How to Beat Wal-Mart
IT'S THE BIGGEST COMPANY IN THE WORLD, IT'S RUTHLESS, AND IT DEVOURS RIVALS AS IT KILLS CATEGORIES. BUT IT IS NOT INVINCIBLE. HERE ARE FOUR STRATEGIES FOR TAMING THE BEAST OF BENTONVILLE.
(Business 2.0) – They came one pale morning last fall to the ancient and holy grounds of Teotihuacán, outside Mexico City. There were hundreds of them--men, women, children--many wearing the feathered headdresses of their ancient Aztec forebears. They gathered at the steps of the 2,000-year-old Pyramid of the Sun, beating drums and brandishing amulets. They prayed to the great gods and to the spirits of their warrior ancestors for deliverance from a dread intruder.
But the gods did not hear. Wal-Mart came anyway.
In November, just weeks after the demonstration at the pyramid, Wal-Mart, the world's biggest company, opened a massive superstore on 7.5 acres just over a mile from Teotihuacán. The site had been in the heart of the Aztec empire until the coming of the conquistadores, and many in Mexico equated one with the other: Wal-Mart endured years of protests and not-infrequent comparisons to Cortés. But it prevailed, and in so doing added further to its aura of being a company that no one, in this world or the next, can stop.
Wal-Mart's ascent from a single store in Rogers, Ark., in 1962 to a global powerhouse with 5,310 locations has already placed it in the exclusive club of companies whose raw power makes them the most feared corporate animals of their time. Wal-Mart has killed or wounded competitor after competitor: Bradlees, Circuit City, Toys R Us, and grocery chain Winn-Dixie, not to mention thousands of small Main Street merchants. The company's $285 billion in 2004 revenue tops the combined sales of its five next-largest competitors. Some analysts think that within a decade Wal-Mart could be a half-trillion-dollar company, dominant in thousands of product categories in dozens of countries. Even today, if Wal-Mart were a country, it would have the world's 30th-largest economy, right behind Saudi Arabia's.
The Wal-Mart modus operandi is renowned: Cut prices to the bone, squeeze suppliers to the point of asphyxiation for cost concessions, and masterfully deploy technology to control supply chains, monitor inventory, and track buying trends. Critics--and even a few of the company's own partners--rail about some of its tactics. Wal-Mart recently shelled out $11 million to settle federal charges that it used illegal workers, and paid $135,000 to the Department of Labor for allegedly violating child labor laws. The company also faces a massive class-action lawsuit brought by women who say they were discriminated against while working there. The complaints have been loud enough lately that CEO Lee Scott has launched a multimillion-dollar ad campaign defending the company as, among other things, a job-creation machine that helps local economies. Still, there's little doubt that Wal-Mart is among history's premier practitioners of Darwinian capitalism, red of tooth and claw. It is at the top of the food chain, and it is always hungry.
But it can be had.
As with all great powers, Wal-Mart has its imperfections, frailties that wily competitors have learned to exploit. The survivors have found ways to change the game on Wal-Mart to suit their own strengths, to zig when the giant zags, and, in some cases, to come straight at Wal-Mart and simply outdo it. Costco, for instance, has for years been clobbering Wal-Mart's Sam's Club division in the warehouse-club business. Dollar Tree has peeled off many Wal-Mart customers by offering even lower prices. Others, like grocer Save-a-Lot and sporting goods retailer Dick's, likewise have managed to thrive. Their experiences provide rules of engagement that can be helpful to almost any business, not just those currently in Wal-Mart's sights. Because the truth is, if your company isn't competing in some fashion with the Beast of Bentonville today, there's a pretty good chance that it will be soon.
Hit 'em where they ain't.
COSTCO is whipping Wal-Mart by targeting different customers: people who have cash and want cachet on the cheap.
VITAL SIGN: Costco sales per store, 2004: $115 million. Sam's Club: $67 million.
As chairman of Seattle-based Costco Warehouses, the nation's fifth-largest retailer, Jeff Brotman has battled Wal-Mart for two decades. He knows as well as anyone what havoc his archrival can wreak. "When they come to town," he says, "it usually means death and destruction."
But Costco has vexed Wal-Mart for years. In the world of warehouse clubs--150,000-square-foot shells filled with everything from Bianchi bicycles to precooked pork chops--Costco has consistently pounded Sam's Club, named for fabled Wal-Mart founder Sam Walton. Despite having 218 fewer U.S. locations, Costco generated $47 billion in sales and $882.4 million in profit during 2004, while Sam's Club pulled in $37 billion in sales and estimated profit of $200 million.
What's this giant slayer's secret? In 1982, Brotman, a former venture capitalist, co-founded Costco to be the U.S. version of European hypermarts like Carrefour, which sells fresh produce alongside office supplies. Brotman envisioned a chain that would offer high-end products such as Dom Perignon champagne and J.A. Henckels International cutlery at rock-bottom prices. The target customer? "We're focused solely on the small-business owner," Brotman says.
But he's not really interested in selling that customer office supplies. The Costco founders realized that small-business owners are often among the wealthiest people in a community. Their struggles in building their companies often imbue them with a certain, shall we say, frugality. "They want high-quality merchandise that reflects their status--but they'd prefer it cheap," Brotman says.
Costco delivers for them. "The Costco proposition attracts small-business owners like a magnet drawing iron out of sawdust," says Darrell Rigby, head of Bain & Co.'s global retail practice. While the typical Costco warehouse carries just 4,000 different products, about 50 percent fewer than a typical Sam's Club, each item, from Godiva chocolate to Waterford crystal, is chosen to "wow" shoppers with a brand name at a bargain-bin price. For instance, a Cartier watch that costs $2,000 at a department store costs just $1,300 at Costco. That kind of deal explains why the average Costco customer has a household income of $74,000; Sam's Club doesn't provide that metric, but analysts say the figure is nowhere close to Costco's level. (The typical U.S. household brings in $43,500.) "Anyone can sell Cheerios on pallets," says Jim Sinegal, Costco's CEO. "Once you get past commodity, it's all about the merchandise."
Costco's supply-chain systems don't get the ink that Wal-Mart's do, but they're still considered among the best in retail. Equally important, Costco has some of retail's most loyal and productive employees and uses them to take advantage of what's widely seen as another of Wal-Mart's weaknesses: the sense that it is not a very good place to work. Costco pays more than anyone else in its industry. A cashier with four years of experience makes more than $41,000 a year, while a similar Sam's Club employee generally makes 25 percent less.
This generosity pays off. While Wal-Mart's annual turnover hovers around 44 percent--the company spends an estimated $1.5 billion each year ensuring that its stores are staffed--a paltry 6 percent of Costco employees leave after the first year, the industry low. And Costco's motivated and well-treated workers also sell more. Costco employees each accounted for $16,550 in operating income in 2004, compared with $12,800 at Sam's Clubs.
Playing catch-up doesn't sit well with Wal-Mart brass, and they've run six different CEOs through Sam's Club since 1990, trying to find a way to clip Costco's wings. The latest, Kevin Turner, says that in the long run the Wal-Mart formula will win out and Costco will wilt under pricing pressure. But Costco does seem to have gotten under Turner's skin. He recently dismissed his rivals in an angry letter to an industry trade magazine.
Brotman shrugs off the rhetoric from Bentonville. After seeing Costco grow from a single warehouse into a $47 billion retail powerhouse in just two decades, he chooses to take the long view. "We want to be a great retailer in 50 years," Brotman says. "And this business is a game of inches, so we'll get a little better every year." Wall Street may share that view: For the past 18 months, Costco shares are up 59 percent. Wal-Mart's stock during that period? Down 14 percent.
Outdiscount the discounter.
DOLLAR TREE attacks Wal-Mart's strength with simple pricing and a less painful shopping experience.
VITAL SIGN: Dollar Tree operating margin, 2004: 9.7 percent. Wal-Mart: 5.9 percent.
It might seem crazy to compete on price with the company whose founding precept was "Always the lowest prices. Always." But Dollar Tree, based in Chesapeake, Va., has developed an ingenious way to attack Wal-Mart's greatest strength--and live to tell the tale.
Dollar Tree is the nation's largest single-price vendor, meaning it doesn't carry anything priced at more than $1. From picture frames and pet supplies to frozen food and fine china, Dollar Tree has sold every item on its shelves for a buck for the past 19 years. Since its inception in 1986, Dollar Tree has grown from a single 3,000-square-foot store in a Virginia mall into a nationwide retailer with 2,735 locations and annual revenue of $3.2 billion. Net sales have surged nearly 191 percent since 1998. In 2004 the company earned $186 million.
Bob Sasser, Dollar Tree's CEO, attributes the company's success largely to the ways it acquires merchandise--frequently the same stuff offered by Wal-Mart--cheaply enough to sell it for a buck and still make money. Because of Dollar Tree's rapid growth, and because of a desire to counter Wal-Mart's buying clout, consumer-products giants like Clorox, Dial, and Procter & Gamble have begun to develop items especially for Dollar Tree. For instance, when Dollar Tree wanted a new line of cleaning supplies early last year, Sasser and his team worked closely with P&G designers to produce 18-ounce bottles of Dawn dish soap to sell at $1. The bottles were smaller than Dawn's standard 20-ounce size--and they were so popular that P&G plans to double production next year.
A lot of what's on Dollar Tree's shelves, however, comes from the industrious sleuthing of the company's hundreds of buyers, who scour their territories for odd lots, remainders, and discards. Last fall, when a rival canceled an order for Pringles potato chips, Dollar Tree bought 2 tons of the product at pennies on the dollar and sold it all in a few weeks. "We take things off manufacturers' hands, and everyone's happy," Sasser says.
He believes that his other advantage over Wal-Mart is simple convenience. Dollar Tree's biggest stores are 17,000 square feet, about the size of a high school gym. Wal-Mart's cavernous supercenters can be 20 times as big. "You can wear out a pair of shoes just trying to find the gardening section," Sasser says, while at Dollar Tree, the average store visit is 15 minutes. He tries to make it easy for frazzled Wal-Mart shoppers to sample that convenience by locating Dollar Tree's stores as close to Wal-Mart's as possible; about half of all Dollar Trees are within 2 miles of a Wal-Mart. Sasser figures that's where the shoppers are.
Like Wal-Mart itself, Dollar Tree also runs an incredibly efficient (and profitable) ship. Dollar Tree's 9.7 percent operating margin is nearly double Wal-Mart's. Bentonville has taken notice: In March 2003, Wal-Mart began testing a dollar-store format at 20 of its locations, and it has discussed launching a chain of dollar stores, reportedly to be called Pennies-n-Cents. Still, Sasser's not convinced it's a market that Wal-Mart truly intends to invade. "Their efforts really don't trump what we do," he says.
Re-create what Wal-Mart has swept away.
SAVE-A-LOT grocery stores bring back the bygone Main Street feel and focus on underserved neighborhoods.
VITAL SIGN: Save-a-Lot profit margin, 2004: 3.5 percent. Wal-Mart (groceries only): 2.6 percent.
Few industries have suffered more at the hands of Wal-Mart than the grocery business. Since Wal-Mart introduced its wildly popular supercenter format in 1988, adding groceries to the list of 116,000 items offered in a typical store, it has become the industry's biggest player, grabbing 10 percent of the $775 billion market. Which makes Save-a-Lot's success all the more impressive. Wal-Mart's advance has forced national chains like Winn-Dixie to close hundreds of locations and doomed scores of neighborhood markets. But St. Louis-based Save-a-Lot has doubled its store base since 1998. It now has 1,250 outlets in 39 states. Sales--an estimated $4.2 billion last year--are growing about 7 percent annually, a rarity in an industry where 1 percent revenue gains bring cheers. And Save-a-Lot's 3.5 percent profit margin is the best in the business.
This is all the fruit of a shrewd strategy. Recognizing the important role played in communities by the traditional neighborhood grocer, Save-a-Lot keeps its stores small--only 20 to 25 employees--and its selection limited. Save-a-Lot sells no more than 1,250 grocery items at each location. (A Wal-Mart supercenter can have 40,000.) There is just one type of each product, whether canned corn or head of lettuce. The company also relies heavily on private-label brands, which account for 75 percent of its inventory and enable Save-a-Lot to offer steep discounts.
Changing demographics also shape the chain's strategy. The company focuses on neighborhoods where incomes are fixed or below $35,000 a year--which now encompasses 42 percent of the nation's households. It reaches those neighborhoods with a network of 16 distribution centers that can deliver a store's full order on a single truck, avoiding the jumble of vehicles from multiple vendors that most grocers contend with. To avoid trademark costs, brand names are taken from employees: For instance, McDaniel's Gourmet Blend coffee ($3.99 for a 34.5-ounce can) carries a vice president's name. "I have my mother-in-law's name on quite a few products," says CEO Bill Moran.
Thanks to its unique format, Save-a-Lot consistently sells its grocery staples at prices nearly 40 percent below those of supermarkets like Albertsons and Safeway and, most impressive, as much as 15 percent below Wal-Mart's. The chain is now the nation's fifth-largest grocer. "Save-a-Lot is one of the most powerful concepts in the food retail industry," says Edouard Aubin of Deutsche Bank. "It could easily triple its market share over the next few years."
Win the service game.
DICK'S SPORTING GOODS has created a sales team with true expertise that coddles customers.
VITAL SIGN: Dick's revenue growth, 2004: 34 percent. Wal-Mart (sporting goods only): 16 percent.
In a corner of a Dick's Sporting Goods on the outskirts of Pittsburgh, Christine Helt stands in her blue sweatsuit amid a forest of exercise machines. Helt, a Dick's employee for about a year, has recently been certified as a personal fitness trainer, and she presides over the store's fitness section as if it were a real gym. At a moment's notice, she stands ready to do anything from demonstrating a leg press machine to offering tips on how to start an aerobic workout. Part of a new program to put trainers in all 240 Dick's stores, Helt's three-week certification course was paid for by her employer.
It's an ongoing attempt by Dick's Sporting Goods to employ people who actually know what they're talking about--and attack another perceived Wal-Mart weakness: lackluster care and feeding of the consumer. "Customers today want information," says Dick's CEO Edward W. Stack, whose father, Dick, started the business in 1948. "They're not going to go somewhere where they're ignored." Indeed, while Helt patrolled her fitness section, the six sporting goods aisles at the nearby Wal-Mart were barren, lacking both shoppers and anyone with a name tag.
Wal-Mart sells far more sporting goods than anyone else ($6 billion worth per year), but Dick's is steadily expanding its customer base of loyal sports enthusiasts. With stores primarily in the eastern half of the country, the company is now the nation's second-largest sporting goods retailer, with 2004 sales of $2.1 billion.
In addition to the personal trainers, Dick's outlets also have experienced golfers working in the in-store golf shop--200 PGA pros work at Dick's--and hunting and fishing enthusiasts in the lodge shop. Golfers can try out clubs in a driving cage that, in some cases, tracks their shots on a computer-simulated golf course. Sneaker shoppers can test new shoes on a 60-yard rubber track, bike owners can have their cycles repaired, and tennis players can get their rackets restrung.
Analysts say the additional costs of creating this almost theme-park-like atmosphere are minimal compared with the returns. For the past four years, Dick's sales have been growing 16 to 23 percent annually, and earnings are advancing even faster. In the past two years, the stock price has more than quadrupled from a split-adjusted $8 to a recent $34. And the company, headquartered in Pittsburgh, has ambitious plans for coast-to-coast expansion. But perhaps the most revealing indication that Dick's is onto something is that for the past year and a half, Sports Authority, another sporting goods power player, has been remodeling many of its stores to include high-concept displays and a large golf shop. "Dick's is definitely leading the industry in innovation," says Piper Jaffray analyst Mitchell Kaiser.
Dick's has a wider selection of goods than Wal-Mart, especially on the high end. But Dick's is also exceptionally cost-efficient. Its inventory "turn"--how many times per year a store cycles through its entire inventory--is 3.7, compared with the industry average of 2.7, Kaiser says. Dick's quick turn is partly accomplished by an automatic replenishment system that the company requires many vendors to use--shades of Wal-Mart--so that carefully calibrated orders are sent to Dick's warehouse exactly when they're needed. And to keep closer tabs on how his growing enterprise is faring, Stack is taking another page out of Sam Walton's playbook. He spends two days a week visiting his stores to find out what works and what doesn't. "I'm not out there to pontificate," he says. "I'm there to listen."
Stack may be onto something that anyone facing Wal-Mart should keep in mind. Walton himself was for many years the scrappy underdog; the seemingly overpowering behemoth when he started out was Sears. You could do worse than to use some of Walton's own precepts to battle the giant he created. One of his rules was to never allow himself to think his powerful competitors were invincible. "Most retailers," he once said, "could still be around today but for missing opportunities." The trick is to find those opportunities, and make sure it's Wal-Mart--not you--that misses them.