First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  October 11 , 2007  

Wal-Mart, the Supply Chain, and the Wheel of Retailing

Gilmore Says:
Maybe we should talk about a “Wheel of Supply Chain,” and not just a Wheel of Retailing.

What do you say? Send us your comments here

“The Wal-Mart Era, the retailer's time of overwhelming business and social influence in America, is drawing to a close.”

So says a recent article in the Wall Street Journal.


Of all the pieces we’ve done in SCDigest, perhaps my favorite was last year’s “Time for New Supply Chain Icons?”, which basically said it was time for many of us to stop citing Wal-Mart and Dell as about the only two supply chain paragons (See Time for New Supply Chain Icons?). Each company has encountered some strong overall market turbulence, and the loss of some supply chain advantage was certainly a contributing factor. And too often, these certainly fine companies and supply chains were cited by pundits for SCM excellence without the commentators really having any real idea as to why their supply chains were supposed to be so great.

Are Wal-Mart’s current challenges really only of interest to stock market investors and retail competitors? I say no, it’s actually quite important to supply chain management as a whole, as I’ll explain in a few paragraphs.

The Wall Street Journal piece says that, “Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image while other discounters pitched themselves as more upscale and more palatable alternatives. The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers.”

The impact is obvious. While certainly still the largest gorilla in the retail jungle by far, and a huge percent of sales for most consumer goods companies, Wal-Mart’s overall growth has slowed dramatically in the US; international strategies have had mixed success; and the percent of total sales through Wal-Mart channels for many companies, such as Procter & Gamble, are shrinking.

That brings me to the “Wheel of Retailing” theory. I learned this concept in a retailing class I took in grad school, and have been surprised that almost no one seems to drag it in to the whole Wal-Mart discussion.

To summarize, the Wheel of Retailing theory says that retailers tend to emerge at the low end of the market, and win at the outset by offering customers low prices made possible by highly efficient operations – which Wal-Mart did in the 1970s through the 1990s in spades. But over time, these retailers become increasingly "fat" by letting their costs and margins increase. The new retailers' success leads them to upgrade their facilities and offer more services, increasing their costs and forcing them to raise prices. Eventually the new retailers become like the conventional ones they replaced, and the cycle begins again when still newer types of retail forms evolve with lower costs and prices.

Does this not seem to mirror Wal-Mart’s trajectory as it tries to move into higher end apparel, electronics, and organics, with limited success? Did it not let its inventory growth get out of control in 2004-2006, negatively impacting profitability?

Now let’s bring it back to the supply chain. There is no question that Wal-Mart competitors, from other mass merchandisers like Target, to the grocery store chains, to drug stores now offering increasingly broad assortments, have learned some strong SCM lessons form Wal-Mart – and found other advantages of their own. Wal-Mart’s ability to use its supply chain to drub the competition has clearly waned – and in some areas disappeared.

The supposed Wal-Mart edge in technology is no longer feared by many competitors. Competitors like Target and Best Buy have bought or built systems that are as good or better, says the WSJ, and Wal-Mart’s RFID initiative has sucked up tremendous resources with little real bottom line benefit to date.

“For years, Wal-Mart was held up as a shining example of cutting-edge thinking in retail technology,” Patricia Edwards, a retail consultant, told CIO Magazine. “But today, when I hear about a retailer doing something cutting edge, it’s never Wal-Mart being talked about.”

If you have any interest in business generally, this is a fascinating story. But I think it’s important for all of us in supply chain and logistics for the following reasons:

  • Rightly or wrongly, the whole industry has looked to and cited Wal-Mart as a supply chain model to emulate. This tendency has already diminished, and is likely to accelerate. We’ll all increasingly seek new supply chain innovators for guidance.
  • Relatedly, it shows that supply chain models and supply chain competitive advantage are no more permanent than overall business competitive advantage - which means not long today. I think Procter & Gamble, for example, actually has put more focus on truly developing continuous supply chain innovation than either Dell or Wal-Mart.
  • If you are a consumer goods manufacturer, your strategic supply chain planning has to at least consider that Wal-Mart will in fact be a much less dominant factor in your decision making.  It will still be the biggest customer for some time or even forever, but not so large a company’s supply chain and program are built around Wal-Mart.

“Four of the top 10 consumer-products companies say they can move merchandise faster with Walgreen and CVS," says Burt P. Flickinger III, a consultant from Strategy Resource Group, in the Wall Street Journal piece.

Maybe we should talk about a “Wheel of Supply Chain,” and not just a Wheel of Retailing.

Do you think we are at the end of dominant “Wal-Mart” era? Does this have implications for the supply chains of consumer goods companies? Have other retailers significantly reduced the supply chain and logistics advantages of Wal-Mart? Let us know your thoughts at the feedback button below – and as always, we’ll keep your name and company anonymous upon request.

Let us know your thoughts at the feedback link below.

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