Digital opportunity looms larger
Increased attention was given to Walmart’s multichannel efforts in this year’s supplier survey — and for good reason. Amazon.com is now in a virtual dead heat with the dollar store channel in terms of the retailer/channel that suppliers view as the most significant competitive threat.
Walmart suppliers are right to be concerned about Amazon.com given the pace at which the $48 billion company, now the nation’s 10th-largest retailer, is piling on sales and expanding its reach into new categories. Walmart’s online sales now total $9 billion, as Neil Ashe, president and CEO of global e-commerce, revealed recently.
Despite their concerns, the digital arena is an area of great growth potential, and suppliers are excited about the prospect, with roughly 75% of those surveyed indicating they already sell products online. However, survey results also show a large swath of suppliers who registered a middling level of agreement with the statements “Walmart is headed in the right direction in terms of its online/multichannel strategic initiatives,” and “my team understands Walmart.com’s various strategic initiatives and priorities.”
That a higher percentage of folks didn’t register a stronger level of agreement in these areas should be a source of concern for Walmart.com as it has aggressive growth plans in place and will need the support of suppliers to execute its strategies.
An area in which Walmart.com should feel encouraged is that 18% of suppliers expressed the strongest level of agreement with the statement that they view Walmart.com as an integral part of the new item introduction process. Another 22% expressed the highest level of agreement with the statement that they are highly focused on growing with Walmart.com. Unfortunately, 21% of respondents also expressed the highest level of agreement that Walmart.com is challenging to work with.
While the signals are certainly mixed, it is perhaps understandable given that the pace of change in the digital world can make it difficult to keep track of what’s going on. It was only two years ago that Walmart intensified its multichannel focus with the creation of its global e-commerce group. Ashe didn’t join the company until this past January, and the recent analysts’ meeting was his first time presenting a comprehensive overview of the strategy. Ashe gave investors plenty to feast on — describing Walmart’s global network of 10,000 stores, 200 million weekly customers and a commitment to building a next-generation global technology platform to capture a disproportionate share of a worldwide e-commerce marketplace McKinsey & Co. expects to reach $1.3 trillion by 2015.
“It is a fascinating opportunity that we are uniquely positioned to take advantage of,” Ashe said, adding that he is focused on, “how do we do it differently and better than anyone in the world.”
Perhaps the most intriguing development to date is a pilot program involving same-day delivery in San Francisco, Minneapolis, Philadelphia and Washington, D.C. The program leverages Walmart stores in those markets as fulfillment centers for popular products with carriers executing same-day deliveries of orders placed before noon. According to Ashe, with 4,000 points of contact throughout the United States, the service is something Walmart is uniquely capable of executing, and he described the company’s store network as the envy of the e-commerce world.
Supplier expectations offer insight at Walmart
Continued growth and increased competition from Amazon.com and the dollar stores. Improved in-stock levels offset by questionable in-store execution. Reduced buyer turnover and senior executives receptive to trading partner views.
Those are among a few of the key findings of the third annual Walmart Supplier Survey conducted by Drug Store News’ sister publication, Connecting Northwest Arkansas. Participation in this year’s survey increased to 219 respondents, compared with 194 last year, and was limited to those who occupy senior leadership positions at their respective companies and whose responsibilities for the overall Walmart business relationship enable them to offer an informed view on a breadth of topics relating to Walmart U.S., Walmart.com, Sam’s Club and Walmart International. Connecting Northwest Arkansas worked with Cameron Smith & Associates, the leading recruitment firm based in Rogers, Ark., to field the survey across a mix of large and small companies and a breadth of product categories comparable to the merchandise mix found in a typical Walmart store.
Nearly half of those who participated indicated they have worked with Walmart for 15 or more years, and three-quarters of respondents indicated that Walmart is their company’s largest account. Accordingly, this veteran group of CPG executives with considerable exposure to Walmart offered the view that despite some challenges, they expect continued growth from Walmart. That means in the years ahead roughly 10% of those surveyed said they would be allocating significantly more resources to Walmart, while 45% said slightly more. A large group (41.3%) will keep things about where they are.
Another interesting revelation this year is the extent to which Northwest Arkansas-based supplier teams are supplemented by additional resources at companies’ respective home offices. For example, about 27% of those surveyed said roughly 90% of the employees their company dedicates to Wal-Mart Stores are physically located in Northwest Arkansas, but roughly 40% said their Bentonville, Ark., team accounted for less than 39% of the resources allocated to Walmart.
Another area explored in this year’s survey was Walmart’s renewed emphasis on Every Day Low Price/Every Day Low Cost. These foundational aspects of the company’s business model are credited with driving improved financial performance and are supposed to yield supplier benefits as well due to the elimination of demand fluctuations within the supply chain that is caused by promotional activity. It hasn’t turned out that way just yet, with survey respondents offering a mixed view of the impact EDLP/EDLC is having on their business and relationship with Walmart. For example, survey respondents were nearly evenly split on the topic of whether Walmart’s adherence to EDLP/EDLC would contribute to an improved rate of profitability on their sales at Walmart. In addition, there was a core group of suppliers (15.3%) who said their ability to manage the business relationship was much better as a result of Walmart’s renewed emphasis on EDLP/EDLC, and 31.6% said it was somewhat better. However, nearly 30% said their ability to manage the relationship was now more challenging, and 23.3% said it was largely unchanged.
In addition, a little more than half of those surveyed disagreed with the statement that Walmart’s adherence to an EDLP/EDLC operating model going forward would contribute to an improved rate of profitability on their sales at Walmart. Meanwhile, a slightly higher percentage disagreed with the assertion that EDLP/EDLC would allow them to operate more efficiently. Said another way, a little less than half of those surveyed did agree that EDLP/EDLC is favorably impacting their ability to operate efficiently and more profitably.
Finally, suppliers were asked about expectations for marketing support. Nearly 24% said expectations had increased significantly, and 37.9% said they had increased somewhat, figures that might have been thought to be lower considering a lack of promotional price is supposed to diminish the need for advertising.
Those suppliers who’ve yet to see the benefits of EDLP/EDLC can take comfort in the fact that Walmart’s senior executives are willing to listen. The company rated very high in this regard, with the overwhelming sentiment among suppliers being that Walmart’s senior leadership is receptive to their views. More than 84% of respondents agreed with that sentiment. Walmart also can feel good about the perception held by 66.5% of respondents that buyers are willing to experiment with new products, services and merchandising strategies. In addition, nearly as many suppliers believe buyers’ ability to manage and grow categories has improved due to Walmart’s decision to participate in such data syndication networks as Nielsen and Symphony/IRI.
Neighborhood Market format revisited
When planning commission officials in Northwest Arkansas gave Walmart the go ahead for a 40,000-sq.-ft. store in Bentonville, Ark., back in 1998, it was the retail industry’s biggest story that year.
A few months later, the name Neighborhood Market was revealed, and an early October opening was set for the Bentonville unit and a second location near Little Rock. The openings were a big deal because Walmart was already gobbling market share at an accelerating pace with a rapidly growing base of supercenters and coming off of a year in which same-store sales had increased by 9%. The prospect of another new format to accelerate share gains in the food and consumable space was as intriguing to investors at the time as it was disconcerting to competitors.
“Walmart’s assault on the market share of the nation’s supermarket and drug store operators has been expanded with the recent opening of the first two Neighborhood Market stores,” was the takeaway of Drug Store News’ sister publication Retailing Today following the opening. “The 40,000-sq.-ft. units, located in Bentonville and Sherwood, Ark., provide Walmart with a promising new growth vehicle while addressing the reality that its large supercenters, discount stores and Sam’s Clubs don’t always fit customers’ definition of convenience.”
The competitive concern then, as now, was that a company capable of opening 150 supercenters annually — as Walmart planned to do in 1999 — would be able to open three or four times that many smaller stores annually. Walmart did little to quell such thinking.
At the opening, then president and CEO David Glass did say, “We need to get it open and run it and see what happens,” but later offered that the company’s successful discount stores, supercenters and Sam’s Club concepts also had begun as experiments. Former U.S. stores COO Tom Coughlin took things a step further. “You are at the start of something that has the prospect of growing into another great company,” Coughlin told those gathered at the Bentonville store.
Financial analysts felt the same way, and speculation promptly ensued. Richard Church, an analyst at the former Salomon Smith Barney, forecast Walmart could eventually open between 1,000 and 2,000 units with annual sales ranging from $10 billion to $20 billion.
“We believe the testing phase will be short, and a rapid rollout will begin as early as the year 2000,” Merrill Lynch analyst Dan Barry said at the time, further speculating that “acquisitions of smaller supermarket chains that could be converted to [the Neighborhood Market] concept are likely in the future.”
Lehman Brothers analyst Jeff Feiner declared, “We believe, operationally speaking, it represents an excellent complement to the supercenter.”
Stephen Long at Prudential Securities offered a voice of reason, noting that Neighborhood Market is a test “that has received a lot more attention than some of the other things they have going on. As for the Neighborhood Market’s prospects going forward, it is much too early to speculate.”
Grand expectations for Neighborhood Market may not have materialized within the time frame that some envisioned 14 years ago, but as annual unit growth creeps into the triple-digit range next year, executives are again alluding to the possibility of dramatic growth.
“You know, at our peak, I think we were [opening] over 300 supercenters a year,” Walmart U.S. president and CEO Bill Simon said recently during the company’s investor conference when asked about the pace of expansion. “So if we could do 300 supercenters, I would think smaller stores would far exceed that.”
No one knows for sure how many Neighborhood Markets will open or how fast it will take place, but with pressure to remain a growth company ever present and a multibillion dollar capital budget at its disposal, Walmart has the motive and means to make a rapid rollout happen.