Gaining and Sustaining a Competitive Advantage

Walmart, a discount retailer, was started by Sam Walton in the small town of Rogers, Arkansas, in 1962. By 2014, Walmart had become the world’s largest retailer, with more than $476 bil- lion in revenues and 10,942 stores.1 More than one-quarter of Walmart’s revenues came from outside of the United States as it continued to take its low-cost business model around the world. Traditional discount-retailing competitors, including Sears, Kmart, and Target, were now dwarfed by the size of Walmart’s operations (see Exhibits 1 and 2).
However, as the new century began, Walmart faced some new competitors and new chal- lenges. Costco had entered the discount-retailing market, offering low prices on products that were generally deemed to be of higher quality than many products sold at Walmart and Sam’s Club. Aldi, a new discount retailer out of Germany, offered lower prices than Walmart by using a business model that was even more bare-bones than Walmart’s. But the biggest threat came from Amazon.com, the dominant player in the fast-growing online segment of the discount retailing business. Amazon.com was growing rapidly by selling large volumes of goods online at prices that usually matched—or beat—Walmart’s prices, with the additional advantage of zero sales tax. Walmart’s success in the future would require responding effectively to the growing trend toward online purchases and the emergence of Amazon.com as a major competitor.

EXHIBIT 1 Walmart’s Sales and Income by Segment (in millions)
Fiscal year ending Jan 31, 2007 2011 2013 2015 9-Year Growth
Walmart Stores Segment
—Net Sales $226,294 $260,261 $274,433 $288, 049 27%
—Operating Income $17,029 $19,914 $21,491 $21,336 25%
—Operating Inc. % Sales 7.6% 7.8% 7.8% 7.4%
International Segment
—Net Sales $77,116 $109,232 $134,748 $136,160 77%
—Operating Income $4,259 $5,606 $6,617 $6,171 45%
—Operating Inc. % Sales 5.1% 4.9% 4.9% 4.5%
Sam’s Club
—Net Sales $41,582 $49,459 $56,423 $58,020 40%
—Operating Income $1,512 $1,711 $1,960 $1,976 31%
—Operating Inc. % Sales 3.6% 3.5% 3.5% 3.4%
Source: Walmart Annual Reports.

C-1

EXHIBIT 2 Competitors’ Financial Performance Results (in millions)
Fiscal year ending in: 2007 2011 2013 2015 9-Year Growth

Domestic Discount Retail
Kmart
—Net Sales $17,256 $15,285 $15,593 $10,188 −41%
—Operating Income $402 $-34 $353 −$292 −14%
—Operating Income % Sales 2.3% N/A 2.3% −2.9%
Target
—Net Sales $63,367 $69,865 $72,596 $73,785 16%
—Operating Income $5,272 $5,322 $4,229 $4,910 −7%
—Operating Income % Sales 8.3% 7.6% 5.8% 6.6%

Warehouse
Costco
—Net Sales $63,088 $87,048 $102,870 $113,666 80%
—Operating Income $1,609 $2,439 $3,053 $3,624 125%
—Operating Income % Sales 2.6% 2.8% 3.0% 3.2%

International Discount Retail
Tesco
—Net Sales £42,641 £60,931 £64,800 £62, 284 46%
—Operating Income £2,648 £3,811 £2,188 −£5,792 −319%
—Operating Income % Sales 6.2% 6.3% 3.4% −9.3%
Carrefour
—Net Sales €82,148 €81,271 €74,888 €76,945 −6%
—Operating Income €3,338 €2,182 €2,238 €2,445 −27%
—Operating Income % Sales 4.1% 2.7% 3.0% 3.2%
Source: Company Annual Reports.

Walmart’s History
Walmart’s founder, Sam Walton, was born in the small town of Kingfisher, Oklahoma, in 1918. He learned about retail by working at JC Penney before serving in the military during World War II. Walton’s first store was a Ben Franklin franchise, located in Newport, Arkansas (a town with a population of 7,000), which he opened in the 1950s. Walton had intended to open a Federated store with a friend in St. Louis, but Walton’s wife, Helen, refused to live in any town with a population larger than 10,000.2 As his chain grew, Walton continu- ally looked for new ideas, traveling the nation to observe retail practices. Those observa- tions convinced him that opportunity was available for discount retailers in small-town America.

When Ben Franklin wouldn’t support his idea for discount retailing, Walton put up his home and all his property to secure financing for the first Walmart, which he opened in Rogers, Arkansas in 1962 (the same year Target and Kmart opened their doors). Following the suggestion of a manufacturer’s rep, he decided to emphasize low prices and high volumes in his first store. When Walton opened the store, it was the first time anybody had ever discounted prices to a deep level in such a small town. Small mom-and-pop retailers simply couldn’t compete with the prices offered at Walmart, and Walton was able to expand his one store into a growing chain.
Walton’s plan to grow Walmart had two key elements: Start in small towns and expand in his own region before spreading to new areas. Walton said, “Our key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring.”3 Walton opened 18 stores in the second half of the 1960s. Those stores had annual sales of roughly $9 million. In contrast, Kmart had already grown to 250 stores and had annual sales close to $800 million. But Walmart continued to grow. In his 1993 autobiography, Walton recalled, “Kmart wasn’t going to towns below 50,000 We knew our formula was
working even in towns smaller than 5,000.”4 By the early 1970s, Walmart had more than 30 stores in rural Arkansas, Missouri, and Oklahoma. As the company grew, Walton spent much of his time observing his competitors and adapting useful ideas. Many now-familiar elements of Walmart, including self-service, company cheers, referring to employees as “associates,” and Sam’s Club warehouse stores, all came from his observations of other businesses.
Although Walmart performed well during the 1960s, its cost of goods sold (COGS) was still high relative to the large national retailers. Walton said that, early in Walmart’s history, vendors typically dictated the terms and prices to Walmart, which did not yet have the size or power to negotiate its own terms. Walton recognized that for Walmart to receive the same prices and level of service as the larger retailers, the company would need to start buying in much higher volumes. To store such large amounts of merchandise, Walmart would need to invest in a big warehouse. Walton was already leveraged to the point that he couldn’t finance the investment on his own, so he took the company public in 1972. The stock sale infused Walmart with $4.95 million, just enough capital to build a $3.3 million warehouse.5 This was Walmart’s first step toward developing its own set of distribution centers to quickly and efficiently get merchandise to its stores.
In order to manage these distribution centers and to coordinate shipments from suppliers, Walmart made significant investments in information technology (IT). Walmart’s IT system allowed the company to see where in its distribution system any product was at any time. The IT system also linked Walmart’s automated distribution centers to stores and to suppliers, allowing the company to restock stores’ inventories precisely and quickly. Walmart also invested in communications, creating a private satellite network that allowed company managers to communicate quickly and easily with stores all over the country without traveling to visit them, saving Walmart significant time and money.
These investments helped Walmart grow quickly in the 1980s and 1990s. Its return on assets (ROA) peaked above 13 percent in 1990 and gradually declined to around 8.5 percent by 2010 (see Exhibit 3). In 1985, Walmart’s COGS ran at 73.8 percent of sales. This was higher than the industry average of 71.9 percent, but Walmart had an advantage in its operating structure. Walmart’s total operating expenses were 18.5 percent of sales. Rental expenses came to
1.8 percent of sales, advertising costs were 1.1 percent of sales, and payroll expenses were
10.1 percent of sales. In contrast, industry averages for rental, advertising, and payroll expenses were 2.2 percent, 2.3 percent, and 11.2 percent of sales, respectively, with a total operating expense at 23.3 percent of sales on average. Walmart’s cost advantages in these var- ious areas helped the company achieve an operating income 2.6 percent of sales higher than the industry average. At its 25th anniversary in 1987, Walmart had 1,198 stores, $16 billion in sales, and 200,000 associates. Just 25 years later, at its 50th anniversary in 2012, Walmart had become the world’s biggest retailer with 10,130 stores, $444 billion in sales, and 2.2 million associates. See Exhibit 4 for a summary of Walmart’s key income statement and balance sheet items.

70%

60%

50%

40%

30%

20%

10%

0%
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

EXHIBIT 3 Walmart’s Performance Ratios over Time
Source: Walmart Annual Reports.

Walmart’s 5-Year Global Operating Results

2016 2014 2012 2010
Net sales $478,614 $473,076 $443,416 $404,697
Net sales increase –0.7% 1.6% 6.0% 0.9%
Comparable sales in the US 0.3% –0.5% 1.6% –0.8%
Walmart US 1.0% –0.6% 0.3% –0.7%
Sam’s Club –3.2% 0.3% 8.5% –1.4%
Gross profit margin 24.6% 24.3% 24.6% 25.0%
Operating, SG&A as a % of net sales 20.3% 19.30% 19.30% 19.80%
Operating Income $24,104 $26,872 $26,491 $23,969
Operating Income % Sales 5.0% 5.7% 6.0% 5.9%
Walmart Income (Attributable) $14,694 $15,918 $15,734 $14,433
Net income per share of common stock:
Walmart (Attributable) 4.57 4.85 4.53 3.72
Dividends 1.96 1.88 1.46 1.09
Financial Position
Inventories $44,469 $44,858 $40,714 $32,713
Property, & other assets, net $116,516 $117,907 $112,324 $102,307
Total assets $199,581 $204,751 $193,406 $170,407

Long-term debt $44,030 $44,559 $47,079 $36,401
Shareholder equity $80,546 $76,255 $71,315 $70,468
Source: Walmart Annual Reports.

Walmart’s Operations
Walmart’s structure and systems are designed for efficiency. The key elements of Walmart’s operations strategies include its distribution model, relationships with suppliers, human resources management, marketing and merchandising practices, store formats, and inter- national operations.

Distribution
Walmart’s distribution centers are typically 1 million square feet in size, require about
$70 million to build, are highly automated, and operate 24 hours a day. Each distribution center receives hundreds of truckloads per day and serves roughly 150 stores within a 150-mile radius. Products typically move through the distribution center within 48 hours, and often in far less time than that.6 As of 2011, Walmart was the world leader in cross-docking procedures, in which goods brought into the distribution center exit the inbound truck and are loaded immediately onto an outbound truck headed to a Walmart store.
Technological innovations enable Walmart’s efficient distribution. The company promotes a system for tracking goods by attaching radio frequency identification (RFID) tags to boxes so that cases no longer have to be manually inspected.7 The RFID program was often fought by suppliers because of the expense of implementation. It is so important to Walmart’s efficiency and reductions in shrinkage (theft), however, that Walmart vigorously enforces its adoption, imposing penalties on its suppliers that do not use the system.8 Walmart also devised a Scan ‘N’ Pay (SNP) system, which means that a supplier’s product is owned by the supplier until the product is actually sold by Walmart.9 Because of these efficiencies, analysts estimated that, in the mid-1990s, Walmart’s inbound logistics expenses were roughly 1 percent less as a percentage of sales than the expense of its direct competitors.10

Supplier Relationships
Walmart is known for tough but productive relationships with its suppliers. Traditionally, negotiations with Walmart have been no-frills experiences involving clear expectations. For example, Walmart typically holds negotiations in small rooms furnished only with a table and four chairs.
Walmart’s ability to put a supplier’s product on the shelves of more than 10,900 stores gives it tremendous leverage with suppliers. If suppliers don’t show up to the negotiations with their price in an already bottom-line position, then Walmart is quick to send the supplier home to retool, or to move on in search of another supplier that would be more competitive. At the same time, however, Walmart has given suppliers access to some of the most accurate consumer data in the world.11 In the 1990s, for example, Walmart implemented an electronic data interchange (EDI) system and operated RetailLink, which provides all of its suppliers with up-to-the-minute, point-of-sale data from all Walmart locations worldwide. Tying its manufac- turers to its stores in this way is one of the primary factors that led Walmart to achieve the lowest operations costs in the industry. According to Richard Sherman, president of Gold and Domas research, “Walmart can be heavy-handed, but its contribution to the supply chain has been to lead the market to adopt best practices they should have been adopting anyway. For the donkeys, those that haven’t been paying attention, the hand is heavy, the 2-by-4 is hard. If you have been paying attention, it’s not a 2-by-4. It’s an opportunity.”12 Taking advantage of this opportunity, some larger manufacturers, such as Procter and Gamble, have located large teams of employees near Walmart’s headquarters in Bentonville, Arkansas, to better coordi- nate with Walmart.
To further encourage suppliers to streamline costs, Walmart developed a Sustainability Index for all of its products. The index uses various methods to track all stages of the product life cycle, from raw materials to disposal, and holds suppliers accountable for any unnecessary

costs added to the supply chain, such as high-carbon materials, excess packaging weight, or an overly long supply chain.13 In order to efficiently manage its sophisticated distribution net- work and supply chain, Walmart has made significant investments in information technology. Walmart spends 0.1–0.3 percent on information technology, as a percentage of revenues, a figure 5 to 10 times more than competitors do in absolute dollars.

Human Resource Management
Walmart has received mixed reviews regarding its human resource management practices. For example, Walmart has been recognized as one of the 100 best companies to work for in the United States, but at the same time, it has occasionally been criticized for its nonunion stance and for gender discrimination. Walmart has worked hard to keep the higher costs of union- ized labor out of its operations. For example, during one attempt to form a meat-cutters union, Walmart simply closed its meat-cutters division and outsourced the entire operation. This sent a clear signal that Walmart was determined to keep its labor costs as low as possible. At one point in time during its history, Walmart’s labor costs were only 10.1 percent of sales, compared to 11.2 percent for its direct competitors.14
Despite their nonunion status, Walmart’s employees generally have been described as motivated and committed to Walmart. An executive at one supplier commented, “Walmart is a lean operation managed by extremely committed people . . . They live to work for the glory of Walmart. This may sound like B.S., but it’s incredible. Our production, distribution, and marketing people who visit Walmart can’t believe it.”15 Some observers attribute employee enthusiasm to the work ethic and culture created at Walmart by Sam Walton. Others attribute it to the fact that profit sharing is available to associates after one year of employment. Walmart contributes a percentage of every eligible associate’s wages to his or her profit-sharing account. Upon leaving the company, the associate can access funds in his or her account either in cash or Walmart stock. Walmart also offers an associate stock ownership plan for the purchase of its common stock, at one time matching 15 percent of up to $1,800 in annual stock purchases. Managers and supervisors are compensated on a salaried basis, and they earn additional incen- tive compensation based on store profits. Store managers usually earn more than $100,000 per year. Members of the top management team typically earn more than 90 percent of their compensation from incentives based on their performance, and less than 10 percent as salary. Walmart typically hires people right out of high school or college. For the most part, management consists of individuals who started their careers at Walmart and have worked their way up the ladder. The company invests in training assistant managers and managers in the Walmart way of doing things. For example, most management training seminars are offered
at the distribution centers, thereby exposing store managers to the distribution network.
Walmart doesn’t have regional offices, which saves the company an estimated 1.5–2.0 percent of sales each year. Instead, regional managers are located at the company’s Bentonville, Arkansas, headquarters and spend roughly 200 days per year visiting stores. Regional managers begin their visits early on Monday morning, and they try to return to Bentonville on Wednesday or Thursday “with at least one idea which would pay for the trip.”

Marketing and Merchandising
From the beginning, Walton’s basic merchandising principle for Walmart was to focus on lead- ing the industry in sales-per-square-foot by offering a broad assortment of extremely low-priced goods. To this end, Walmart carries a wide range of national brands and private label products. In 2003, private label sales were on the rise for Walmart, but they still made up only about 20 percent of annual sales, compared to 50 percent for Target. In 2009, Walmart redesigned the packaging of its largest private label brand, Great Value, to be more visible. The Great Value brand was expected to grow from $13 billion in sales in 2009 to $20 billion in 2014.16 Walmart’s focus on apparel is comparatively lower than that of competitors. Only 10 percent of US sales is apparel, compared to Target’s nearly 40 percent.17

Advertising is also limited. Walmart started with almost no advertising, and its advertising costs were still only 0.6 percent of sales in 2010, compared to Target’s 2.0 percent. The ads the company does run are focused on Walmart’s low prices. Pricing for Walmart has always been built around Every Day Low Prices (EDLP), but there have been some changes to how the focus was implemented over time. Walmart’s original slogan was “Always the lowest price,” but lawsuits by the competition pushed the company to change the slogan to “Always low prices. Always.” The slogan changed again in 2007 to “Save money. Live better.”
To ensure that prices are, indeed, low every day, Walmart conducts weekly price checks in nearly 99 percent of its competitors’ stores. Managers at local stores are given the flexibility to adjust prices to meet, or beat, the competition. One study found that when Walmart and Kmart are located within a mile of each other, Walmart’s prices are 1 percent lower than Kmart’s. In rural locations where Walmart is the only discount retailer in town, Walmart’s prices are found to be 6 percent higher than in locations where a direct competitor is nearby.
During the US recession of 2008–2010, an increased number of middle-class buyers came to Walmart, looking for savings. Hoping to keep the new customers after the economy improved, Walmart launched Project Impact, an initiative designed to improve the quality of the shopping experience in order to help Walmart compete more effectively with Target. Project Impact focused on widening aisles, lowering shelves, and removing palleted promotions from walk- ways to clean up the overall look of stores.18 However, at the beginning of 2011, after eight straight quarters of reductions in same-store sales,19 Project Impact was deemed a failure. Although increasing its appeal to the middle-class, Walmart had alienated its core blue-collar, working-class customer. Walmart decided in 2010 to return to its original high-stacked, pal- leted aisles.20
While still commanding a strong lead in its key measure of success, sales-per-square-foot, Walmart had watched the gap between it and its competitors gradually narrow over the course of a decade. In 2003, Walmart had sales-per-square-foot of $440, and Target had $249. By 2012, Walmart’s sales-per-square-foot had dropped to $428, and Target’s had risen to $302.21

Walmart Store Formats
In 2000, Walmart’s original discount-store format still dominated its store-format mix, but during the next 10 years, the original format was supplanted by the much larger supercenter for- mat, which adds a full-line grocery department and other specialty departments to the original discount store. Walmart’s original intent in including groceries was to drive traffic to its general merchandise, but the grocery department has been profitable on its own, and it now represents about 35 percent of Walmart’s earnings.22 At roughly 90,000 square feet, Walmart’s supercenters are double the size of its approximately 42,000 square-foot original discount stores. At the begin- ning of 2011, Walmart had 2,898 supercenters worldwide (including many discount centers that had been converted to supercenters) and was down to 701 discount centers worldwide.23
Walmart also operates Sam’s Club warehouse stores. The company built its first Sam’s Club in 1983 after Sam Walton observed the rapid growth of the Price Club, and the new orga- nizational group quickly grew to dominate the segment. The warehouse store requires a fee for membership, but it then sells heavily discounted goods to customers right off the pallets. There tend to be far fewer stock keeping units (SKUs), or individual products, available than in a Walmart supercenter, and the available products also tend to change quickly.24 However, Costco, which some said was the only competitor that Walmart feared,25 surpassed Sam’s Club, to become the most successful warehouse store retailer in the world. In 2012, Costco had reve- nues of $97 billion from 644 stores, while Sam’s Club had only $49 billion in revenues from 609 stores.26 Costco’s success is attributed to focusing on a higher-income client by selling higher quality or, at times, even luxury goods at discount prices. Sam’s Club adjusted its product mix for a short time toward the higher-quality products, but its core customers never really appre- ciated them.27
As Walmart started to achieve critical mass in the rural and suburban markets for its discount centers and supercenters, the company moved to enter even smaller markets, with a format called the Neighborhood Market.28 The Neighborhood Market is essentially a

supermarket. It focuses on groceries, but it also carries drugstore products and some mer- chandise. Walmart’s plans were to roll out the Neighborhood Market in relatively slow fashion. It had 112 Neighborhood Markets in operation in 2008, and the number had grown to only 160 by 2010.29 See Exhibit 5 for a summary of the type of Walmart and competitor stores by life- style region.
Walmart also sells online, but online sales account for only $6 billion in 2010. In Walmart
.com’s early years, store managers fought hard against the website and even complained about hav- ing the website address emblazoned on in-store bags. Not surprisingly, managers were concerned that online sales would cannibalize store sales and thus reduce their bonuses. The online store also struggled to replicate the price advantage held by Walmart’s brick-and-mortar stores. In the online arena, Amazon.com is often the low-price leader. Amazon.com also carries more than 14 times as many products online, and its website receives twice as many visits per month as Walmart’s.30

International
Walmart started to expand internationally in 1991,31 and by 2011, it had more stores outside the United States, with 4,557 international locations and 4,413 domestic locations.32 In 2013, Walmart’s international division was its fastest growing division by revenues, and more than 28 percent of its sales came from international markets.33
Walmart expanded into international markets both by building its own stores, as it had in the United States, and through joint ventures and acquisitions. It acquired ASDA in the United Kingdom in 1999, and despite local protest, it purchased of 51 percent of Massmart in South Africa in July 2011. In each of the markets into which Walmart expanded, it faced unique obsta- cles. In some nations, Walmart was unable to overcome the obstacles to its entry. For example, in Germany it faced the challenges associated with strong labor unions, as well as strong com- petition from local competitors, including Aldi and Lidl. Unable to overcome those obstacles, Walmart exited Germany in 2006. In South Korea, Walmart found consumers who were often very loyal to local chains and small retailers. Consumers also frequently avoided buying the low-cost goods made in China that often appeared on Walmart’s shelves, because China was a major competitor of Korea. Walmart also left the Korean market.
In other nations, including China, Walmart persevered despite obstacles. Walmart’s initial Chinese stores did not carry enough local merchandise, and prices were high relative to many local retailers. It also had to deal with a less technologically developed supply chain. More- over, the two largest Chinese retailers, Lianhua and Huilan, merged into a state-owned mega- chain called the Bailan Group. But Walmart repositioned the stores in China, adding local

EXHIBIT 5 Walmart’s and Competitors’ Store Locations By Lifestyle Region
Affluent/Elite Mid/Downscale Suburbs Inner City Small-Town Living Rural America
Walmart Discount Stores 375 159 217 673 1,227
Kmart Discount Stores 465 216 411 544 458
Target Discount Stores 414 123 197 218 46

Walmart Supercenter 67 44 61 247 535
Super Kmart 27 12 20 27 18
Meijer 49 15 8 60 13
Super Target 25 0 4 6 2

Walmart Neighborhood Market 8 2 5 5 0
Source: Adapted from Pankaj Ghemawat, Stephen Bradley, and Ken Mark, “Wal-Mart Stores in 2003,” Harvard Business School Case 9-704-430, 2004.

merchandise, aiming to have Chinese consumers view Walmart as providing good value, if not the lowest prices.
Walmart’s entrance into India and Russia was met with so many obstacles that Walmart stopped expanding and withdrew from each market.34 In India, government regulations pre- vented Walmart from executing a profitable strategy by requiring the company to buy 30 percent of products from local small and midsize businesses in India. In addition, internal corruption within Walmart’s Joint Venture with Bharti, an Indian retailer, forced Walmart to buy out Bharti’s share and operate independently.35 In Russia, Walmart attempted an acquisition strategy for several years, but it failed to win bids because of financial and cultural pressures.36 As it expanded internationally, Walmart also had to compete with other international dis- count retailers, including Tesco, Aldi, and Carrefour, all of which were very large and pushing for international growth at the same time as Walmart. Competition was strongest in these stores’ home markets. Competition from extreme discount retailer Aldi was a key factor in Walmart’s withdrawal from Germany. Similarly, competition from already-established Carrefour in Brazil and Argentina made success difficult there. In the United Kingdom, Tesco quickly built its own
supercenters after Walmart entered the UK with its superstore format.
Walmart’s first approach to international operations was to hire a president for the company in each country. The presidents had control of all Walmart operations for their coun- tries, making all decisions related to sourcing, merchandising, and real estate.37 Eventually, Walmart chose to fall back on its success with centralized distribution and management, how- ever. In 2010, the company announced the formation of a global supply chain, with purchasing and distribution for the entire international division combined into one centralized system.38 Such decisions were expected to keep Walmart’s annual growth steady at roughly 4.7 percent through 2015, but lagging the projected growth of Carrefour and Tesco.

Looking Forward: New Competitors and New Challenges
Amazon has been a formidable opponent in Internet retailing in both US and foreign markets. Although Walmart had stumbled out of the gate with regard to Internet sales, it appeared that Walmart was making some headway. By 2013, Walmart had become the No. 4 online retailer by sales, with sales growth of 30 percent, which even topped Amazon’s sales growth of 20 percent, albeit on a smaller sales base.39 Because of Walmart’s online growth rates, some analysts pro- jected that it would capture the No. 2 online retailer spot in the near future.40

Competition
In addition to Amazon.com and Costco, perhaps the most significant new low-cost com- petitor for Walmart was Aldi, an extreme discounting retailer based in Germany. Aldi was founded in 1961 and invented the hard-discounter format. The hard-discounter model, also replicated by other competitors, typically offers a very low number, about 1,500, of SKUs. In contrast, Walmart supercenters offer about 100,000 SKUs. Aldi stores are about one-tenth the size of a Walmart, have lower staffing levels, and are often located in low-rent districts. Private labels typically make up the vast majority of hard-discounters’ lines.41 In Aldi’s case, more than 85 percent of its sales are private label.42 Aldi cut costs further by requiring cus- tomers to bring their own bags, rent their own shopping carts for a quarter, and purchase goods only using cash, debit, and EBT cards. Furthermore, Aldi cut labor and energy costs by staying open only during popular shopping hours. In a unique twist, Aldi also offered double guarantees, promising shoppers to replace their products and refund their money if they weren’t satisfied.43 All of these factors contributed to Aldi’s products being priced nearly 29 percent cheaper than Walmart’s.44

Similar to Walmart’s growth through the latter part of the twentieth century, Aldi was mostly ignored by the competition during its early years. Competitors made several assump- tions about Aldi: Its hard-discounting could succeed only in Europe. Aldi stores attracted only the poor or new customers only during recessions. Its products were of inferior quality. Instead, the company’s store products has been shown to be comparable to national brands, the middle-class is shopping there,45 and as of 2014, Aldi had more than 1,000 stores in 30 states in the United States.46

New Challenges
In 2012, CEO Michael Duke admitted that some of Walmart’s initiatives, such as Project Impact, had been less than successful. But Walmart still has a great deal to be proud of. When Doug McMillon took over as CEO in 2013, Walmart was the world leader in retailing revenues by a wide margin. Its annual sales were more than double those of its next largest competitor, and it continues to have consistent sales growth in the United States and internationally. The com- pany had been listed as one of Fortune’s World’s Most Admired Companies every year for the previous decade. Moreover, Walmart is becoming less and less an American company and more and more a global discount retailer.
But success in the future will require responding effectively to the growing trend toward online purchases and the emergence of Amazon.com as a major competitor. The online retailing market, 11.7 percent of total retail sales in 2016, was expected to grow from roughly $390 billion in 2016 to more than $1 trillion by 2026.47 According to Internet Retailer, the problem for Walmart, and other companies trying to compete online, is that Amazon
.com drove 65 percent of e-commerce growth in 2016.48 By the end of 2016, all major brick- and-mortar retailers were feeling the heat from online purchases as Sears, JC Penney, and Macy’s were among a throng of companies announcing store closings. Even Walmart seemed to feel the heat as profits dropped by 8 percent from the third quarter of 2015 to the third quarter of 2016. Walmart CEO McMillon responded by cutting headcount by 1000 at its corporate headquarters. But simply cutting headcount would not help Walmart suc- ceed with online customers and with millennials, a generation that was not enamored with Walmart’s offering.
In response to this trend toward online purchases, and to attempt to better connect with millennials, Walmart decided to purchase Jet.com for $3.0 billion in September 2016. Like Amazon.com, Jet.com was an online discount retailer but one that focused on more price sensitive customers by attempting to provide better pricing than Amazon.com using a dynamic pricing model. Essentially, customers are rewarded for buying multiple items, which decreases shipping costs and thus decreases customers’ costs. Then, when the cus- tomer goes to check out, Jet’s algorithm behind the scenes figures out which sellers are the most efficient in terms of shipping and price, so if one seller is closer but charges more for shipping, you’ll buy from a more distant seller that charges less for shipping and thus results in a lower overall cost for the customer. “Our technology is built more like a real-time trading system than it is an e-commerce site,” says Jet.com founder Marc Lore. “As people shop, we’re repricing products to reflect the true underlying economics of getting those products to the customer, based on what products are already in the (checkout) basket and based on how far away those products are from where the customer lives.”49 One of the first things that Walmart CEO McMillon did after the acquisition was make Lore president of Walmart’s US e-commerce business. But the acquisition of Jet.com—and putting Lore in charge of Walmart’s e-commerce business—raised a number of questions going forward. For example, should Jet.com continue to be a completely separate site from Walmart.com? If so, for how long? Should Walmart.com adopt some of the innovative pricing approaches used by Jet
.com? Would putting Lore in charge of Jet.com and Walmart.com be sufficient for Walmart to figure out a way to compete more effectively with Amazon.com in online discount retailing? Or were other actions necessary for Walmart to compete successfully in both e-commerce and brick-and-mortar retailing simultaneously?

References
1Walmart, 2014 Annual Report, http://www.corporatereport.com
/walmart/2014/ar/_pdf/WMT2014AnnualReportFinancials.pdf, accessed April 1, 2014.
2S. Walton and J. Huey, Sam Walton, Made in America: My Story (New York: Doubleday, 1993).
3Ibid.
4Ibid.
5Walmart, Investor FAQs, http://stock.walmart.com/faqs, accessed April 1, 2014.
6P. Ghemawat, S. Bradley, and K. Mark, “Wal-Mart Stores in 2003,” Har- vard Business School Case 9-704-430, 2004.
7Ghemawat, Bradley, and Mark.
8J. Bonney, “Size, Scale, Innovation. Always.,” Journal of Commerce (Octo- ber 19, 2009).
9Ghemawat, Bradley, and Mark.
10S. Bradley and P. Ghemawat, “Walmart Stores, Inc.,” Harvard Business School Case 9-794-024, 1996.
11W. Hesterly, “Case 1-2: Wal-Mart Stores Inc. in 2008,” in Strategic Management and Competitive Advantage: Concepts and Cases, 3rd edition, ed. J. Barney and W. Hesterly (Boston: Prentice Hall, 2009), PC 1-15.
12Bonney. 13Ibid.
14Bradley and Ghemawat.
15Ibid.
16J. N. Frank, L. Celmer, and K. Parker, “Top 30 Private Label Retailers: Walmart Tops . . . ,” Private Label Buyer (September 1, 2010).
17Women’s Wear Daily Staff, “The Personality of Cheap: Profiling the Value Retailers,” Women’s Wear Daily (August 20, 2010).
18J. Crosby, “Wal-Mart Shifts Strategy. The Recession Has Driven New Consumers to the Retail Giant . . . ,” Star Tribune (December 6, 2009).
19A. Cheng, “Is Wal-Mart Losing Its Price Edge? Morgan Stanley Starts Wal-Mart at Equal Weight . . . ,” SmartMoney (July 13, 2011).
20M. Bustillo, “Wal-Mart Plans Small, Urban Stores,” The Wall Street Journal (October 14, 2010).
21Walmart, 2012 Annual Report, http://www.walmartstores.com/sites
/annual-report/2012/WalMart_Financials.pdf, accessed April 1, 2014; Target, 2012 Annual Report, https://corporate.target.com/_media
/TargetCorp/annualreports/content/download/pdf/Annual-Report
.pdf?ext=.pdf, accessed April 1, 2014.
22Ghemawat, Bradley, and Mark.
23Wal-Mart, 2011 Annual Report, available at http://stock.walmart.com
/annual-reports, accessed April 1, 2014.
24Hesterly, PC 1-15.