoming. One New York City councilwoman said simply, “Over my dead body will Wal-Mart ever get into New York City.” Wal-Mart had encountered similar opposition throughout New England, Chicago, and California. As Figure 8 communicates, key decision makers in these 15 cities often perceived Wal-Mart as persona non grata. Given the number of permits required to build a supercenter, even minority opposition could halt investment in its tracks and keep Wal-Mart out.

3. Logistics. Even if Wal-Mart could find the land and overcome political opposition, its existing logistics systems are designed to move large quantities of goods with ruthless efficiency. Keeping the shelves of a supercenter stocked requires frequent deliveries of large quantities of product. A typical supercenter might receive up to seven fully loaded semi-trailers every day. Yet, a single tractor-trailer rig would snarl traffic in the typical urban center. Simply stated, the highly congested, inadequate infrastructures common to large urban centers prohibit Wal-Mart’s approach to fulfillment.

Taken together, real estate prices, political opposition, and poor logistics infrastructures promised to stymie any attempt by Wal-Mart to enter these 15 underserved, densely populated markets—at least via Wal-Mart’s existing formats.

To get the small-format equation right, Sam’s team undertook an extensive three-step scanning effort. The first step was to identify key decision makers throughout the corporation who would influence the development and execution of the small-format strategy. These decision makers were asked two questions: 1) If you were to build a small-format operation, what would you do? 2) What wouldn’t you do? These discussions helped make the need for a small-format growth engine visible and thereby swing key executives to support the idea.

The second step involved an in-depth competitive analysis. The team crisscrossed America looking at a variety of formats smaller than 45,000 square feet. The team complied data on grocery stores, convenience stores, specialty stores, and drug stores. Some of the standouts included Walgreens, CVS, Wawa, Whole Foods, Dollar General, Family Dollar, and Aldi. Big picture issues such as differentiation drivers and delivery approaches were evaluated. The team found the drive-through concept particularly interesting. Customers order on line and pick up their pre-picked carts in the parking lot. Likewise, detailed cost comparisons were made. The team dove down to a SKU-by-SKU analysis of price points on some competitors. Two key learning points emerged: 1) Aldi was best in class across a variety of dimensions and 2) nobody had truly cracked the code to profitable urban stores. Wal-Mart may have fallen behind in the small-store segment, but game was far from over.

The final step took Sam and his team on a world tour. After all, within Wal-Mart’s own ranks, many brands had been competing aggressively and profitably in large, urban markets for years. The team visited Mexico to examine the Bodega family of markets including Bodega Aurerra Express. Other stops included Costa Rica, England, Belgium, and France. The most unique format, which was not owned by Wal-Mart, was Krono Express, a French drive-though concept. Two visits led to eye-opening and format-defining learning opportunities.

1. Asda Supermarket. At Asda, a British retailer Wal-Mart acquired in 1999, Sam’s team learned that savings in capital and labor costs could help offset high urban real estate prices. Asda had established the Supermarket division to extend Asda’s reach into cities where its supercenters could not compete. The 25,000 square-foot stores were needed to grow in markets dominated by Tesco.

   Unfortunately, initial efforts had failed to provide profitable growth. Profits started to emerge when Asda brought in a manager who scrutinized every capital investment, requiring that every pence be justified. A second breakthrough occurred when one of the stores went through a staffing crisis caused by an ethics violation that required Asda to replace the entire staff. Rather than leave the store closed during the transition, the decision was made to open it with a skeleton crew of 15 instead of the normal 60. To everyone’s surprise, the skeleton staff got the job done. By reducing capital and labor costs, Asda Supermarket could deliver profitable growth.

2. Supermercados PALi de Costa Rica. At Pali, Sam and his team found a best-in-class player that optimized operations to minimize costs. PALi’s tagline was “Bienvenido a los PRECIOS MAS BAJOS” (Welcome to the LOWEST PRICES). Intrigued by PALi’s approach, the team invited the COO to spend six months in Bentonville teaching them how to take costs out of small-format store operations. Two vital takeaways emerged.

   First, leadership style is critical. Small formats need leaders who roll up their sleeves and get their hands dirty—right alongside their co-workers. Resource constraints mean everyone has to be willing to pitch in wherever needed to get the job done. Sam liked to describe these managers as follows; “They bring two sets of clothes to work because by the time customers start to come through the doors, they have grimied up and sweated through their first set of clothes.” Moving store managers from supercenters to an Express format was a recipe for failure.

   Second, simplicity and discipline are everything to a small format. Every store manager brings a stopwatch and a tape measure to work. They time cashiers and help them improve their efficiency. Cashiers are expected to do about 60 scans per minute—an incredibly fast pace. The tape measure is used to measure store displays and assure that everything is in the right place. Employees learn that low prices are essential, but a good customer experience is also expected.

Every learning point was incorporated into the operations for an Express format.

Ultimately, Sam’s team proposed a 12,000-15,000 square foot store that was true to the Wal-Mart brand and culture. Each store would carry a selection of about 12,000 SKUs that a customer might need on the spur of the moment, including grocery, ready-to-go pre-packaged meals, health care items, and even a few home goods (see Figure 10). Critically, the Express format fits the urban market where space is at a premium and customers demand convenience. It also offers the size, efficiency, and convenience needed to locate in rural areas that can’t support a supercenter but that are the incubation zone of the deep discounters like Aldi and the dollar stores.

Sam and his team had learned that ideation and execution are two very different beasts. To win in new-format design, the team would need to slay both. Unfortunately, despite their efforts to be inclusive and to build buy-in throughout the development process, merchandizing wasn’t fully on board as the Express concept was reaching test stage.

Why was this a big deal? Walmart was designed for the masses. For example, the typical Walmart supercenter sells around 150,000 SKUs. Having the right 150,000 SKUs is very different from having the right 10,000-15,000 SKUs. Having the right SKUs on the shelf at the right price was equally important, especially given the possibility that Aldi might locate one of its own small-format shops nearby.

The Aldi effect gave Sam’s team an idea. They built a mock grocery aisle just outside their war room. The aisle was stocked with almost 500 different non-perishable SKUs. Four different brands of each SKU sat side by side: Aldi, Save-A-Lot, Walmart’s Great Value, and Walmart’s national brand equivalent. Little cards with price points, percent differences, and a bright sticker were posted next to each product. Aldi’s color was yellow, Save-A-Lot’s pink, and Walmart’s blue.

With the display—and the facts—in place, Sam’s team invited Walmart’s executive team in for a quick tour. When confronted with a “sea of yellow,” Lee Scott, former CEO and member of the board, said, “This is heartbreaking.” Within days, the merchant team was touring the mock store. The goal: Figure out how to work with the supply base to restore Walmart’s price position and enable Express to go head to head with Aldi.

To support Express pilot stores, Sam’s team set up a fulfillment zone within a Walmart cross-dock DC. The 1,000,000 ft2 host DC (about 18 football fields under one roof) dwarfed the 10 ft x 10 ft Express replenishment operation. In this setting, where the desire to do things on a grand scale was ever present, Sam and his team had to constantly remind themselves that the amount of dog food or the number of apples that would sell in a day at a supercenter would stock an Express store for two months.

Within the DC, product flowing to a supercenter moved from full inbound trailers to waiting outbound trailers on 10 miles of conveyor belts at about six miles an hour. Star scanners read each carton’s bar code, routing it automatically to the right store. Twenty years of optimization had created a synchronized—and very efficient—operation. This efficiency was critical to Walmart’s frequent deliveries and EDLP strategy. By contrast, product being sent to an Express store was hand picked and moved by pallet jack to the staging area where delivery pallets were hand stacked. These store-bound pallets were so undersized that it was sometimes difficult to securely shrink wrap them.

Of course, Walmart’s remarkable replenishment efficiencies did not stop at the dock door. Each 53-foot trailer’s 22 pallet positions were loaded to optimize for cube and weight. Up to seven trailers might deliver to a supercenter each day, allowing 5,000 cases of merchandise to be shelved overnight. Such scale was completely missing at the Express outlets. Two pallets looked a little silly sitting in an empty 53-foot trailer. But, Walmart’s fleet of 6,500 tractors, 55,000 trailers, and more than 7,000 drivers was supersized for massive deliveries—not for keeping the shelves of a mom-and-pop-sized store full.25 Indeed, a 53-foot trailer couldn’t even navigate the streets in the urban centers the Express format was designed to serve.

The bottom line: Replenishment costs per unit were much higher for Express than for any of Walmart’s other physical formats. This reality could be tolerated during the market-proving stage of the Express concept, but it wasn’t scalable. If Bill Simon wanted to build hundreds of Express stores per year, Sam and his team needed to come up with an efficient and scalable replenishment model.