Problem
Walmart, the largest discount store in the United States, has had a very unique run. Since its establishment in 1969, the establishment has succeeded in surging ahead of its rival discounter – K-mart. But it was only after the 1980’s that the company succeeded in expanding in an unprecedented, yet successful manner. With its expansion, however, the company also took care to develop a robust purchasing and distribution network. In addition, the management actively focused on store operations and related marketing. Its Human Resources and Administration policies made sure that even the top management got involved in any ‘people issues’ that came up in its individual stores, thus keeping out unions from the store. However, a unique problem presented itself before the management.
The problem was whether or not the company should seek to diversify its operations from its existing discount store format to a Warehouse/Wholesale Club and other alternative formats. While the Sam’s Warehouse Club was a very successful venture in that space, the competition was progressively increasing in the wholesale Warehouse space. It was not yet very clear, as per the analysts, if multiple competitors could exist profitably in the same market or the extent to which individual company profits could be hit due to competition in a single market. (Ghemawat, 2007, p. 9) The latent potential in Warehouse market coupled with the fact that Walmart had achieved impressive sales targets in its discount retail store format led the management to examine this strategic move of business diversification. In case of Walmart, Sam’s Club was geographically restricted to California and Arizona. Analysts believed that the management at Walmart would increase both store locations and the geographical spread of the warehouse business. The main question for the management is should they, should focus towards diversification in the form of expansion of the Wholesale and Warehouse business? If so, should how should they treat the retail discounting business? Two separate plans will be discussed here with an aim to provide a solution for this problem.
Plan 1
In this case, Walmart should focus on its existing discount retailing business and should consider a status quo on its expansion of the Wholesale merchandise business, at present with the possibility of focusing on this segment after another three to five years. By executing this strategy, the company will have a status in the discount store business that will be unchallenged by competition. In the duration, the company could also focus on a complete geographical expansion that would cement its standing in the retail business as a nationwide discount retail store. For instance, the company has the majority of its stores in about 7-8 states while it has limited presence or virtually no presence in the remaining states. It would make strategic sense; therefore, for the company to expand the retail store operations to these other states so that once the discount retail segment is captured, the company could focus its sights on diversification through the wholesale business.
With regard to the warehouse business, the company could operate and upgrade their existing warehouses by aiming to increase service quality, but consider a status quo on existing business expansion in this segment. As mentioned, this strategy would help the company consolidate its position in the retail discount market. Also, since most analysts are not very sure of the impact of competition on the warehouse business and its profitability, it would make sense for the company to adopt a ‘wait and watch’ policy before burning precious cash. One could term this particular strategy as a prudent policy, yet a safe one. Therefore, the company management could consider this option only if they feel that it is better to employ a cautious outlook.
Plan 2
In this plan, the company would go ahead on expansion of its Warehouse businesses either by signing of additional leases or expanding its Warehouse network into states where it had no wholesale business stores. The rationale behind this strategy would be that the company has reached a stage in its retail business where it is a clear market leader and there is no other competitor in that space who could displace it from that position. Hence, it would make sense for the company to experiment by diversifying its ventures rather than continuing its focus on the discount retail segment.
As for the retail business, the company has two options – 1. Go ahead full steam with the discount retail store expansion as per targets or 2. Tone down the rate of expansion of retail stores and divert resources towards the expansion of the Warehouse business. The company could consider the second option only if decides to dedicate its resources solely for the expansion of the Warehouse business. These options, therefore, are important decision points for the company management and the decision taken could impact the company’s growth potential. Thus, in a way, the company would carry out its wholesale business expansion at the cost of its retail store business.
Recommendation
Of the two plans, Plan 1 seems to be the prudent and safe option. However, considering Walmart’s previous forays into ventures that involved taking calculated risks, Plan 2 seems the better of the two options. There are many reasons for choosing Plan 2 over Plan 1. The rationale for Plan 1 was that the Warehouse business was relatively unknown with little history or track record. As a result, a cautious approach would mean that Walmart would operate in its ‘comfort space,’ namely the discount retail store segment and venture into the Wholesale business once it gauges its Sam’s Warehouse and Club outlet store performances over different geographies.
However, both the retail and wholesale spaces are characterized by competition in which Walmart has emerged as the market leader. In such a case, it would not be very befitting for the company to follow Plan 1, since both investors as well as the public would probably expect an expansion of the Warehouse business. Moreover, the company’s experience also showed that Sam’s Warehouse outlets could also operate along with Walmart discount stores, making it all the more lucrative for the company to consider focusing on both the businesses.
Within Plan 2, the company should consider if it should either tone down retail outlet expansion or if it should go ahead with the retail store expansion as well as Warehouse expansion. In this case, the recommendation would be to, ideally, go ahead with expansion of both retail as well as Warehouse formats given their synergies and their diverse clientele. Also, given the fact that one format does not cannibalize the other even when the stores are placed next to one another, it makes all the more sense for Walmart to execute the strategy in line with Plan 2 so that the company can keep its brand image as well as its objective of diversification intact.
Reference
Ghemawat. P (2007). Wal-Mart Stores’ Discount Operations. Cambridge, MA: Harvard Business School Publication.
