Wal-Mart's Reinvention Has Ramifications For All Retail

By Brent Felgner On Jun 5 2006 - 6:00am




Wal-Mart's current drive to reinvent itself will likely go a long way toward redefining the way large chunks of retailing are done.

It may also change the nature of the relationships between merchant and consumer and merchant and vendor — straining the latter, at times, to the breaking point.

At the supplier level, the die has been cast. Wal-Mart's never-ending demand for greater productivity and lower costs has led it to dig deeper into its suppliers' businesses. At times, that has resulted in burrowing even to the commodity level in order to assure supply and control pricing.

“We will go to the best supplier we can find, and if we can go direct and save money, fine,” vice chairman John Menzer told TWICE. “What's funny is how much we were importing [through U.S.-based suppliers] and we didn't even know it, adding cost to the consumer. So, where we see it's an area where we're focused and we can go direct for those items ... we will go direct rather than pay someone another fee for doing what we can do ourselves.”

Taken together, Wal-Mart's initiatives are part of a bold campaign quietly launched about two years ago when president/CEO Lee Scott and other senior executives determined they needed to shake the company out of its mounting lethargy. Many of Wal-Mart's domestic stores were aging poorly, the formats maturing along with same store sales. The company determined it rightly “owned” the opening price point business in the United States, but little more. That factor alone was limiting growth.

On the whole, the companywide changes “show a Wal-Mart in transformation,” Scott told reporters.

The changes, or at least their impact, are reminiscent of those Wal-Mart helped drive in the early 1980s, when it pushed relentlessly for the industry-wide adoption of UPC bar coding and front-end scanning. Executives saw then — as they do now — that the mastery of logistics and new retail technologies held the key to immeasurable gains in productivity and, therefore, profits.

Wal-Mart is altering its assortment strategies, moving further than ever before from the essentially narrow and deep, good, better, best inventory configurations that defined the early days of discounting — and which over the years selectively ballooned. Today, the company has made it clear its logistics and inventory controls are enabling it to carry much broader selections at much shallower — and ostensibly more profitable — inventory depths, all while meeting in-stock demand.

Every retailer's dream of just-in-time replenishment may actually be within striking distance. Wal-Mart's Network Remix program, creating specialized distribution centers pushing targeted deliveries of the fastest moving SKUs in general merchandise, is being built out throughout the U.S. operation and should be completed next year.

At the same time, the company is seeking to empty out its backrooms, pushing merchandise directly from the back door to the store shelves. Supporting this is the development of radio frequency identification (RFID) which in tests in 100 stores has reduced inventory ownership between 16 percent and 25 percent overall. Wal-Mart will push RFID to a total of 600 vendors by the end of 2007, and by the end of this year 1,000 stores will be RFID-enabled.

Indeed, chief financial officer Tom Schoewe said he believes Wal-Mart can reach a point within a few years where sales growth can outstrip inventory growth by a factor of two.

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