Wal-Mart's Strengths in Groceries Compared to Competitors

Wal-Mart’s Strengths in Groceries Compared to Competitors

Wal-Mart has an tremendous history of innovating low cost distribution systems. Wal-Mart’s operational efficiencies made the food side itself profitable from the beginning of the supercenter concept. As a result, the supercenters are typically larger, more focused on food, and able to have more side businesses than their competitors. Wal-Mart’s extension to groceries seemed very logical and offers customers a chance for one-stop shopping.

Given the company’s reputation for low-prices, customers can be confident they will also be getting the best prices on food. The success of the grocery side is making the switch to supercenters very easy for Wal-Mart. The company is very enthusiastic to switch to ever larger supercenters. This attitude is reflected in Wal-Mart’s Vice Chairman John Menzer when he said “We would love to wave a magic wand and [make] every one of our discount stores a supercenter.”

Wal-Mart’s Grocery Weaknesses to Competitors

Wal-Mart’s move to groceries was largely pushed by their realization that their standard discount stores had saturated the market. They plan to open 1000 supercenters in the next five years. But this focus on supercenters has problems.

While the grocery side of Wal-Mart was able to turn a profit, the grocery business was already operating on low margins when Wal-Mart entered. This means that Wal-Mart has little advantage to offer prices which are much lower than the competition. Wal-Mart needs to provide value outside of their low prices to attract consumers into the supercenters. In fact the supercenters operated on margins of 6.6% while their discount stores traditionally held margins of 9%-10%. This signals that any growth by Wal-Mart will be of the low margin variety rather than the more profitable (and saturated) discount stores. Companies have been turning to international opportunities for growth, but history has shown Wal-Mart discount stores do not have good success. Unless overseas operations turn around, the expansion of the discount stores is all but dead. The low margin environment of groceries is not an inviting fact for their prospects of high margin profitability.

Because of Wal-Mart’s long-standing reputation for low prices, it offered a different mix of brands than their competitors. Wal-Mart’s grocery side is more concentrated in national brands. Target has 50% of their sales in private label products. What private labels Wal-Mart did carry were cheaper than the competition. Wal-Mart’s small selection of premium items are contained in the Sam’s Choice label. This is in stark contrast to HEB, who has many premium private labels in addition to their low priced labels. Furthermore, despite being more heavily concentrated in national brands, the supercenters carry less variety national brands than competitors like HEB. Supercenters typically had about 75% the brand selection of an HEB.

On the personnel front, Wal-Mart’s strong anti-union stance caused problems when trying to deal with the people necessary for typical grocery store operations. In the late 90’s the United Food and Commercial Workers (UFCW) union emerged as one of the strongest unions with 70% of employees of grocers as members. This led to clashes and eventually Wal-Mart switched to precut meats after meat-cutters in Texas banded together to get representation at Wal-Mart. With the strength of the UFCW, it makes personnel decisions more difficult for Wal-Mart and has led cutting back services to avoid union workers.

HEB

HEB has traditionally been to groceries what Wal-Mart has been to retail. HEB cultivated a reputation for “Everyday Low Prices” and positioned themselves in poorer neighborhoods. But unlike Wal-Mart, HEB has long had a focus on differentiation of the stores and on developing their own private label brands. With 19% of sales coming from their Own Brand private label, this puts them in the top tier of private label performers in the country. In addition, the private label sales account for a disproportionate amount of HEB total profitability, helping them gain an edge in the low margin grocery environment. Additionally, to contain costs HEB is committed to having internal manufacturing plants for their meat, dairy, and many other Own Brand label items. Despite these facts, Wal-Mart stills shows an aversion to premium private labels. Bob Anderson, Wal-Mart’s vice president stated, “I’m a little concerned about all the premium [private label] programs. I think you risk diluting the customer’s impression of you [own] brands.”

With HEB’s premium labels, they have been able to branch out into other store formats. Of interest is HEB’s Central Market. This store has a focus on premium products and has molded the entire experience of the store around this. The stores have flashy displays, a personal, butcher-style meat department, and wide variety of wines, international cheeses, and pastas. The traditional HEB store operates on convenience and draws customers from a five mile radius. The Central Markets are intended to be a destination experience and draw from a fifty mile radius. Wal-Mart has experimented with a similar format called Neighborhood Markets. But where the two styles differ is that while the Central Markets have gone upscale, Wal-Mart is keeping with their reputation as the low-price option for food, health and beauty items.

I addition to other store formats, HEB has an advantage over Wal-Mart internationally. In northern Mexico, HEB already has a good reputation for low prices and excellent variety. HEB has committed to a full management infrastructure in Mexico and believes Mexico is the next great growth opportunity. This gives HEB a great advantage in the higher growth international markets.

Strategies Against Wal-Mart

It is almost impossible to compete with Wal-Mart on efficiencies. Wal-Mart has continually invested in distribution technologies which have squeezed the wasted costs out of the value loop. At best, competitors can try to mimic Wal-Mart’s best practices in this area. So for another grocery, clothing, or health store to compete against Wal-Mart they must provide services, value, and other options in areas that Wal-Mart does not. In HEB’s case, they rely on a more decentralized management system and try to tailor stores much more to the local market than does Wal-Mart, who’s