Wal-Mart rejiggers EDLP to de liver more ROI

BENTONVILLE, ARK. —There’s a reason the standard protocol at a Wal-Mart store opening calls for the manager to thank employees’ families. They don’t get to see their loved ones much during the five-week process of transforming the empty shell of a building into an operational business.

It is a scenario that has played out hundreds of times each of the past five years, and beyond the impact on the families of new hires as well as those of employees from nearby stores who are often enlisted in the opening process, the rampant pace of Wal-Mart’s expansion in recent years impacted the business in others ways. As stores were located closer together they cannibalized one another and same-store sales suffered. Last year same-store sales at U.S. stores increased 1.9% following a 3% increase the prior year.

Wal-Mart attempted to defend the strategy by calling it “market development,” and gave cfo Tom Schoewe the thankless task of defending the strategy to investors who wanted little to do with Wal-Mart. That all changed earlier this month when Schoewe was given the opportunity at the company’s shareholders meeting to reveal that the company would open substantially fewer supercenters this year than it originally planned.

“Rather than opening the 265 to 270 supercenters we shared with you last fall, we will moderate that growth a little bit and open between 190 to 200 supercenters,” Schoewe said. “When you get into the years after that, our plans would call for about 170 supercenters each and every year after that.”

The moves free up cash to fund a newly authorized $15 billion share repurchase and should eventually benefit same-store sales calculation. However, the biggest beneficiary of the new thinking regarding U.S. expansion is Wal-Mart’s store operations group. During the past 18 months there has been tremendous pressure on Wal-Mart’s field operations group tasked with executing the broad range of initiatives related to improving the experience of shopping at Wal-Mart. In addition to having a lot on its plate, the operations group had also undergone a major restructuring.

By scaling back store openings, Wal-Mart senior executives are convinced the strategies that have been created at the home office will be better executed in the field, since going forward personnel will be less distracted by the next round of new store openings.

“The slowdown of the growth has to do with aligning the strategies we have shared with you in the past with our growth,” Wal-Mart Stores division president and ceo Eduardo Castro-Wright told financial analysts after the shareholders meeting. He is the architect of Wal-Mart’s strategy to break its market into customer segments in the same way as consumer packaged goods companies. “We have gone back and worked with our segmentation analysis to find those markets that are most attractive and aligned that with competitive intensity to determine where we have the strongest position. We feel very good about the progress we are making to utilize segmentation to drive assortments.”

According to John Menzer, Wal-Mart’s chief administrative officer, who headed the review process that led to the reduction in supercenter openings, the company was striving for what he called “the sweet spot.” In past years, store expansion came at the expense of profitable growth, but with fewer stores Menzer believes Wal-Mart has achieved harmony between driving top-line sales growth, improving returns for shareholders and increasing same-store sales that are so highly prized by investors as a means to measure a retailer’s success.

Menzer is also optimistic about the supply chain and efficiency benefits Wal-Mart is poised to realize from new technology and converting its distribution network to a velocity-based system to improve the in-stock position on fast-turning items.

Wal-Mart currently has about 1,000 RFID-enabled stores and plans to equip another 400 to 500 stores with the technology in subsequent years. Meanwhile, the velocity-based distribution center project known as Network Remix that began in March 2005 will be completed this August and include 6,500 products. According to Menzer, Wal-Mart is seeing improved labor efficiency, more frequent deliveries of key items, improved returns and better in-stocks.