Walmart, p.10
Walmart, page 10
Slashing prices on national brands, and doing so below cost in some cases, was a desperate attempt by Walmart to win back market share. Some point the finger to the host of external executives who have joined Walmart’s management team in recent years. The retailer has hired executives from CPG companies and competing retailers, some of whom ‘just didn’t get Walmart’s business philosophy’, according to a senior executive. In any case, such pricing was unsustainable and uncharacteristically Walmart: this was high–low behaviour. It’s no surprise then that Walmart’s number-one goal today is to restore EDLP across its entire corporation. They now aim to have an opening price point – either national brand or private label – in every single category and in 2011 introduced an aggressive ad match policy to restore confidence among shoppers that Walmart offers the lowest prices around.
No need for weapons of mass distraction
Across the Atlantic, Walmart’s British operations were also guilty of veering away from EDLP at one point. In the UK, where 40 per cent of all sales were on promotion in 2011,18 EDLP-driven Asda has struggled at times to compete against promotion-orientated competitors such as Tesco and Morrisons. When you factor in a weak economic backdrop, the temptation to veer away from EDLP becomes even greater. Back in 2009, Asda began to dabble in multi-buy promotions in an attempt to drive shopper traffic and claw back some lost market share. The retailer continued with its efforts to win shoppers over with ‘buy one, get one free’ (BOGOF) and other limited-timed deals into the following year. In the four weeks to 5 July 2010, the number of promotions at Asda increased by 13.4 per cent on an annual basis to 1,646. This was still below competitors such as Sainsbury’s and Morrisons, but in fact greater than Tesco – one of the most promotional supermarkets – which ran a total of 1,615 promotions during the same time.19
Despite its intent of improving price perception, the move towards promotional activity simply confused shoppers and in the process made Asda blend in with the rest of the supermarkets. Similarly, as food price inflation eased, Asda found that suppliers would offer more promotions rather than decreasing unit costs.20 As an EDLP retailer, this is unacceptable, yet, from an CPG supplier’s point of view, it’s far more favourable to end a promotion early than to push through longer-term base price increases. It turned out that multi-buy offers, or ‘weapons of mass distraction’21 as then CEO Andy Bond famously referred to them, were not in Asda’s interests and the retailer is now ‘on a journey back to EDLP’, Andy Clarke told the authors. Clarke, however, points out that, while low prices are important, having a strong value proposition goes much further. ‘We are the best-value retailer in the UK, not the biggest discounter.’
Preço Baixo Todo Dia: is it an EDLP world?
The Asda example leads us to a very important question – does EDLP translate in every market? Generally speaking, Walmart has made significant improvements in flexibility with regard to its international operations, recognizing that not all markets are created equal after failures in Germany and South Korea. For example, in Latin America and Asia, many stores trade under local banner names and merchandising is also very much reflective of the local market. However, when it comes to pricing, there’s no two ways about it – a uniform EDLP approach must be adopted by all markets:
Everyday low prices in every market. No exceptions, no excuses.
(Mike Duke, 2011)22
On 6 January 2011, 5,000 miles south of Walmart’s cold Bentonville headquarters, its Brazilian division was celebrating something special. And no, it wasn’t just a warm summer day in the southern hemisphere, but the day that EDLP was launched in its Brazilian stores. All hypermarkets and supermarkets – including Walmart, Big and Hiper Bompreço – were closed that morning so that employees could permanently reduce prices on 2,000 items by up to 20 per cent. The chain officially reopened at lunchtime as an EDLP retailer.23
The conversion had been in the works for nine months, as Walmart worked with suppliers to renegotiate contracts and also with consumers to help educate them about the benefits of EDLP. The new pricing model had been tested in a handful of Brazilian outlets and met with ‘fairly good results’. Days before the launch, Walmart ended its Bomclube loyalty programme which had approximately 4 million members in the north-east and south of Brazil. It was time once again to focus on cost reduction and driving everyday low prices.
The move in Brazil is significant for a few reasons. Firstly, Brazil is unique in that it is one of the few retail markets in the world dominated by the large multinational retailers: Companhia Brasileira de Distribuicao (or CBD, which is jointly controlled by France’s Casino), Carrefour and Walmart are the country’s three most important food retailers. Their efficiency-led approach has helped to drive prices down in what is already an extremely promotional market. As such, there is a tremendous amount of price transparency in the Brazilian food sector. It is not uncommon to see shopping-basket price comparisons at the entrance of Carrefour or Walmart, and Brazilian shoppers are accustomed to finding comparison signage for specific products at the shelf. Walmart’s commitment to EDLP therefore puts additional pressure on vendors, who of course sell to both Walmart and its competition.
Now Walmart is certainly an important retail customer for Brazilian FMCG suppliers – but they’re not number one. Unlike in the United States where some FMCGs make more than one-third of their sales through Walmart, in Brazil CBD is actually the largest retail account. Therefore, if an FMCG supplier is asked/required by Walmart to adopt an EDLP approach, it is bound to ruffle some feathers when it comes time for negotiations with CBD.
EDLP doesn’t exist without EDLC
Our highest priority is to continue being the retailer with the lowest cost structure in the market, so as to be in a position of giving our customers Every Day Low Prices.
(Walmart de Mexico y CentroAmerica 2010 Annual Report)
In order for EDLP to be a success in a new market, it’s absolutely vital for two things to take place: (1) EDLC must be well established and (2) prices must be truly cheaper than the competition. ‘EDLC is and continues to be a part of our DNA. We invest in low prices which drives volume and enables us to go back and reinvest in price. It’s all a cycle and something that is truly unique to Walmart’, Asda CEO Andy Clarke told the authors.
But this doesn’t always happen overnight – in Mexico it took Walmart eight years from market entry to EDLP implementation. Ownership structure plays a major role in Walmart’s ability to offer everyday low prices to shoppers. In Mexico, majority ownership was achieved in 199724 and by 1999 EDLP was introduced.25 Prior to this, Walmart had spent years stripping out excess costs in Mexico in order to fund EDLP, and its vision for EDLC continues to this day. By 2000, the EDLP model had already been established on the back of a lean cost structure whereby general expenses accounted for 15.1 per cent of revenues and operating margin was 5.3 per cent. A decade on, general expenses were reduced even further to 14 per cent of revenues as part of Walmart’s relentless drive for efficiency.26 That year, Walmart de Mexico invested more than 1 billion pesos in the automation of two of its distribution centres (DCs). How does this affect prices, you might ask? Productivity at those two DCs in Tabasco and Cuautitlán is expected to increase by up to 30 per cent,27 allowing Walmart to transport merchandise to a larger number of stores more efficiently. The cost savings achieved through DC automation as well as global sourcing and other supply chain initiatives will once again get fed back to the customer in the form of EDLP, enabling Walmart to attract additional shoppers and fund further investment in technology and the supply chain. It is an ongoing cycle, all in the name of lower prices.
While Walmart certainly benefits from the increased traffic and consequent market share gains on the back of price investment, it is by no means a charity and therefore some of those cost savings are used to buffer the bottom line and appease shareholders – over the past decade, Walmart de Mexico has recorded a 280 basis point improvement in operating margin.28 Today it is the unequivocal market leader in Mexico, with sales reaching $25 billion in 2010.29
Kakaku Yasuku – EDLP implementation isn’t always seamless
EDLP is a proven recipe in fast-growing, price-conscious markets like Mexico and China; however, the transition hasn’t gone quite so seamlessly in the stagnant, more affluent Japanese retail market. Initially, EDLP simply didn’t work for Walmart’s Japanese shoppers, 90 per cent of whom are women,30 who were used to finding weekly specials in chirashis, newspaper inserts produced by many retailers. We know by now that weekly flyers are a big no-no when it comes to Walmart’s EDLP approach; however, when Seiyu attempted to abandon the chirashi, sales quickly plunged: EDLP wasn’t going to happen overnight.31
In Japan, another barrier to EDLP was the fact that many consumers had traditionally been motivated by quality over price, although this has shifted in recent years owing to austerity measures. This is especially true when it comes to fresh food – a vital component of the Japanese consumer’s diet. Even for a retailer like Walmart, there is very little room for cost reductions in perishables because most Japanese farms are family-run operations that tend to offer better deals on smaller orders rather than on larger ones.32
In fact, many Japanese consumers associated cheap food with inferior quality and let’s not forget that, owing to higher population densities, consumers do not have the space in their homes to bulk-buy six months’ worth of toilet paper or canned beans. Add to the mix that there is a strong preference for domestic goods and we can begin to see why Walmart struggled for so many years in Japan.
But differences in consumer behaviour were certainly not the only barrier Seiyu faced when attempting to convert to EDLP. Going back to our earlier points about the prerequisites for success with EDLP, Walmart Japan initially failed when it came to both ensuring that it was offering the lowest prices available and achieving EDLC in order to fund EDLP. ‘Everyday Low Prices cannot be achieved overnight, but we have to meet the challenge. Otherwise, there will be no rebirth of Seiyu’, then Seiyu President Masao Kiuchi said in 2005.33 Seiyu’s stores were dated and prices were not compelling enough – more than a decade of deflation in Japan meant that most retailers were forced to cut prices aggressively:
When we started talking to the Japanese multinationals about EDLP, and the fact that EDLC was an important part of that, they didn’t get it, quite honestly.
(Scott Price, CEO of Walmart Asia)
Like Mexico, Walmart Japan’s ownership structure held them back initially. They entered the market in 2002 by purchasing a 6.1 per cent stake in Seiyu.34 During the first few years, Walmart had little to do with the day-to-day operations of Seiyu. They were there primarily to learn the ropes of this vastly different but potentially very lucrative new market, so if it all went sour they could easily sell their minority stake. Well, it did go sour for quite a while and many analysts, noting similarities with Germany, questioned Walmart’s ability to crack such a difficult, stagnant market. Despite continued losses in Japan, Walmart felt that it needed to hold a more influential role in one of the world’s largest economies. Japan may have had its nuances – a finicky consumer, a stagnant economy and an inefficient supply chain – but it was a big market with a fragmented retail sector. This was music to Walmart’s ears. It gradually increased its stake over time until Seiyu eventually became a wholly owned subsidiary in 2008.35 The timing was ideal: the impact of the global financial crisis meant that Japanese consumers who previously shunned lower prices were quickly developing an appetite for cheap goods.
Achieving full ownership gave Walmart more power and flexibility to invest in key areas such as merchandising, store remodels, distribution and logistics, ultimately enabling them to invest in EDLP. Cost reduction on the whole has been a much slower process in Japan compared to other markets, owing to higher wages and underlying complexities in the structure of the grocery distribution system. However, within months of acquiring the final shares of Seiyu, Walmart flexed its muscles by shutting down 20 unprofitable stores and reducing its corporate workforce by 29 per cent36 – a move that was uncommon in employee-loyal Japan and therefore met with a degree of resentment among both staff and shoppers. Yet it crucially enabled Walmart to invest in price. It began to realize additional economies of scale by processing meat in a central facility (and therefore eliminating the need for in-store butchers and freeing up floor space for higher-margin prepared meals). Walmart began to achieve higher labour productivity in stores from initiatives such as multi-tasking, improved logistics efficiency and lower advertising costs:
The Japanese customer needs us. Thirty per cent of the Japanese are now classified as working poor.
(Scott Price, 2010)
Kakaku Yasuku (EDLP) was launched in 2008, just months after Seiyu was fully integrated into Walmart’s business. Whereas previous half-hearted attempts at EDLP had met with mixed results, the launch of Kakaku Yasuku resonated with today’s more price-conscious shopper. There had also been a change in the consumer psyche around quality perception – many now recognize that lower prices do not necessarily equate to lower quality, an area that has been bolstered by Walmart’s global sourcing and private label initiatives. Previously, Seiyu lacked a compelling in-store environment and crucially was not always the cheapest, despite its best efforts. Today, renovations have attracted shoppers (traffic was up 2 per cent in 2010) who are also more convinced of their pricing strategy thanks to a series of guarantees which honour competitors’ prices if shoppers find a product cheaper in another retailer’s chirashi. Seiyu reversed seven consecutive loss-making years by turning a profit in 2008 – the year EDLP was implemented.
Global sourcing has played, and continues to play, a major role in Seiyu’s ability to offer not only greater value but also more compelling merchandise. Take grapes, for example. Seiyu had been sourcing grapes through an existing supply chain in Japan and selling them to customers for 348 Japanese yen. In 2010, they began importing a different variety of grapes from California, which were offered in a larger package and sold for a whopping 40 per cent discount to the Japanese variety. At 248 Japanese yen, the California grapes not only offer greater value to the customer but it’s also a differentiated product with a quality level that is equal to or better than the current option. Now you can argue that this goes completely against the notion of offering locally and sustainably sourced foods, which ironically is a major priority for Walmart at home and in international markets, particularly in India, China and Central America. However, as Mike Duke puts it: ‘What’s happening is the geographic borders are more blurred and there’s more of a global optimization going on as it relates to product.’ If Walmart can leverage this and offer greater value to its shopper, you bet it is going to act on it.
Additional examples of Seiyu utilizing Walmart’s global sourcing network include US beef, US broccoli, Australian asparagus, US-made household products from Procter & Gamble, Chinese-manufactured home electrical appliances and electronics from Haier, EUPA and Funai, and Walmart private labels such as Extra Special wines from the UK, as well as Mainstays home textile products from India and Pakistan.
In another international market, South Africa, Walmart’s entry has been touted as a possible precursor to a bitter price war, with Walmart using its global scale and influence to bring down prices for South African shoppers. To some extent, this will be true, with Walmart expected – in the longer term – to implement some of its efficiencies and best practices to bring lower costs (and therefore lower prices) to Massmart. Walmart can also be expected to reinforce Massmart’s commitment to centralized distribution and will also be keen to expedite the process of centralized procurement.
Owing to the sanctions that were placed on South Africa during the apartheid era, there were very few European or US suppliers that built a significant presence in the South African market, meaning that competition among vendors was largely limited to South African suppliers servicing South African retailers. In an attempt to foster competition, many retailers and suppliers became organized on a regional level, with procurement and logistics often being structured around provinces and then being further segmented around different brands or ranges. The end result is a very fragmented FMCG market with very many decentralized conversations taking place between retailer and supplier. This will be something that Massmart, guided by Walmart, will seek to remedy. Walmart prefers to have fewer, more senior conversations with its suppliers and will not be content with Massmart’s buyers operating on a regional or SKU-specific basis. Suppliers in South Africa will soon be asked to centralize and shift away from the legacy provincial structure.
However, there are also a number of reasons why Walmart’s impact on pricing in South Africa might be limited. The first reason is that Massmart is a relatively small retailer – particularly in grocery categories – where it is dwarfed by Shoprite, Pick n Pay and SPAR, meaning that its bargaining power will be limited. Any attempts by Massmart to implement EDLP will be met by resistance from suppliers and from their larger retail customers, who may act punitively towards suppliers if Massmart is seen to be receiving better prices. The second reason why Walmart’s impact on pricing might be muted is due to the aforementioned absence or weakness of global FMCG giants in the South African marketplace. The leading suppliers in the market are not Walmart’s traditional partners such as Tyson, Procter & Gamble or Clorox, but instead local conglomerates like Tiger Brands and AVI, companies that Walmart will have done little – if any – business with. The retailer will therefore be starting from scratch to some extent in building relationships with local vendors and will be less able to draw on the collaborative relationships that it has historically enjoyed with the likes of P&G.
