CASES (BPS)
CASE 1: Walmart's Growing Chain of "Neighborhood
Markets"
After its entry into the supermarket industry,
Walmart soon recognized that its huge supercenters and
discount stores do not serve the needs of customers who
want quick and convenient shopping experiences, for
example, when they want to pick up food for evening
meals. It also recognized that customers spend billions
of dollars shopping in local stores such as neighborhood
supermarkets, drugstores, and convenience stores and
that this was potentially a highly profitable segment of
the retail market. Thus, in the 2000s, Walmart entered
this segment by opening a new chain of Walmart's
"Neighborhood Markets." Each of these supermarkets is
approximately 40,000 square feet, about one-quarter the
size of a Walmart superstore, and stocks 20,000–30,000
items compared to more than 100,000 items available in
superstores.
Walmart's strategy for the new chain stores was to
position them to compete directly with local
supermarkets, such as those run by Kroger and
Safeway. They
would be open 24 hours a day to maximize
responsiveness to local customers, and they would also
have high- profit t- margin departments such as a
pharmacy, drugs, health, and beauty products to draw
off trade from drugstores such as CVS and Walgreen's.
As a result, customers could shop for food while they
waited for their prescriptions to be fi lled or their fi lm to
be developed.
To test whether its cost- leadership model would
work at this small scale of operations, Walmart opened
stores slowly in good locations. Margins are small in
the supermarket business, often between 1% and 2%,
which is lower than Walmart was accustomed to. To
keep costs low, it located its new stores in areas where it
had efficient warehouse food preparation and delivery
systems. Its strategy was to prepare high-margin items
like bakery goods and meat and food products in central
locations and then ship them to supermarkets in
prepackaged containers. Each
neighborhood market store was also tied in by satellite
to Walmart's retail link network so that food service
managers would know what kind of food was selling
and what was not. They could then customize the food
each store sold to customer needs by changing the mix
that was trucked fresh each day. Also, because the
stores had no onsite butchers or bakers, costs were
much lower. As a result of these strategies the 60- plus
United States stores opened by 2004 were able to
undercut
the prices charged by supermarkets such as Publix,
Winn- Dixie, Kroger, and Albertsons by 10%. A typical
neighborhood market generates approximately
$20 million per year in sales, has a staff of 90, and
obtains a 2.3% profit margin, which is significantly
higher than average in the supermarket industry.
Encouraged by their success, Walmart continued to
open more stores and by 2009, had 145 neighborhood
markets in operation, most of which are the southern
United States. Walmart is continuing to experiment with
new kinds of small supermarkets to increase its share of
this market segment. Its "Marketside" store concept is an
even smaller "corner- store" format with store size in the
30–25,000 square- feet range. It is also experimenting
actively with a chain of stores geared to
the needs of Hispanic consumers. One experimental
"Hispanic Community" store in Texas is a large-format
store at about 160,000 square feet, which in addition
to its focus on Hispanic food and grocery also offers a
large selection of non- food products tailored toward
Hispanic shoppers. Walmart is also looking into small
"bodega" supermarkets tailored toward this customer
group. Clearly, many profitable opportunities exist in
this market segment, and just as at the global level,
Walmart's managers are developing strategies to take
advantage of them— indeed, in 2010, Walmart
announced it would open another 1,000 Neighborhood
Markets in the next five years.
The story of Wal-Mart's rise to dominance is a
standard case on resources and capabilities and how
they contribute to sustainable competitive advantage.
Yet, despite its overwhelming success, Wal-Mart faces
some critical strategic questions. Their stores have
saturated many markets, and growth opportunities for
supercenters are increasingly scarce. Thus, it is unclear
whether their traditional growth model (expansion) will
work in the future. The second problem is that online
commerce continues to grow, especially in the form of
Amazon. With its vast resources, Walmart has lagged
far behind Amazon in this arena. The third challenge is
that Wal-Mart's success in the international arena has
been mixed at best. It is unclear that they have a
coherent global strategy, and there are important
questions about the strategy.
CASE 2: STARBUCKS
In 2006, Starbucks', the ubiquitous coffee retailer, closed
a decade of great financial performance. Sales had
increased from $697 million to $7.8 billion , and net
profits from $36 million to $540 million. In 2006,
Starbucks' was earning a return on invested capital of
25.5%, which was impressive by any measure, and the
company was forecasted to continue growing earnings
and maintain high profits through to the end of the
decade. How did this come about?
Thirty years ago, Starbucks was a single store in
Seattle's Pike Place Market selling premium roasted
coffee. Today it is a global roaster and retailer of coffee
with more than 12,000 retail stores, some 3,000 of which
are to be found in 40 countries outside the United States.
Starbucks Corporation set out on its current course in
the 1980s when the company's director of marketing,
Howard Schultz, came back from a trip to Italy
enchanted with the Italian coffeehouse experience.
Schultz, who later became CEO, persuaded the
company's owners to experiment with the coffeehouse
format— and the Starbucks experience was born.
Schultz's critical insight was that people lacked a
"third place" between home and work, where they could
have their time out, meet with friends, relax and have a
sense of gathering. The business model that evolved out
of this was to sell the company's premium roasted
coffee, along with freshly brewed espresso-style coffee
beverages, a variety of pastries, coffee accessories, teas,
and other products, in a coffeehouse setting. The
company devoted and continues to commit considerable
attention to the design of its stores, to create a relaxed,
informal, and comfortable atmosphere. Underlying this
approach was believing that Starbucks was selling far
more than coffee— it was selling an experience. The
premium price that Starbucks
charged for its coffee reflected this fact.
From the outset, Schultz also focused on providing
superior customer service in stores. Reasoning that
motivated employees provide the best customer service,
Starbucks executives developed employee hiring and
training programs that were the best in the restaurant
industry. Today, all Starbucks employees are required to
attend training classes to teach them not only how to
make a good cup of coffee but also the service-oriented
values of the company.
Beyond this, Starbucks provided progressive
compensation policies that gave even part-time
employees stock option grants and medical benefits ts—
a very innovative approach in an industry where most
employees are part-time, earn minimum wage, and have
no benefits. Unlike many restaurant chains, which
expanded very rapidly through franchising
arrangements once they had established a basic formula
that appeared to work, Schultz believed that Starbucks
needed to own its stores. Although it has experimented
with franchising arrangements in some countries, the
company still prefers to own its stores wherever
possible. This formula met with spectacular success in
the United States, where Starbucks went from obscurity
to one of the best-known brands in the country in a
decade. As it grew, Starbucks generated an enormous
volume of repeat business.
Today the average customer comes into a Starbucks
store around 20 times a month. The customers are fairly
well-healed; their average income is about $80,000. As
the company grew, it developed a very sophisticated
location strategy. Detailed demographic analysis was
used to identify the best locations for Starbucks stores.
The company expanded rapidly to capture as many
premium locations as possible before imitators.
Astounding many observers, Starbucks would even
sometimes locate stores on opposite corners of the same
busy street—so that it could capture traffic going in
different directions down the street. By 1995 with almost
700 stores across the United States, Starbucks began
exploring foreign opportunities.
The first stop was Japan, where Starbucks proved that
the primary value proposition could be applied to a
different cultural setting (there are now 600 stores in
Japan). Next, Starbucks embarked upon a rapid
development strategy in Asia and Europe. By 2001, the
magazine Brandchannel named Starbucks 1 of the ten
most impactful global brands, a position it has held ever
since. But this is only the beginning. In late 2006, with
12,000 stores in operation, the company announced its
long-term goal to have 40,000 stores worldwide. It
expects 50% of all new store openings to be outside the
United States.
