Wal-Mart Stores  has been the primary catalyst for change in the retail food industry for much of its 50-year history — impacting virtually everything supermarkets do from pricing to distribution to labor negotiations — and there are no signs that distinction is anywhere close to being over.
“What we’ve seen is an evolution that’s been fairly unforgiving,” John Rand, director of retail insights for Kantar Research, Cambridge, Mass., told SN. “The industry has learned to deal with it by becoming more local, more accurate and more efficient — things it had ceased to be before Bentonville, Ark.-based Wal-Mart came along.
“Now the industry is more analytical, carrying inventories only of items that sell, with a more local focus and a more efficient approach to warehousing and distribution. None of that would have happened if not for Wal-Mart.
“Wal-Mart forced supermarket operators to stop simply copying each other and competing only with each other, and that’s likely to continue as Wal-Mart continues learning and changing.”
This special report on Wal-Mart also includes these stories:
- Following the Leader: From Walton to Duke 
- Express Format, International Growth in Wal-Mart's Future 
- Wal-Mart Timeline: From Rogers, Ark., to International Behemoth 
According to Rand, Wal-Mart was able to make its impact felt so powerfully “because it exposed parts of the industry that had gotten complacent in areas like shelf pricing and particularly in the back of the house, where Wal-Mart has excelled at being efficient.
“So the first stage of the industry’s evolution involved a new willingness to invest at the price level and to work on improving back-of-the-house profits.
“I’m not sure the industry supply chain would be as impressive as it is if Wal-Mart had not transferred the efficiencies it developed to shelf prices, which put the industry back on its heels.
“Wal-Mart also inspired other efforts by supermarket companies to make themselves better retailers, which included closing or selling unprofitable stores and creating new formats.
“Once supermarkets got past the issue of competing with Wal-Mart on price, they shifted their attention to figuring out how to use their inherent advantages in presentation and service, and that became the rock on which they have built their business, more so than trying to build it on the price of a can of peas.
“Unfortunately, Wal-Mart set the bar low for quality, and it’s been able to operate that way by passing lower costs to customers and operating with less service and fewer people in the stores.
“So by concentrating on service departments, customer service, store design and fresh offerings, the grocery industry has gone back to its roots, and it is better for that.”
PRICING IS KEY
Wal-Mart’s impact all stems from its approach to pricing, observers said.
“Wal-Mart prices itself between 13% and 18% lower than traditional supermarkets, and that kind of difference has changed a lot of shopper behavior,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., told SN. “Over the years, Wal-Mart has maintained that price range, and many of those markets are still trying to figure out how to compete.
“Failure to compete on some level means a company proceeds at its own peril. But trying to compete on price alone means almost certain death because, for a business with a 1% or 2% profit margin, it’s only a matter of time — and not a long time — before lowering prices to Wal-Mart’s levels means you go out of business.
“So it’s been staggeringly apparent for years that no one can compete with Wal-Mart on price alone.”
The industry has come up with a variety of alternative responses, Hertel pointed out.
“Some chose to remodel their stores to add space — space they often couldn’t justify economically. Others ceded certain aisles and categories to Wal-Mart — like paper goods and household chemicals — while competing on fresh offerings with a broader assortment and better service.”
Andrew Wolf, managing director at BB&T Capital Markets, Richmond, Va., also said Wal-Mart’s pricing has reshaped industry market share around the country.
“Thirty years ago the industry was made up of a bunch of local quasi-oligopolies, where two or three companies in each market controlled the majority of share. They had high returns on capital, and there were few price operators.
“Wal-Mart used low prices to take away a lot of that market share, which turned the industry upside-down and resulted in lower profit margins across the industry.
“Because of Wal-Mart, low prices have become a more important component of how chains go to market. That’s why companies like Ahold  and Delhaize  and Supervalu  have adopted their own low-price programs over the last few years.”
Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, said Wal-Mart’s pricing policies made supermarkets more aware of how big the grocery category could be. “Wal-Mart cut its teeth with a strong price statement on groceries, and as it saw the success it had, it moved to other supermarket categories.
“Initially, Wal-Mart used paper goods, pet foods and laundry detergents to convey a price message and build a competitive advantage — even before it got into consumables. And once consumers realized they could get the same branded items at Wal-Mart for less than they paid at the supermarket, it made them more aware of Wal-Mart.
“The immediate result was that supermarkets became more promotional in the grocery category, though they were not competitive across the board.”
Basically, the response by supermarkets to Wal-Mart was slow, observers said.
“Wal-Mart was creating competition during the years it was growing discount stores into supercenters, but other retailers didn’t always recognize it or they were slow to react,” Rand pointed out. “And by the time supermarkets recognized the competitive threat the supercenters posed, there were a lot of them.”
Though Wal-Mart has been around for a half-century, its impact grew slowly during its first 20 years, with only a few discount stores in operation by the early 1980s, Hertel pointed out. That’s when it began approaching vendors, he said.
“Wal-Mart went to its major suppliers and asked how it could get their best prices, telling them it was willing to take costs out of its systems if it could get better pricing that it could reflect on the shelves. And that’s the model it followed through the 1980s and into the 1990s, before most traditional supermarket chains took note of it as a major competitor,” Hertel explained.
“By the time they did recognize Wal-Mart as a direct competitor, it was doing $30 billion or $40 billion in grocery sales. And even five years ago, when Wal-Mart took a hiatus from releasing sales information to syndicated data suppliers, some supermarket companies opted to ignore it because they didn’t have a basis for evaluating its business performance.”
One of the industry’s first significant moves to blunt the competitive impact of Wal-Mart came in the mid-1990s, when Cincinnati-based Kroger Co.  sought to take costs out of the system and pass those savings along to its customers in lower pricing, Hertel pointed out.
“Once Kroger acknowledged that it accepted Wal-Mart as its No. 1 competitor, it got costs in line, and since then it has done a pretty good job of staying roughly within 8% of Wal-Mart on price, which is about as far as it can go and still maximize its profitability.
“Kroger is able to compete at that level on groceries by making up the price differential with its fresh offerings and a strong private-label program, including some up-market premium brands, which has proved to be a winning combination,” Hertel said.
Wolf noted that before Wal-Mart began rolling out supercenters in the 1990s, supermarket chains tended to raise prices when they needed to make more profits, “and as long as they weren’t competing directly with Wal-Mart, that proved to be an effective approach.”
“Kroger changed all that,” he said. “Kroger was one of the few chains that went toe-to-toe with Wal-Mart in most markets, and in the mid-1990s it acknowledged that price matters.
“Kroger said if its prices weren’t relevant, then it would keep losing share to Wal-Mart. So it launched the strategy it’s been pursuing, and that’s pretty much when everyone else got in line trying to be more relevant on price.”
Gary Giblen, an industry analyst, agreed that Wal-Mart was “very incidental” to most of the supermarket industry until the 1990s, “which was when Wal-Mart began accelerating the expansion of supercenters and began using food as a strategic weapon by putting in significant amounts of additional items,” he said.
Wal-Mart also deliberately opened supercenters in locations that would hurt independents and their wholesalers, Giblen added. “I once talked with a Wal-Mart executive who showed me a ’war map’ that targeted every Fleming independent in a given area. Because the independents generally had less ability to compete with Wal-Mart in terms of size, assortment or operating hours, the company decided that was an easy way to pick up more business.”
By the same token, Wal-Mart avoided going up aggressively against certain companies, including San Antonio-based H.E. Butt Grocery Co. , “because, as a private company, H-E-B was extremely motivated and determined to succeed,” Giblen said.
According to Cerankosky, supermarkets were certainly aware of Wal-Mart and the potential competitive threat it posed, “but prior to the mid-1990s, employment was high and people were trading up, so most of the industry generally ignored Wal-Mart.
“But when the 2001 recession hit, customer visits to Wal-Mart rose and the amount they spent there also went up, and that’s when traditional retailers began to pay closer attention,” Cerankosky said.
“Before 2001, the industry was probably pricing sharper and promoting deeper because of Wal-Mart. But Wal-Mart’s stores were concentrated primarily in the Southeast quadrant of the U.S. and beginning to creep into the Midwest at that time, so its presence was easier to downplay while the economy was strong.
“But once the recession began, retailers reacted more aggressively toward the competitive threat Wal-Mart posed. Some cut back on remodeling plans to concentrate on pricing, and several began to focus more on point-of-sale analytics to identify loyal customers and to target specific households. They also began addressing distribution and private label.”
IMPACT ON LABOR
Another area in which Wal-Mart had a significant impact on supermarkets after the 2001 recession was in labor negotiations, observers explained. The unionized chains began to deal more aggressively with the unions to achieve a more level playing field by cutting in-store costs and forcing showdowns like the 2003-2004 strike-lockout in California.
According to Wolf, the unions helped create the situation in which supermarkets found themselves “because they completely failed to organize Wal-Mart.”
One area in which observers said Wal-Mart has not attempted to lead the industry is in fresh product. “Fresh is still a challenge for Wal-Mart,” Hertel said.
“Wal-Mart has done a lot simply to drive costs out of the perishables section rather than trying to match what the traditional supermarkets do.”
Other areas in which Wal-Mart has forced the industry to evolve include:
• Distribution. “Wal-Mart has led the industry in cross-docking and a lot of collaborative programs with vendors,” Hertel said. “Wal-Mart found a lot of ways to make the distribution process more efficient, and it’s been quite good at developing scorecards and holding suppliers’ feet to the fire on fill rates.
“But it was ahead of its time in terms of straightforward discussions with suppliers on what their expectations were and how to measure fulfillment. Its discipline came from making sure the stores were in stock, and it’s those kinds of practices that have become more broadly used and that made the entire industry more efficient.”
• Information technology. While most grocery chains were tied to longtime legacy systems, Wal-Mart was starting pretty much from scratch, Giblen said, “so they were able to leap-frog the rest of the industry in trying new technologies that ultimately forced others to move forward with their systems.
“But Wal-Mart was able to use IT to lower the cost of logistics, to buy better and to maintain better inventory controls. In the process, it accelerated best practices throughout an industry that has been below-average in IT compared with other classes of retail trade.”
• Multi-function teams dedicated to a single customer. “One of the things Wal-Mart did brilliantly,” Hertel pointed out, “was creating customer business teams.”
There are between 700 and 1,000 teams based in the Bentonville, Ark., area, he noted — some as large as 300 people. “That’s certainly a different way to support a customer, and it’s a very significant best practice,” he noted.
“Wal-Mart empowered those groups, making them comparable to out-sourced category managers, and as a result, CPG companies have invested huge amounts of intellectual property at Wal-Mart headquarters and in the headquarters cities of most other large chains.”