Inside Wal-Mart's $50 Billion Buy American Campaign

Story by Sheldon Cwinn


Michelle Gloecker, SVP Home, leads the
New Initiateive.

Bill Simon, Wal-Mart's President of U.S. operations, laid out the vision in a recent speech at the National Retail Association's annual meeting. In order to stimulate the economy, and increase consumer spending, Wal-Mart will increase domestic purchases by $50 billion a year within the next 10 years. That is quite a lofty objective. Let's see how this initiative will impact not only Wal-Mart, but also the U.S. economy.

Wal-Mart already purchases two thirds of its products in the United States, so the $50 billion is already on top of that. So what the initiative actually amounts to, allowing for Wal-Mart's growth is a staggering $500 billion of domestic purchases a year.

The initiative will create jobs in areas such as manufacturing, industrial engineering, shipping and transportation, management, accounting, large equipment maintenance, and additional spin-off jobs in ancillary services such as restaurants and medical services. Products will be made closer to the point of purchase which will allow for additional flexibility because of reduced lead times and reduced transportation times. The cost recovery to Wal-Mart in warehousing and shipping will combine with multiple ripples in the supply chain, making the supply chain even more efficient than it already is. So there is a solid business case for the new initiative.

Which categories will be effected? Wal-Mart intends to grow U.S. manufactured merchandise on two fronts. By increasing what they already purchase domestically in categories such as sporting goods, apparel basics, storage products, games and paper products. And, helping create new U.S. manufacturing opportunities in categories such as textiles, furniture, pet supplies, some outdoor categories, and higher end appliances.

The 10-year lead time will allow Wal-Mart to adapt many of its existing suppliers back to domestic manufacturing. How will this work? Let's say Wal-Mart has a supplier for towels that currently come from factories off-shore. It is easy to figure out that with a few committments from Wal-Mart, an idol U.S. towel factory can be re-started and be back online, to make the merchandise domestically again. In fact, many off-shore manufacturers that used to be domestic suppliers,in many cases, still have equipment and production facilities that have sat empty, but remain in-place. Only Wal-Mart has the volumes that would make the numbers work to return to U.S. based manufacturing again.

The economics of manufacturing have changed rapidly. Previously investments went to Asia where wages were lower. The price of oil and transport was low. New Asian factories sprung up literally over night.Today some of these investments are nearing the end of their useful life. The equation is changing. There are tipping points in each product category where it is no longer profitable to manufacture merchandise off-shore.Through Wal-Mart's shear buying power, they can foster large enough orders to eclipse those tipping points and make it profitable to manufacture domesticly again.

By using new supply chain initiatives such as CPFR, Wal-Mart can collaborate with manufacturers and provide them with much more reliable and long-range forecasts, thereby allowing Wal-Mart to make long-range production committments which in turn will help new factories control their costs, expenses, and growth.

Wal-Mart's Inventory Problems Continue.

 Adapted from Bloomberg.com

“We have to get better and remain laser-focused every day because momentum can turn against you in a second,” said Bill Simon, the executive vice president and chief executive officer for Wal-Mart’s United States operations, according to minutes from a February 1 meeting, seen by Bloomberg at the end of last month.
 

Shares of the retailer are up 23.08 percent over the past 12-months and 9.59 percent this year to date, but those fundamentals belie serious problems at Wal-Mart. Earlier in February, an email from Wal-Mart’s vice president of finance and logistics, Jerry Murray, leaked to Bloomberg announced to the world that the company’s sales were a “total disaster.”

The situation was exacerbated when Simon commented at an executive officers’ meeting, leaked once again to Bloomberg, that the company has inventory problems. “We run out quickly and the new stuff doesn’t come in,” he stated, noting that these “self-inflicted wounds” were Wal-Mart’s “biggest risk.” As the publication outlined in an article published Tuesday, Wal-Mart does not have enough workers to restock the shelves, according to interviews conducted with store workers. In the past five years, the company has added 455 stores in the United Stores, a 13 percent increase according to regulatory filings. But the company’s employee count dropped by approximately 20,000 in the same period…

This thinly spread workforce has had widespread consequences. As several interviews with Wal-Mart customers served to prove, shoppers are moving elsewhere. “If it’s not on the shelf, I can’t buy it,” former customer Margaret Hancock told Bloomberg recently. “You hate to see a company self-destruct, but there are other places to go,” she added, noting that Wal-Mart’s loss has been a gain for stores like Target and Safeway.

The problem is not that Wal-Mart does not have the merchandise to fill its shelves, a point that was emphasized by the company in response to Bloomberg’s article. But it is piling up in aisles and in the back of stores because of its labor issues.

“Our in stock levels are up significantly in the last few years, so the premise of this story, which is based on the comments of a handful of people, is inaccurate and not representative of what is happening in our stores across the country,” Brooke Buchanan, a Wal-Mart spokeswoman, said in an emailed statement. “Two-thirds of Americans shop in our stores each month because they know they can find the products they are looking for at low prices.

But despite the points that Buchanan highlighted in that statement, customer satisfaction has continued to deteriorate. Last month, the American Customer Satisfaction Index ranked Wal-Mart last among department and discount stores, and in the past six consecutive years, the company has either tied or taken the bottom spot. Even worse, in the last week, Wal-Mart traded at a 1.4 percent discount to Target on a price-to-earnings basis; comparatively, over the past two years the company has averaged a 5.9 percent premium to its rival, and it even traded as high as a 22 percent premium in January 2012.

Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management, has carefully assessed the company’s customer satisfaction problems. “When times were good and people were still shopping, the lack of excellence was OK,” he told Bloomberg. “Their view has been that they have the lowest prices so customers keep coming anyway. You don’t see that so much anymore.” Shoppers are “so sick” of Wal-Mart’s inventory problems, he added.

As Ton’s assessment indicates, Wal-Mart’s inventory problems have coincided with slowing sales growth, a problem noted by Murray in his leaked emails. In the company’s earnings conference call on February, CEO Bill Simon stated that same-store sales in the United States for the 13 weeks ending on April 26 will be little changed.

Smaller Format Stores Fuel Wal-Mart Expansion

Wal-Mart Expands Using Smaller Format Stores
By Lydia Dishman - Forbes.com

Big box is so last decade. That’s why Walmart is upping the ante on its expansion efforts with smaller stores. According to Bill Simon, head of Walmart’s U.S. division who spoke on an industry conference call yesterday, “They compete really well against multiple channels,” including competitors such as Dollar General, Walgreens and supermarkets.
Simon said the company plans to add 115 new outlets that have less than 60,000-square-feet of selling space this year. Walmart’s not abandoning the big box yet. Simon says to expect 125 Supercenters to open this year, too.
Though Simon asserts that about 90% of Walmart stores are in supersize territory, this isn’t Walmart’s first foray in shrinking store footprints. The company’s attempts include Neighborhood Markets which launched in 1998 and is designed to shoehorn its grocery offerings in smaller towns. The similar format Supermercado de Walmart followed in 2009 and are mostly located in areas with a high concentration of Hispanic residents.

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Marketside, Walmart’s experiment to offer U.S. shoppers a convenient location to purchase prepared food, produce, wine and other groceries inexpensively launched in 2008 and shuttered in 2011. The world’s largest retailer left the Marketside website up in what appears to be an online “suggestion” box for consumers.
If the company seems particularly bullish on these expansion efforts it may be because Walmart’s fourth quarter financials were looking good. Walmart U.S. added more than $10 billion in net sales during fiscal 2013 and fourth quarter comps at stores open at least one year were up 1%. Simon points out that Walmart has nearly $13 billion in free cash flow to invest “primarily in food and consumables, because we know that’s a traffic driver in our business.”
Groceries will certainly drive sales in smaller stores, not to mention health and beauty aids (hello aisles full of vitamin supplements and shampoos). Even with less shelf space and low prices, Walmart can still make bank in the volume of transactions as the formats catch on as customers seek value, not volume.
Lower margins could be offset by packing the selection with private-label merchandise, a strategy Walmart employed successfully in Mexico with its Bodega concept.
In an age when consumers are flocking to shop on the Web in bigger numbers, small format is relative. As Simon observes, existing Neighborhood Markets are all enabled with e-commerce and Site-To-Store capabilities, “So you have that endless aisle that we can offer that others might not be able to offer.”

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