Is This the End of Local Stores? Mighty Walmart Plans to Build 350 Mini ‘Express’ Shops a Year to Take on Smaller Retailers Essay
Is this the end of local stores? Mighty Walmart plans to build 350 mini ‘express’ shops a year to take on smaller retailers The article I have chosen is one about Walmart and the opening of their new convenience stores around the US. I found this article quite interesting and thought it showed very much where the retail industry is heading, a more uniform retail environment, especially in a market like grocery stores. This article also gives a strong example of retail strategy and location as well as illustrating the effect these multinational retailers are having on the smaller independent retailers.
To best evaluate this article we need to discuss the relevant retail marketing concepts, models and theories that are present. Wal-Mart is the largest retailer in the world based on revenues and competes with other retailers like Costco, Target and Amazon, according to Forbes (2011). According to one analyst at Forbes, Walmart commands about 33% of the U. S. grocery market. Walmart’s venture into convenience stores or neighbourhood market’s could be seen as acquiring profit from a whole new segment of the market. We need to understand why Walmart have decided to open new convenience stores to get an idea of their retail strategy.
According to The Economist 1 ‘Demographics and changes in lifestyles have played into the convenience stores hands, with young urbanities and the well off elderly often more concerned about location and speed than price. ’ So as we can see these convenience stores provide something that Walmart’s superstores cannot, quick, convenient service. Mike Duke, Walmart’s chief executive, says that Walmart 2‘is seeking new avenues for growth in the United States as comparable-store sales in the company’s namesake stores have fallen for seven consecutive quarters. This shows that the demand for superstores is saturating, people in the US are wanting smaller stores nearby that can offer similar products on a smaller, more convenient scale. The economist says that 1‘In the US convenience stores came back with a vengeance last year, reporting a record US$337 billion in sales – a whopping 16% rise on the year before. ’ So obviously there is an incentive to invest in the smaller outlets, so that they can get a hold on some of the profits made in this segment of the market. Also with Walmart’s spending power they ill be able to undercut the other convenient stores in the area. One theory as to why Walmart have extended their company into convenience stores is explained through Hollander’s (1960) ‘retail accordion theory’, which is based on McNair’s ‘wheel of retailing’ theory. McNair (1931, 1958) argues that retailers always enter a market as low price, low service and low margin operators, who gradually trade up when they mature. This makes them vulnerable to new and innovating retailers, who, in turn, go through the same pattern.
Hollander (1966) extended this theory after reviewing the history of American retailing to say that the change of retailing follows a ‘general-specific-general cycle’. This explains the change in demand from large stores to small, more specific stores. Huffman and Kahn (1998) believe that this is due to too much choice, which can cause overload and confusion, causing some customers to retreat and not make a purchase at all. Going back to what Mike Duke, Walmarts chief executive, said store sales have fallen for seven consecutive quarters, whereas the sales in convenience stores in the US have gone up 16% from the previous year.
This helps to justify Hollander’s theory, as the demand for the ‘general’ store reduces the demand for the ‘specific’ store increases. The external environment surrounding this market may give us an explanation as to why Walmart are downsizing their stores. Chain stores, like The Home Depot have already cut back on store size over the years to move into non-traditional locations or reduce operating costs. 4Debra Hazel believes that ‘a combination of demographic, economic and technological opportunities is propelling these trends forward with a newfound urgency’.
She believes that the financial crisis over the last couple of years is factoring into the shrinking of store size, for some retailers opening and operating smaller stores are a way to cut costs. Paul Freddo, senior executive VP leasing and development of developers Diversified Reality, believes that a smaller size also allows a retailer to reach smaller markets with less density, and to be closer to its existing store base. Leon Nicholas, director of retail insights of consultancy Kantar Retail, says ‘The digitilisation of retail goes with the shrinking of retail. Grocery stores are now offering Internet shopping which would mean that in the future larger stores would not be as necessary. The article makes it clear that Walmart intend their strategy to be two-pronged, ‘stores in small towns that aren’t big enough to support a full-sized Walmart, and stores in big cities where building a whole super centre is impractical. ’ This is a way of expanding the Walmart brand in areas where it is unreasonable to have super centres. They are trying to make Walmart accessible for everyone so consumers don’t have to drive to the nearest superstore.
The article mentions that ‘the average round trip to a dollar store is six miles, compared with thirty miles for a typical Walmart trip. ’ This is too far for most consumers especially when were in an era of high gas prices. Dollar stores will have an advantage over the superstores for that simple reason, its quick and efficient. Walmart will try and use their brand image to help promote these new stores, people trust the brand, so the consumers know exactly what their getting when they walk into a Walmart store.
The article says that the new Arkansas Walmart express store looks like a tinier version of the company’s usual sprawling self. Walmart has no reason to change the way the store looks like; it’s obviously a successful layout that consumers have become accustomed to over the years. They will be able to use their brand image and large economies of scale to offer a lower price than their competitors. 1In the UK, when tesco’s opened their new smaller outlets they were able to charge only 4% more than supermarkets whereas the independent stores tended to charge around 15% more.
This makes it very hard for the independent stores to stay in the market. Store location is often said to be the most important aspect of retailing. You can be the best retailer in the world, but if you set up your shop in the wrong place, you’ll never do much business (Clarke and Rowley, 1995). Walmart decided to open up three prototype stores, two in Arkansas and one in North Carolina. According to the article Walmart have decided to open their store in Arkansas in an area whose population is a little over 3,000 and about a 16-mile round trip to the nearest Walmart super centre.
This will allow Walmart to understand the distances their super stores need to be in relation to their convenient stores to help them reach both the catchment areas of the two stores. Typically the performance of a store will depend on the population, expenditure and competition of the local catchment area. So Walmart would have to assess the area and understand the population and make sure that they can compete with the local competitor. The use of GIS (Geographic Information System) and other such systems were probably used to help Walmart get an idea of their spatial environment.
However these large retailers, like Walmart, have built their own database of information over the years. Using loyalty cards they can get hold of household and address data, which can be used to find the distance in which customers are travelling to get to Walmart. This is useful to find the catchment areas of their stores. This information will then be used to help find new locations for their new stores. On the other hand, loyalty cards provide little information on what customers do with the rest of their time and money, nor do they pinpoint non-cutomers (Joyner, 2001).
William Applebaum (1966) presented the analogue method following the development as a forecasting technique used by the Kroger Company. The analogue theory is essentially as follows: 1. Identify other stores, preferably within the same chain, which have many essential features in common with the proposed store and location 2. Quantify the key features of these stores and trading areas, then tabulate and summarise these data 3. Extrapolate from these analogue stores to estimate the likely turnover and profitability of a store at the proposed location (McGoldrick, 2002)
We can see some similarities to this method of assessing location and the one that has been implemented here by Walmart. The article mentions that the express stores look like a tinier version of the company’s usual sprawling self, which corresponds to point 1. One of the stores is also being put 8 miles away from the nearest Walmart super centre, which suggests that Walmart have used this analogue store to estimate the potential profitability of the new store in this area. This allows them to reduce the risk of the new store failing, as they already know the type of customers in this area fairly well.
This article also gives a really great insight as to the effects these chain stores are having on the small independent stores. The article mentions that Walmart’s stores have been blamed for gutting local towns by driving down prices, it goes on to say within two years of a Walmart store opening in Chicago, 82 local stores went out of business. According to the latest Economic Census (2002) 3‘multi-store firms account for 65% of retail sales. In addition, based on Price Waterhouse Coopers (2004), it is estimated that those firms control another 21% through franchise contracts.
Hence retail chains are responsible for approximately 86% of US retail sales, and this percentage is increasing. ’ This is a huge amount of control for multi-stores, this control makes it very hard for independent stores to compete and so are generally forced out of the market. This could cause problems in the long run as these independent retailers will leave due to the level of competition on price. This will lead to there being only a few large firms in the market, firms could then collude and agree on a price to maximise their profits, which is not very beneficial for consumers.
Another problem that is presented in the article is the loss of jobs due to the opening of these stores. A study called ‘The Effects of Walmart on Local Labour Markets’ found that for every two jobs that Walmart creates, three local jobs are destroyed. This is potentially very damaging to the US economy. The article’s main focus, I believe, is on the effect that Walmart’s new convenience stores will have on the local independent stores. It also gives us a picture of the future of retailing in this industry and the increasing use of technology in making decisions.
We can see that multi-store companies like Walmart are always looking of ways to gain more profit and reduce the competition they face. However this is having a potentially devastating effect on the economy. As the article mentions within two years of a Walmart store opening in Chicago, 82 local stores went out of business. This is reducing jobs in the area as well as reducing the competition Walmart face, which ultimately will increase price and affect consumer spending. The article also gives us an insight into the methods used when deciding the location strategy of new stores.
The use of the analogue theory and also the databases of information formed over the years by Walmart through loyalty cards, these all help the company make an informed decision on their location strategy. This article shows that the retail industry has many aspects to it and involves a lot of research before a decision is made.