Wal-Mart’s Growth Conundrum: Should Its Business Model

Be Changed?

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Case Study Reference No. BSM0062P

This case was written by Kalyani Gohokar under the direction of Joel Sarosh Thadamalla,
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IBSCDC. It is intended to be used as the basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation. This case
was compiled from published sources.

© 2006, IBSCDC
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No part of this publication may be copied, reproduced or distributed, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or medium – electronic,
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mechanical, photocopying, recording, or otherwise – without the permission of IBSCDC.

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 Wal-Mart’s Growth Conundrum: Should Its Business Model
Be Changed?

"There are a lot of issues here, but what they add up to is the end of the age of Wal-Mart. The glory days
are over."1
Richard Hastings, a senior analyst at Bernard Sands.2

‘Everyday low prices’3 has been the primary growth driver for Wal-Mart since its inception in 1962. With
several players successfully selling at low prices, Wal-Mart can no longer claim it as its USP. In 2006, Wal-
Mart Stores Inc., the Bentonville, Arkansas, US headquartered retailing giant recorded its first quarterly
profit decline in 10 years. Wal-Mart’s domestic same-store sales4 posted a meager 1.9% points rise in 2006,
which was the worst performance in Wal-Mart’s history.5 Is Wal-Mart’s business model running out of

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steam? Will Wal-Mart be able to resurrect its productivity and profits, and unearth its next growth pool?

Wal-Mart’s Retail Innovation: Profits and Perils

Wal-Mart’s evolution can be traced back to 1960s when Sam Walton along with brother J L Walton opened
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the first Wal-Mart discount City in Arkansas in 1962. Wal-Mart worked out a strategy of operating in small
towns that were sparsely populated and being catered by only one store. Wal-Mart adopted the ‘everyday
low prices’ strategy whereby it offered deep discounts for branded goods. Wal-Mart usually sold goods
which were 15% cheaper than what other stores had to offer.6
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In the process, Wal-Mart was able to outsmart the local retailers, as the sparse small town populations were
not able to support two discounters at the same time. Wal-Mart introduced the Good Concept7 stores
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through which it offered customers deep discounts. It achieved profits through increased sales volumes as
well as by adopting a unique advertising strategy wherein it kept its advertising expenditure to bare
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minimum which was one-third that of other retail chains. Gradually, Wal-Mart was thus able to establish its
foothold in the smaller towns of the United States with little or no competition from rival discounters and local
retailers. By the end of the 1960s, Wal-Mart had grown to 18 stores in different regions of United States
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which were incorporated as Wal-Mart Stores Inc.8

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After having used its business strategy to capture the market, Wal-Mart focused on developing inherent
organisational capabilities to reinforce its competitiveness. In the 1970s, Wal-Mart developed a strong
warehouse distribution system, which resembled the hub and spoke model. A warehouse was built and
populated with several Wal-Mart stores which, though situated far away from each other, were located at

1
Bianco Anthony, “Wal-Mart's Midlife Crisis”,
http://www.businessweek.com/magazine/content/07_18/b4032001.htm, April 30th 2007
2
It is a retail rating agency covering the retail-distribution spectrum.
3
“Wal-Mart's Midlife Crisis”, op.cit.
4
A statistic that compares sales from stores which have been open for a year or more. It helps in pinpointing,
how much of sales growth occurred due to opening of new stores.
5
Goldschmidt Alex, “What’s Wrong With Walmart”,
http://walmartwatch.com/blog/archives/whats_wrong_with_wal_mart/, August 16th 2007
6
Moore and F James, “ The Evolution of Wal-Mart: Savvy Expansion and Leadership”, Harvard Business
Review, May/June 1993, page 82 (Ref. No. 00178012)
7
Wal-Mart's ‘good concept’ involved huge stores offering customers a wide variety of name-brand goods at
deep discounts that were part of an ‘everyday low prices’ strategy.
8
Wal-Mart Stores, Inc-Company History, op.cit.
distances not more than a day’s drive from the distribution centre. Wal-Mart built several such warehouse-
store models which not only helped serve the needs of the customers but also kept competitors at bay by
saturating entire regions, especially the smaller towns, with its stores.9

Wal-Mart’s logistics infrastructure played a key role in gaining an edge over its rivals. Wal-Mart had an
admirable fleet of trucks and trailers compared to its competitors who usually outsourced their logistics
requirements. Wal-Mart managed its inbound logistics in a way where 85% of the store merchandise needs
were fulfilled by the distribution centers unlike that of its rivals which averaged to about 50%.10 Both the
number of outlets and sales grew rapidly for Wal-Mart and by the end of 1970s, it achieved the $1 billion
mark11. Wal-Mart efficiently managed communication and network of its stores, warehouses and its
suppliers through its satellite system which was launched in 1983.12

The 1970s and 1980s saw a rapid increase in the number of Wal-Mart stores which operated in different
retail formats.

Besides operating discount stores, Wal-Mart started the Sam’s Club13 in 1983, evolved hypermarkets14 into

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Supercentres15 in 1988 and began operating Neighbourhood markets16 from 1998. Meanwhile, Wal-Mart
continued to consolidate on its economies of scale and its logistics prowess, which it employed to further
gain market clout. This increased its bargaining power with its suppliers. Wal-Mart dictated terms to its
suppliers who were required to install extensive cross company distribution systems and in the process get

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better terms of payment from Wal-Mart than its competitors. The suppliers also depended heavily on Wal-
Mart who used its monopoly in the retail sector to pressurize its suppliers to keep prices low in order to
provide discounted prices to its large pool of loyal customers.17 Wal-Mart created its monopoly by wresting
market share from small discount stores, but competition was coming from bigger retailers.

Many retailers dotted Wal-Mart’s competitive landscape. The closest competitors were Carrefour18, Costco
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Warehousing Corp19, Target Corp20, Home Depot21 and Kroger22. France based Carrefour came into
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9
“ The Evolution of Wal-Mart: Savvy Expansion and Leadership”, op.cit.
10
Govindrajan Vijay and Gupta Anil, “Taking Walmart Global”, Harvard Business Review, fourth quarter
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99,page 14-25 (Ref. No.99403)

11
Wal-Mart Stores, Inc-Company History, op.cit.
12
“ The Evolution of Wal-Mart: Savvy Expansion and Leadership”, op.cit.
13
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The nation’s leading members-only warehouse club offers a broad selection of general merchandise and large-
volume items at value prices. This retail format was started by Wal-Mart to compete with the leading warehouse
retailer Costco Warehousing Corp.
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14
Hypermart USA stores combined a grocery store, a general merchandise market, and such service outlets as
restaurants, banks, shoe shine kiosks, and videotape rental units in a space that covered more area than six
football fields.
15
To meet the growing demand for one-stop family shopping, Wal-Mart Supercenters were started and most are
open 24 hours a day for the ultimate in convenience. Supercenters save customers time and money by combining
full grocery lines and general merchandise under one roof at Wal-Mart’s signature Every Day Low Prices.
16
Neighborhood Markets offer a convenient shopping experience for customers who need groceries,
pharmaceuticals and general merchandise. Generally, they are located in markets with Wal-Mart Supercenters,
supplementing a strong food distribution network and providing added convenience while maintaining Wal-
Mart’s Every Day Low Prices.
17
“ The Evolution of Wal-Mart: Savvy Expansion and Leadership”, op.cit.
18
Carrefour is a French international hypermarket chain, with a global network of outlets. It is the second
largest retail group in the world in terms of revenue and sales figures after Wal-Mart.
19
Costco Wholesale Corporation is the largest membership warehouse club chain in the world based on sales
volume, headquartered in Issaquah, Washington, United States.
20
Target Corporation headquartered in Minneapolis, Minnesota, is the fifth largest retailer by sales revenue in
the United States behind Wal-Mart, The Home Depot, Kroger and Costco.
21
The Home Depot is an American retailer of home improvement and construction products and services.
22
The Kroger Co. is an American retail supermarket chain and third-place general retailer in the country, with
Wal-Mart and The Home Depot filling slots one and two, respectively.
existence in 1959 and was the only major competitor of Wal-Mart in the international arena. Carrefour
pioneered the concept of ‘Hypermarket’ with the aim of providing customers with a one stop shopping
experience. Carrefour expanded internationally by initially opening outlets in the European Union (EU) and
then proceeding through Mexico to Asia. By 2000, Carrefour operated in about 30 countries under different
names and various formats. Carrefour outlets were characterised by expansive shopping areas coupled with
low prices and efficient management of resources. However, France remained a major market contributing
to 51% of Carrefour’s sales. The relatively high price positioning associated with Hypermarkets, a weak
French economy, and Governmental support for smaller retailers were some of the challenges which
Carrefour had to contend with. However, Carrefour opened new stores across the globe at a pace faster
than any other retailer including Wal-Mart and consolidated its leadership in the European market by
undertaking a slew of competitive measures.23

Target appeared on the discount store scene in 1962 by opening its first outlet in Downtown Minneapolis,
US. Though Target operated as a discount retailer, there were striking differences between Wal-Mart and
Target. Target projected itself as an upscale merchandiser catering to the urban consumer of North
America. Target focused on the product design rather than its price and also spent more on advertising and

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promotions, unlike Wal-Mart. Target had certain disadvantages compared to Wal-Mart pertaining to its
prices and consumer pool. Mass consumers perceived Target as a retailer, which sold only expensive
items. However, in reality, Target’s merchandise was priced only slightly higher than that of Wal-Mart.
Target had presence only in the US, whereas Wal-Mart had a global outreach. However, Target

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outperformed Wal-Mart in specific areas especially the fashion apparel segment and furniture retailing.
Target’s departmental stores were aesthetically designed compared to Wal-Mart stores which had a
minimalist layout. Retail analysts suggested that Target also scored higher when it came to sales growth
and its upscale image. However, Wal-Mart still was able to retain the top position in the retailing world. 24

Another retailer, Costco Warehousing Corporation competed with Wal-Mart in the wholesale club segment.
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Costco, founded by Sinegal and Brotman in 1983 in Washington, served customers both in the US and
abroad by operating in different retail and membership formats. It offered products at a premium of 12-14%
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compared to the 20-30% offered by other discounters such as Wal-Mart. It provided both branded
merchandise and private labels but focused on stocking only those wares in which it was able to offer cost
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savings. Costco could provide products at discounted prices due to its operational efficiencies. Costco
adopted a strategy whereby it continually worked on the product mix to generate customers’ interest and
thereby increased its sales and inventory turnover. Though both Costco and Wal-Mart competed with each
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other in bulk sales, they catered to different customer segments. Costco’s customer base was primarily the
upper middle class while Wal-Mart’s ‘Sam’s Club’ catered to small businesses and Wal-Mart shoppers. It
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gave fierce competition to Wal-Mart in the warehousing segment and, in fact, became the largest
warehouse retailer in the US ahead of Wal-Mart’s Sam’s Club.25 With all this competition, Wal-Mart was
finding it difficult to sustain its market leadership as a discounter.

In order to sustain itself as a discounter, Wal-Mart needed to grow in order to further increase sales and
profits. The US had become a saturated market and hence Wal-Mart undertook global expansion. Wal-Mart
leveraged on its home-bred competencies in expanding globally. Wal-Mart had the support of well known
giant suppliers like Procter & Gamble, Pfizer, and Coke besides utilising its key resources in the areas of
warehouse and store management and employing its logistics and technology skills.26 Wal-Mart entered

23
Maldar Nusrath Jahan and Manda Srinath, “Carrefour: Competitive Strategies During Challenging Times”,
Icfai Business School Case Development Centre, 2005 (Reference No.305-079-1)
24
Ramgopal Priyanka and Dhar Souvik, “Walmart Vs Target: Image Differences and Competitive Responses”,
Icfai Business School Case Development Centre, 2005 (Reference No. 305-549-1)
25
Kannan Bindu and Ganeshan Senthil, “Costco Warehousing Corporation: Strategies for Growth”, Icfai
Business School Case Development Centre, 2005 (Reference No. 304-390-1)
26
“Taking Walmart Global”, op.cit.
Mexico in 1991 by tying up with Cifra, Mexico’s leading retailer, and later on acquired a commanding stake
in the venture. Mexico proved to be the testing ground for Wal-Mart and its mode of entry in Mexico became
the theme of operation in its other international forays. Wal-Mart entered Canada in 1994, as the buying
behavior of Canadians was similar to that of US citizens. However, South America was the focal point of
Wal-Mart’s international expansion by establishing presence in Brazil and Argentina in 1995, besides
Mexico.27 Wal-Mart adopted a strategy where it tied up with the leading operator in the nation thus
eliminating any possibility of competition with it. At the same time, it leveraged on the local partner’s assets
of real estates and workforce besides gaining its pool of customer base. Wal-Mart initially entered the Asian
market by agreeing to sell its low priced goods to leading Japanese retailers who sold them in Japan,
Singapore, Hong Kong, Malaysia, Thailand, Indonesia and the Philippines. In 1996, Wal-Mart entered China
by opening its store in the city of Shenzhen. Wal-Mart then ventured into Germany and South Korea in 1998
by acquiring the Wertkauf28 chain and later on entered UK by buying ASDA29 in 1999. In 2007, Wal-Mart
declared a joint venture with Bharti Enterprises30 to begin operations in India by 2008. Wal-Mart continued to
expand its global reach and became the numero uno retailer in Canada and Mexico. As of 2007, Wal-Mart
operated in thirteen markets employing more than 550,000 people across various countries.31 The structure
of its stores as well as their performances were as diverse as the countries they operated in (Exhibit I).

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Exhibit I
Wal-Mart’s International Operations

Country
Argentina 13 2,573
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Wal-Mart International 2006
Stores Total Sq. Ft. (1000s) Avg. Sq. Ft./Store (1000s) Gross Sales (mm) Sales/Sq. Ft.
198 $752 $292
Brazil 302 14,779 49 $4,848 $328
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Canada 289 33,099 115 $12,253 $370
China 73 12,863 176 $1,426 $111
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Costa Rica 137 2,153 16 $656 $305

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El Salvador 63 840 13 $497 $592

Guatemala 132 1,668 13 $618 $370
Honduras 40 323 8 $190 $588
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Nicaragua 40 377 9 $74 $196

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Japan 458 16,178 35 $9,679 $598

Mexico 889 34,929 39 $19,482 $558
Puerto Rico 54 3,940 73 $1,223 $310
United Kingdom 331 14,876 45 $31,706 $2,131
U.S. 4,002 612,046 152 $267,876 $438
Source: “Walmart Stores (WMT)”, www.wikinvest.com/stock/Wal-Mart_Stores_(WMT)

27
“Taking Walmart Global”, op.cit.
28
It was a 21 unit hypermarket chain in Germany.
29
ASDA is a chain of supermarkets in the United Kingdom offering food, clothing, and general merchandise
products.
30
Bharti Enterprises is a large business conglomerate in the field of telecommunications based in New Delhi,
India, operating primarily across India and in the Seychelles.
31
“International Overview”, www.walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=369
Wal-Mart’s Increasing Popularity: Decreasing Growth

Wal-Mart had been facing growth slowdown since the mid 1990s.32 The changing retail landscape and
growing saturation in the US market affected Wal-Mart’s fortunes.

Wal-Mart had no choice but to grow and open new stores to achieve increased sales volumes in its quest to
offer lower prices to its customers. The company had a major presence in smaller towns of the US.
However, Wal-Mart opened stores at such close proximity that it ended up cannibalising on itself. As per
David Abella, an analyst, “It’s the main reason why same-store sales have been flat.” 33 With saturation
setting into rural areas of the US, where Wal-Mart enjoyed a monopoly, it tried to enter the untapped urban
markets in the US. However these markets posed several challenges to Wal-Mart. The urban markets were
an altogether a different ball game. The consumers in the urban areas were more quality conscious. Wal-
Mart found it difficult to cater to these urban masses who were driven by price, quality, service and
convenience. Besides, stores such as Target catered to these consumers by providing upmarket
merchandise at competitive prices. As a result, Wal-Mart had to face stiff competition from competitors like
Target and Costco in these areas (Exhibit II).

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(Exhibit II)

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Comparative Sales of Walmart and Target

Wal-Mart (US) v. Target, 2006

Wal-Mart Target
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Total Sales (millions) $226,294 $57,878
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Growth from 2005 11.7% 12.9%

Same Store Sales Increase 1.9% 4.8%
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Sales per Store (mm) $65.7 $38.9

Sales per Square Foot $421 $316
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Source: “Walmart Stores (WMT)”, www.wikinvest.com/stock/Wal-Mart_Stores_(WMT)

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Wal-Mart tried to lure the city dwellers by offering more upscale merchandise and introducing more hip 34
women’s apparel like the launching of the upmarket ‘Metro 7’ line. However, it did not meet with much
success, as the trendy line, which included such outfits like skinny jeans, was not able to attract either urban
customers or the traditional Wal-Mart customer. The more urbane consumer perceived Wal-Mart as a down-
market store. Besides, Wal-Mart stores were not aesthetically made up and could not provide the required
standards of quality and customer service to attract such consumers who preferred to shop at the more
upscale stores like Target. Wal-Mart’s new fashion apparel segment was also disliked by its core customers,
as the apparel merchandise, especially the women’s gear, neither provided the required size fit nor
appealed to an average Wal-Mart customer.35 Acknowledging the company’s predicament over the botched
switch towards more hipper image, Lee Scott (Scott), CEO of Wal-Mart told analysts, "We overloaded the

32
Serwer, et al, “ Bruised In Bentonville”, Fortune, April 18th 2005
33
“What’s Wrong With Walmart”, op.cit.
34
Hip is a slang term meaning fashionably current.
35
Shin Annys, “Is Wal-Mart's U.S. Growth Nearing Its Limit?”,
http://reclaimdemocracy.org/walmart/2006/us_growth_slows.php, December 2nd 2006
fashion part, That's not who we are." 36 Apart from its US urban market failure, its international ventures did
not fare well everywhere. Except for Mexico, Canada and China, Wal-Mart had to face difficulties in other
markets.

Wal-Mart had a dismal performance in Germany. Wal-Mart entered the German market by acquiring the
German chain Wertkauf37. Analysts had calculated that Wal-Mart’s entry into Germany would be fraught with
problems as the German market was mature with sales and profits difficult to come by.38 Wal-Mart faced
cultural conflicts as well as stiff competition from retail chains, Aldi39 and Lidl40. Wal-Mart had appointed
people to head its German operations who did not speak German and tried to operate from regions outside
Germany. In the process, they ended up alienating both employees as well as the customers in Germany.
The German customers’ shopping habits and Germany’s short duration of shopping hours was a bolt from
the blue for Wal-Mart. Wal-Mart also botched its logistics infrastructure in Germany. According to an analyst,
Wal-Mart did not focus on opening new stores and instead operated through the existing stores and also
undermined the competition from Kaufland41, a direct competitor of Wal-Mart’s hypermarkets.42 Business
analysts from University of Bremen called Wal-Mart’s fiasco in Germany as “a textbook case of how not to
enter a foreign market”.43 Finally, Wal-Mart withdrew from Germany in 2006 by selling its German

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operations to Metro44.

Similarly Wal-Mart had to exit from South Korea in the same year, as it could not manage the cultural fit or
achieve economies of scale.

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Wal-Mart also struggled in Japan. It entered Japan in 2002 through a minority stake in Seiyu, a Japanese
retailer. In 2005, Wal-Mart acquired a major share holding in the venture. Wal-Mart invested $1 billion in its
Japanese operations with the aim of milking the Japanese economy, which by far was the second largest in
the world.45 However, Wal-Mart could not gain a stronghold in the Japanese market. It earned the ire of the
Japanese workforce by reducing staff by 25% which had negative repercussions in a country which valued
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social harmony.46 Wal-Mart’s strategy of low prices did not work in Japan where customers gave
precedence to quality over price and were ready to pay high prices for quality offerings. Wal-Mart’s concept
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of a one stop shopping centre did not appeal to the Japanese consumers who were not accustomed to buy
everything from one store. As a result, Wal-Mart reported a loss of $479.5 million in 2006 in its Japanese
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operations.47 Commenting on Wal-Mart’s Japanese performance, a Morgan Stanley report said, "There is
little reason to think Wal-Mart is the winning consolidator, unless it can really leverage know-how. Its
investment in Seiyu could be another $1-billion-plus mistake."48
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36
Ibid.
37
It is a German chain of 21 supermarkets acquired by Wal-Mart that include wide assortment of nonfood
goods.
38
“Welcome to Wal-World:Wal-Mart's inexhaustible march to conquer the globe”, op.cit.
39
It is a discount supermarket chain based in Germany and one of the largest retail chains worldwide. The
chain is made up of two separate groups, ALDI Nord and ALDI Süd which operate independently from each
other in specific market boundaries.
40
It is a European discount supermarket chain of German origin that operates 5000 stores.
41
Kaufland is a German hypermarket chain part of the same group as Lidl and Handelshof.
42
“Heading for the exit”, www.economist.com/business/displaystory.cfm?story_id=7253227, August 5th 2006
43
Ibid.
44
Metro AG is a diversified retail and wholesale/cash and carry group based in Germany. It has the largest
market share in its home market, and is one of the most globalised retail and wholesale corporations.
45
Holstein William, “Why Wal-Mart can't find happiness in Japan”,
money.cnn.com/.../fortune/fortune_archive/2007/08/06/100141311/index.htm?section=magazines_fortuneintl,
July 27th 2007
46
Ibid.
47
Ibid.
48
Ibid.
Wal-Mart did not fare well in Britain either. Wal-Mart had entered Britain by acquiring ASDA in 1999 and by
2003 managed to become the second largest retail chain behind Tesco, who was the market leader in
Britain.49 However, ASDA was hit by the changing consumer preferences in terms of their buying behavior
and culinary habits. ASDA’s low price strategy no longer attracted the consumers as other retail chains
offered the same merchandise with insignificant price differences, not noticiable by most shoppers. People
in Britain, influenced by quality, were moving towards premium brands and hence low cost value brands no
longer appealed to them. Meanwhile, other stores like Tesco, Sainsbury’s50 and Waitrose51 had upped their
sales by selling premium brands. ASDA lost ground to such stores, especially Tesco and Sainsbury’s,
whose sales were increasing rapidly than ASDA. Eventually, ASDA’s market share fell to 16.7% losing out
on sales and profit targets in 2006.52

As of 2007, it had further expansion and investment plans in other international markets. However its
international operations have met with mixed results.

Wal-Mart was losing its influence over the manufacturers when it came to making deals and the company
no longer figured on their preferential lists. A striking example was PepsiCo53 which preferred to launch its

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new energy drink named ‘Fuelosophy’ through WholeFoods54, though Wal-Mart has been PepsiCo’s largest
buyer.55 Wal-Mart could no longer rely on its logistics prowess, as it could not sustain the fast moving
inventory.56 Wal-Mart’s scale of operation could not cater to those customers who demanded more choice,
freshness and personal attention.

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Since the mid 1990s, Walmart was embroiled in many controversies. It was at the receiving end of criticism
over a number of issues ranging from low wages and racial discrimination at workplace to its business
practices like squeezing supplier margins and disrupting local businesses. As Wal-Mart grew in size and
opened new stores, the number of lawsuits against the company also increased. There was a significant
increase in the number of class action lawsuits57 against Wal-Mart. The protests against Wal-Mart escalated
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in 2004, with a class action gender discrimination lawsuit getting certified which claimed that the female
employees at Wal-Mart were underpaid and denied promotions when compared to their male counterparts.
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There were other workplace problems like pay disputes, as Wal-Mart employees earned 20% less than
average in the retail sector.58 Store managers forced employees to skip breaks and work overtime without
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getting their dues to meet performance targets.59 Two union funded groups namely ‘Walmartwatch’ and
‘Wakeup Wal-Mart’ tried to garner public attention towards Wal-Mart. Chris Kofinis, communications director
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49
“A long, long way from Bentonville”, www.economist.com/world/britain/displaystory.cfm?story_id=7968351,
September 30th 2006
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50
J Sainsbury plc. is the parent company of Sainsbury's Supermarkets Ltd, commonly known as Sainsbury's, a
chain of supermarkets in the United Kingdom. The group also has interests in property and banking.
51
Waitrose is the supermarket division of the John Lewis Partnership, with 185 branches as of August 2007,
targeting middle class market, and emphasising quality food and customer service.
52
“A long, long way from Bentonville”, op.cit.
53
PepsiCo, Incorporated is a global American beverage and snack company. The company manufactures,
markets and sells a variety of carbonated and non-carbonated beverages, as well as salty, sweet and grain-based
snacks, and other foods.
54
Whole Foods Market is the world's leading retailer of natural and organic foods, with 194 stores in North
America and the United Kingdom.
55
McWilliams Gary, “The end of the Wal-Mart era”,
articles.moneycentral.msn.com/Investing/Extra/TheEndOfTheWalMartEra.aspx, , October 8th 2007
56
Olive David, “Woes mount for Wal-Mart”, www.thestar.com/Business/article/245470, August 12th 2007
57
A ‘class action’ is a civil suit brought by one or more people on behalf of themselves and others who are
similarly situated. In other words, the others are in a substantially similar circumstance where the common
issues are the most critical to the lawsuit.
58
Gogoi Pallavi, “Wal-Mart Fights for Its Reputation”,
http://laborcenter.berkeley.edu/press/businessweek_jan07.shtml, January 9th 2007
59
Kiley David, “Walmart Should Decide What Kind of Company It Wants To Be”,
www.businessweek.com/the_thread/brandnewday/archives/2007/06/walmart_should.html, June 1st 2007
at WakeUpWalMart.com60 ridiculed Wal-Mart’s image improvement efforts by saying "Unfortunately, using
Sam Walton's image in a new TV ad doesn't change the reality that Wal-Mart has turned its back on
everything Sam Walton stood for, by capping salaries, eliminating health-care plans, ending its ‘buy
American’ program, and implementing a new antifamily scheduling policy that makes it difficult for
employees to take care of a sick child or schedule day care."61

In order to provide customers low prices, Wal-Mart mounted pressure on its vendors to cut their costs which
eventually hurt their profit margins. Wal-Mart was also criticized over its buying practices where it tried to
directly deal with the vendors, bypassing the sales representatives. Wal-Mart earned the ire of local retailers
by driving them out of business, as they could not compete with Wal-Mart’s economies of scale.62 Besides
these issues, Wal-Mart had to pay huge amounts of money to immigration authorities over illegal workers
and federal regulators for violating environmental norms.

Wal-Mart ignored all the criticism it faced as its business did well over the years. “We would put up the
sandbags and get out the machine guns,”63 Scott said. However, over the years, Wal-Mart’s reputation
became increasingly important for its sales and future growth. A McKinsey report indicated that 2%-8%64 of

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Wal-Mart shoppers shunned its stores due to its negative publicity. Wal-Mart also had to face opposition
from communities over construction of new stores.

Wal-Mart’s damaged reputation had such far reaching effects that any refurbishment of image would not be

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of much help. As Gerald Baron of AudienceCentral65 puts it, “Wal-Mart has a reputation crisis. Wal-Mart
understands that the situation they are in is a real threat to their future”.66

Can Wal-Mart Bounce Back?

Wal-Mart undertook several initiatives in a bid to achieve the desired growth rates and market share. Wal-
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Mart scaled back on its ambitious plans to market the upscale Metro 7 clothing line from 1500 stores in 2006
to 1000 stores in 200767 and decided to focus on its core customers rather than wooing the more affluent lot.
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It categorized its customer base into three groups namely ‘brand aspirationals’, ‘price- sensitive affluents’
and ‘value-price shoppers’ and said that its product centric decisions would be based on the above
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mentioned categories.68 Wal-Mart had plans to develop “comprehensive multi-format growth strategy” 69
whereby it planned to come out with new store formats. Wal-Mart has been remodeling its stores and also
went for management reshuffles. In an effort to boost customer service at peak shopping hours, it scheduled
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60
Wake Up Wal-Mart is a union-backed campaign group based in Washington, D.C. and is often critical of the
business practices of Wal-Mart
61
“Wal-Mart Fights for Its Reputation”, op.cit.
62
“Wal-Mart Stores, Inc-Company History”, op.cit.
63
Harmon John, “Wal-Mart Grows Up”,
http://jon8332.typepad.com/force_for_good/2007/01/walmart_grows_u.html, January 4th 2007
64
Gogoi Pallavi, “ Wal-Mart: A 'Reputation Crisis'”,
www.businessweek.com/bwdaily/dnflash/content/oct2006/db20061031_471519.htm, October 31st 2006
65
The company provides on-demand solutions to meet the ever increasing demands for fast, direct and
transparent communications. The company is privately held and headquartered in Bellingham, Washington.
66
“ Wal-Mart: A 'Reputation Crisis'”, op.cit.
67
Barbaro Michael, “Wal-Mart shifting its growth strategy”,
www.iht.com/articles/2007/03/02/business/walmart.php, March 2nd 2007
68
Ibid.
69
Waters Jennifer, “Wal-Mart looks for new executives to evaluate store formats”,
http://www.marketwatch.com/news/story/wal-mart-looks-new-faces-new/story.aspx?guid=%7B18E9993B-5C44-
44D7-8E98-41173A878B9F%7D, Aug 27th 2007
its employees accordingly. Wal-Mart embarked on overhauling its distribution system through inventory
reduction program, where it wanted to focus on popular products.70

Wal-Mart also announced plans to provide financial services to its customers by introducing ‘Wal-Mart
MoneyCenters’ which would include facilities like check cashing, bill payments, and international money
transfers. Wal-Mart intended to open 1,000 such financial service centers by 2008.71

Wal-Mart began to realize that its reputation was important in its future growth plans. Hence, Wal-Mart took
several image enhancing steps. It started green initiatives to show its responsibility towards the
environment. Wal-Mart felt that this effort would help in improving its image, motivate its workforce and save
money. Thus, as part of its move to go organic, Wal-Mart became the world’s biggest seller of organic milk
and biggest buyer of organic cotton. It also reduced waste and saved energy at various points of its vast
supply chain network.

In its effort to appease its employees, Wal-Mart introduced a healthcare package for its part time
employees. In also took other initiatives like creation of employment opportunities by opening stores in

PY
areas of unemployment or crime rates and helping the victims of Hurricane Katrina

Though Wal-Mart tried to revive its fortunes through various measures, analysts were skeptical about its
growth prospects. Investors were also losing faith in Wal-Mart. Michael Cuggino, president and portfolio
CO
manager of San Francisco-based Permanent Portfolio Family of Funds, quoted, “There's a realisation by the
market that Wal-Mart’s past growth rates aren’t going to be there going forward.”72 According to McCormick
of Evergreen Fundamental Large Cap Fund, an investor in Wal-Mart, “I’d be surprised if true growth-
oriented investors were involved at this point. The issue the Street has is market saturation: We may be in
the seventh inning of a nine-inning game.”73
T
According to WalmartWatch.com, the challenges and problems faced by Wal-Mart were all interrelated to
O

each other which were getting accentuated by the increasing competition from stores like Target and
Costco.74
N

The dilemma for Wal-Mart is fuelling its US growth in the midst of increasing competition from specialty retail
chains and its core customer base showing indications of financial weariness.75
O

According to David Olive, a business columnist, “The keys to a Wal-Mart revival include adjusting to local
customs abroad and wringing more profits from its core operations at home.”76
D

However, he further adds, “But the long-term dilemma for Wal-Mart remains that its reputational damage
runs so deep that any reclamation project will come too late.”77

70
Lazaroff Leon, “ Wal-Mart pursues growth as gains in profits slow”,
http://www.chicagotribune.com/business/yourmoney/sns-yourmoney-
0514watch,1,6860989.story?ctrack=1&cset=true, May 14th 2006
71
Gogoi Pallavi, “Why Wal-Mart Will Help Finance Customers”,
www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070620_604513.htm, June 20th 2007
72
Lazaroff Leon, “Wal-Mart pursues growth as gains in profits slow”,
www.chicagotribune.com/business/yourmoney/sns-yourmoney-0514watch,1,6860989.story, May 14th 2006
73
“Wal-Mart's Midlife Crisis”, op.cit.
74
“What’s Wrong With Walmart”, op.cit.
75
Plotnitzky Michael, “WMT - Wal-Mart Stores: Growth Strategies at Home”,
www.crossprofit.com/article.asp?id=100, August 28th 2007
76
“Woes mount for Wal-Mart”, op.cit.
77
Ibid.