Strategy at Work

In 1987 Wal-Mart decided to move into the grocery business.  In doing so it changed the grocery industry and provided the foundations for its explosive growth throughout the 1990s.

In the late 1980s, Wal-Mart was eyeing Europe with increasing interest.  Europe was experiencing a boom in hypermarkets.  This format had been started by the European retailer, Carrefour in 1962.  By 1988 it ran 73 hypermarkets throughout Europe and, overall, there were 780.  The idea behind hypermarkets was straightforward: the stores sold grocery and other general goods under one extremely large roof.  Customers could load up with their week’s groceries and buy some clothes or household items at the same time.

Some US chains already offered both groceries and general merchandise.  The potential for Wal-Mart, the dominant general merchandise retailer, was clear.  A combined merchandise/grocery operation offered the chance to continue the company’s rapid expansion.  At the time, Wal-Mart controlled 50 percent of the $150 billion discount store business.  Another 32 percent of the industry was controlled by K-mart and Target.  Any further inroads into market share were going to be difficult to achieve.

Grocery retailing, in contrast, was alluring.  Wal-Mart saw that this $400 billion industry was extremely intriguing – and fragmented.  The largest supermarket chain, Krogers, controlled a mere six percent of the market and the top ten combined only mustered 19 percent of the market.

The downside of grocery retailing was simply that margins were low.  Expansion was possible but, focused grocery outlets would always be handicapped by the industry’s poor margins.  But, looked at differently, Wal-Mart saw a more positive message – consumers visit grocery stores more regularly than general merchandise stores; if the opportunity was there for customers to cross the aisle and buy some general merchandise, the conundrum of low margins in the grocery business and intense competition in general merchandising could be solved.

In 1987 Wal-Mart tested the water with Hypermart USA.  It brought in grocery experts and brought some grocery companies in as partners – this culminated in the 1991 purchase of McLane & Co, a grocery and general merchandise wholesaler.

The first Hypermarts provided a variety of lessons.  These were taken on board when Wal-Mart opened its first Supercenter in Washington, MO in March 1988.  The new store was smaller than the Hypermart format.  More followed.  Over the next two years, five more Supercenters were built in Missouri, Oklahoma and Arkansas.  The smallest was 90,000 square feet; the biggest 170,000.

With six Supercenters and four Hypermarts up and running, the piloting process was underway so that Wal-Mart could fully understand the potential business proposition and likely problems in introducing the combo format.  One notable challenge was posed by inventory.  Wal-Mart was used to carrying a full 60 days of inventory in general merchandising.  In the grocery business, 25 days of inventory was normal – less than 10 days for meat and other fresh produce.  In response, Wal-Mart increased its inventory management capabilities and created manufacturing systems in certain areas.

It took four years of experimentation before Wal-Mart took the plunge into Supercenters.  Between 1992 and 1998, it built 558 such stores.  Roll out was rapid.  Every single store built on the lessons learned in the pilot phase of the early 1990s.

The end result was that by 1998 Wal-Mart had grocery sales of $32 billion and was the third largest supermarket operator – becoming the largest early in the new century. The mutually beneficial relationship between grocery and general merchandise was largely confirmed —  Superstores had 30 percent greater general merchandise sales than their discount store counterparts.

And the strategic lessons? Put your toes in the water, not your legs.  Wal-Mart experimented and tried the hypermarket format out in a limited number of locations.  The stores were enormous – 220,000 square feet – complex, costly and made small profits, but they were important sources of learning – and, most importantly, learning which the company acted on.

Piloting strategy makes sense – as it makes sense in developing products and services.  One of the champions of this approach is Roger Martin who worked with the legendary AG Lafley at Procter & Gamble.  Martin and Lafley were influenced by the idea of design thinking which uses pilots and prototypes.  “AG and I are both really interested in the world of design,” Martin told us. “You prototype your strategy decision, and then you look back and say, based on what’s happened when we’ve exposed the prototype to people, we say, oh, you know, that’s sort of right, but not quite. And you have that attitude towards strategy, so it doesn’t feel like failure, it feels like getting it better and better and better.”

An even bigger point here is picked up by Rita McGrath who points to the convergence of the worlds of strategy and innovation.  “When I started my professional career innovation was over there, that weird thing that the creative people did, and strategy was over here and all about positioning and markets and so forth.  Now they’re converging.  So one of the things I argue that companies need to get better at is developing what I call innovation proficiency.  And what that involves is having funds for it, having a governing mechanism for it, having people who actually do it for a living.  It used to be innovation was always a great job but a lousy career,” says McGrath.

“What we’re going to see now is companies actually building out that capability in a very systematic way.  So the Australian logistics company, Brambles, which has a really exciting business, they were founded on the basis of thousands of pallets left behind by the armored troops after World War Two in Australia, and they get paid for shipping these pallets all around the world.  Now, you wouldn’t think a company like that would be a hot bed of innovation and yet they’ve really turned it into a systemic capability.

“What they’ve realized is that one of the biggest barriers to innovation for a P&L manager is the risk of trying something new that backfires. So, what do you do if it doesn’t work? The worry is that it’s going to show up in my numbers, it’s going to make me look bad.  So what the CEO has done is he’s actually allocated funds in such a way that if the business succeeds the P&L manager gets all the credit, but if it doesn’t work out corporate takes the hit.  And so as a consequence, instead of the usual managers’ response, which is, oh, I don’t want those innovation things, they’re too risky, they’re like, bring it on, bring it on, give me as many as you can because it’s only upside.”

The message is simple: try something small and if it backfires, think again.

The second strategic lesson is even simpler: take control.  Why dilute your control by involving others?  If you have the financial muscle, take control.  Wal-Mart developed its own food distribution network – rather than relying on other distributors; and its engineers and construction team learned from grocery store professionals to construct stores which were suitable to this new use and cheaper than those built by the competition.  Test marketing continues even now so that learning and improvement are on-going.

This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).