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.