WAL-MART AND ASDA: BATTLING FOR RETAIL SUCCESS

In the spring of 1999, the shareholders of UK retail group, Kingfisher, were smiling. They had just seen their share price rocket from around 5 (7.2) to over 9 (13) in less than a year with the news that Kingfisher was to take over Asda, the UK supermarket chain. Geoffrey Mulcahy, who headed Kingfisher, saw the move as another step towards his ambition of being a world-class retailer, where the efficiencies of buying merchandise in massive quantities, managing large stores, and achieving lower prices and higher sales turnover would reap further benefits for shareholders, employees and customers alike. Mulcahy, the normally taciturn former Harvard MBA (he even calls his 40-foot boat No Comment), had turned around the ailing Woolworths chain by selling off its city sites to release cash that could be used for investment. He discovered that Woolworths owned a small do-it-yourself chain called B&Q. By building large retail sheds backed up by service provided by ex-plumbers, electricians and the like, an advertising campaign based on the tag-line You can do it when you B&Q it!, and low prices, the chain became a success story of the 1990s, beating off me-too rivals such as Do It All, Sainsburys Home-base and US invaders such as Texas. By adding the electrical goods retailer Comet and the health and beauty products chain Superdrug, Kingfisher was on the road to fulfilling Mulcahys dream taking over Asda was the next step. Sadly, his vision was to be shattered by Wal-Mart, the US predator that wanted to expand its European presence, which had already begun by the acquisition of the German warehouse chain Wertkauf. Mulcahy was well aware that Wal-Mart was lurking in the wings, but all the talk was that the US retailer was cool about entering the UK market where retail competition was intense and planning restrictions made the likelihood of opening the kind of vast Supercentres it operates in the USA unlikely. All that changed one June Monday morning when he received a 7 am telephone call from Archie Norman, Asdas chief executive, to say that he had a bit of a problem. The problem was that Asda had agreed a deal with Wal-Mart. Wal-Mart USA Enter any Wal-Mart store in the USA and consumers are struck by the sheer scale of the operation. These are stores of over 200,000 square feet in which seven UK superstores could be accommodated. Next come the greeters, who welcome customers into the stores, give them their card in case they need help and put a smiley sticker on them. Then come the prices where, for example, a cotton T-shirt that would sell for the equivalent of around $15

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(9.40/13.5) in a UK department store sells for $1 (0.60/0.90) in Wal-Mart. The choice of products is wide ranging, from clothes via groceries and pharmaceuticals to electrical goods. Stores are well organized with the right goods always available, kept neat and clean in appearance and with goods helpfully displayed. At the heart of the Wal-Mart operation are its systems and information technology: 1000 information technologists run a 24-terabyte database; its information collection, which comprises up to 65 million transactions (by item, time, price and store), drives most aspects of its business. Within 90 minutes of an item being sold, Wal-Marts distribution centres are organising its replacement. Distribution is facilitated by state-of-theart delivery tracking systems. So effective is the system that when a flu epidemic hit the USA, Wal-Mart followed its spread by monitoring flu remedy sales in its stores. It then predicted its movement from east to west so that Wal-Mart stores were adequately stocked in time for the rise in demand. Wal-Mart also uses real-time information systems to let consumers decide what appears in its stores. The Internet is used to inform suppliers what was sold the day before. In this way, it only buys what sells. Its relationship with its suppliers is unusual in that they are only paid when an item is sold in its stores. Not only does this help cash flow, it also ensures that the interests of manufacturer and Wal-Mart coincide. Instead of the traditional system where once the retailer had purchased stock it was essentially the retailers problem to sell it, if the product does not sell it hurts the manufacturers cash flow more than Wal-Marts. Consequently, at a stroke, the suppliers and retailers interests are focused on the same measures and rewards. There is no incentive for the supplier to try to sell-Wal-Mart under-performing brands since they will suffer in the same way as the retailer if they fail to sell in the store. Wal-Mart staff are called associates and are encouraged to tell top management what they believe is wrong with their stores. They are offered share options and encouraged to put the customer first. Wal-Mart has enjoyed phenomenal success in the USA, but faced a tough challenge by its rival Target, which has built its business by selling similar basic consumable goods like soap at low prices, but also higher-margin, design-based items such as clothing and furnishings. The problem Wal-Mart faced was that consumers were buying groceries and toiletries at its stores but not its clothing, furnishing or electronics ranges. Target was stealing customers by positioning itself as an up-market discounter using designers such as Isaac Mizraki and

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stylish lifestyle advertising to attract consumers to its clothing and furnishings. Wal-Mart, by contrast, was using mundane in-store advertising focusing on low prices. Wal-Marts response was to commission, for the first time, a marketing research survey. Hitherto it had believed marketing research was the province of its suppliers. The survey of its customers revealed that Wal-Marts clothing was considered dull. This led to the launch in 2005 of a more up market fashion brand, Metro 7, targeted at the group Wal-Mart calls selective shoppersthose who buy groceries and toiletries but who previously would not have bought clothing. The new clothing range was backed by a change in advertising, including a spread in Vogue magazine and a move to lifestyle advertising, designed to appeal to what the retailer termed fashion-savvy female customers with an urban lifestyle. However, Metro 7 failed as the line was not hip enough to attract fashion buyers or cheap enough to appeal to traditional Wal-Mart customers. Wal-Mart also redesigned its electronics and furnishings departments and improved the product ranges to appeal to wealthier customers. In consumer electrics, for example, it added high-end products from Sony LCD televisions and Toshiba laptops to Apple iPods, and backed the new ranges with aggressive advertising campaigns. Departments have been redesigned with wider aisles and lower shelves. More recently, Wal-Mart began a revamp of all its stores to make them appear less dull and appeal to middle income shoppers trading down in the recent recession. The retailer has also employed what it terms its win, play or show strategy. Win product categories are those where Wal-Mart can outmanoeuvre rivals with low prices on high demand products such as flat-screen TVs, including higher end models. This has increased Wal-Marts share of TVs while increasing margins. Play applies to areas like clothing where Wal-Mart can be a player but is unlikely to dominate. Here product lines are pruned to top sellers like $20 L.e.i. jeans while cutting back on higher-end items. Show are the onestop-shopping essentials such as hardware, which are necessary to compete in the USA with rivals like Home Depot. Here, product lines like hammers and tape measures are restricted to one or two brands. Wal-Marts overseas operations Since 1992 Wal-Mart has moved into thirteen countries and trounced the competition. In Canada and Mexico it is already market leader in discount retailing. In Canada it bought Woolco in 1994, quickly added outlets, and by 1997 became market leader with 45 per cent

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of the discount store marketa remarkable achievement. In countries such as China and Argentina it has been surprisingly successful and international sales have grown to around 25 per cent of total revenue. In 1998 it entered Europe with the buying of Germanys Wertkauf warehouse chain, quickly followed by the acquisition of 74 Interspar hypermarkets. It immediately closed stores, then reopened them with price cuts on 1100 items, making them 10 per cent below competitors prices. Wal-Marts German operation was not a success, however, because of the presence of more aggressive discounters such as Aldi. In 2006 it admitted failure by selling its 85 stores to a local rival, Metro, at a loss of 530 million (740 million). Wal-Marts entry into the UK was the next step in its move into the European market. Asda was a natural target since it shared Wal-Marts everyday low prices culture. It was mainly a grocery supermarket but also sold clothing. Its information technology systems lagged badly behind those of its UK supermarket competitors, but it has acted as consumer champion by selling cosmetics and over-the counter pharmaceuticals for cheaper prices than those charged by traditional outlets. It has also bought branded products such as jeans from abroad to sell at low prices in its stores. Wal-Mart decided to keep the Asda store name rather than rebranding it as Wal-Mart. Although supermarket fascias continue to carry the Asda logo only, the largest store format was renamed Asda Wal-Mart Supercentre. Most of Asdas stores are located in the north of the UK.) The early signs were that the acquisition was a success with sales and profits rising. A major move was to create a speciality division that operates pharmacy, optical, jewellery, photography and shoe departments. The aim was to make store space work harder (i.e. improve sales revenue and profits per square metre). Asda has also benefited from the introduction of thousands of new non-food items across a wide range of home and leisure categories. Space has been made for these extra products in existing food-dominated supermarkets by decreasing the amount of shelf space devoted to food and reducing pack sizes. The George line of clothing has been a huge success and was expanded to include a lowerpriced version of the brand called Essentially George. So impressed were Wal-Mart management with the success of George clothing that they introduced the range in their own stores..Asda took the George brand to the high street by launching standalone 10,000-

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square-foot clothing stores branded George, The stores carry the complete line of Georgebrand mens, womens and childrens clothing at prices the same as those offered in the George departments in Asda supermarkets. However, in the face of competition from Primark and New Look they have been only moderately successful.. Besides expanding its product lines, Asda has also focused on cutting prices, aided by its inclusion in the Wal-Mart stable, which brings it enormous buying power. For example, since the take-over, it has made 60 per cent savings on fabrics and 15 per cent on buttons. This has meant price reductions on such clothing items as jeans, ladies tailored trousers, skirts, silk ties and baby pyjamas. In four years, the price of George jeans has fallen from 15 (21.6) to 6 (8.6). Change of fortunes Asdas initial success was reflected in its overtaking of Sainsburys to become the UKs number two supermarket chain behind Tesco in 2004. Shortly afterwards, however, Asdas fortunes changed. Faced with a rampant Tesco and a resurgent Sainsburys, the company lost market share. When Wal-Mart bought Asda the intention was to build huge US-style hypermarkets. Unfortunately, shortly after the acquisition, UK planning rules tightened to prevent out-of-town shopping developments. Tesco, and to a lesser extent Sainsburys, entered the smaller store market, opening outlets in town and city centres and petrol stations where planning restrictions were much less severe. Asda kept its focus on large supermarkets. In 2005, Andy Bond was promoted internally to replace Tony de Nunzio, who left to join Dutch non-food retailer Vendex. Faced with a dominant Tesco with over 30 per cent market share, and a more aggressive Sainsburys under the leadership of Justin King, Bond faced an enormous challenge. Helped by Asdas positioning as a cut-price, full-range supermarket in the recent economic recession, Bond has rejuvinated Asda Some of his key actions have been as follows. Removed 1400 managers: 200 jobs at Asdas head office and 1200 junior managerial positions in stores were cut. Part of the savings were invested in front-line customer service staff in stores. Opened 17 more Asda Living stores to bring the total to 22 and developed the Living range online: these are non-food stores offering such products as furnishings, electrical goods, DVDs and beauty items.

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 Slowed the growth of George fashion store openings. Trialled two Asda Essentials stores: these were small format stores to challenge Tesco Express and Sainsburys Local convenience stores. They stocked a limited range of products, including fresh food, and were based on the French Leader Price chain, which sells fresh fruit, vegetables, meat, grocery products and cosmetics. The stores sold almost entirely Asda own-label products. After less than a year one of these trial stores was closed and Asda announced it had no plans to open any more. Improved the product line: healthier food sourced from local producers, and sold new products online such as contact lenses and airline tickets. Urged the Office of Fair Trading to open an inquiry into Tescos land bank of 185 development sites with a view to preventing it buying land and opening stores close to existing outlets without reference to the OFT. And if an existing store was sold by one supermarket chain to another, the deal had to be scrutinized by the competition authority. Responded to the recent recession by selling hundreds of products for 1, offering 50p bargains, including 400g of mince, two pints of milk, a white loaf, six eggs and 2kgs of carrots, and launching a TV campaign (supported by evidence from the price comparison website moneysupermarket.com) showing how Asda were cheaper than Tesco. Adopted the less is more strategy, which includes dropping secondary brands to concentrate on the biggest brand names.. References Based on: Merrilees, B. and D. Miller (1999) Defensive Segmentation Against a Market Spoiler Rival, Proceedings of the Academy of Marketing Conference , Stirling, July, 110; Mitchell, A. (1999) Wal-Mart Arrival Heralds Change for UK Marketers, Marketing Week, 24 June, 423; Voyle, S. (2000) Wal-Mart Expands Asda in Drive for Market Share, Financial Times, 10 January, 21; Anonymous (2002) Asda Reaps Reward for International Division, DSN Retailing Today, 25 February, 1; Bowers, S. (2003) Hunter to Raise the Stakes , Guardian, 6 January, 17; Teather, D. (2003) Asdas 360m Plan Will Create 3,900 Jobs, Guardian, 19 February, 23; Troy, M. (2003) Buy George! Wal-Marts Asda Takes Fashion to UKs High Street, DSN Retailing Today, 23 June, 1; Finch, J. (2005) Asda to Open Hundreds of Discount Shops, Guardian, 10 December, 22; Finch, J. (2005) Asda Cuts 1400 Managers in Fight to Stay No 2 Grocer, Guardian, 6 July, 16; Birchall, J. (2005) What Wal-Mart Women Really Want, Financial Times, 10 October, 11; Birchall, J. (2005) Supermarket Sweep, Financial Times, 10 November, 17; Anonymous (2006) Wal-Mart Admits Defeat in Germany and Sells Stores, Guardian, 24 July, 32; Palmeri, C. (2008) Wal-Mart Is Up For This

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Downturn, Busninessweek, 30 October, 42; Finch, J. and A. Clark (2008) 70,000 Extra Customers a Week Head For Asda, Guardian, 10 July, 27; Finch, J. (2009) Asda Sales Continue To Soar As Intelligent Offers Pull in Record 18m Shoppers a Week, Guardian, 14 August, 23. Questions 1. What are Wal-Marts sources of competitive advantage? How do these sources manifest themselves in creating competitive advantage for Wal-Mart customers? 2. Does Wal-Marts acquisition of Asda make competitive sense? 3. Why did Asdas fortunes worsen around 2004? 4. Assess the actions taken by Andy Bond to revive Asda.

This case was written by David Jobber, Professor of Marketing, University of Bradford.

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