Walmart Express: Fending Off Rivals to Grow the Business

Becoming a Growth Company—Again!

Sam Bernards, senior director of innovation on the Strategy and Business Development team, sat in the “war room” reviewing some of the most recent news clips on Walmart’s newest retail format—Walmart Express. One headline caught Sam’s attention: “Wal-Mart sees early success in Walmart Express.” The May 2012 article noted,

Bill Simon, president and CEO of the company’s U.S. Walmart stores division, told investors Wednesday that its Walmart Express stores, which are less than one-tenth of the size of Walmart supercenters, are profitable less than a year after the company started opening them.1

Simon summarized, “So far, so good. The next phase is, how big this could be.” Simon had told investors that Walmart might roll out hundreds of Express stores each year.

Sam smiled. Rumors had been swirling for several weeks now. Leaders within Walmart as well as industry pundits had begun hinting that the Express format might drive Walmart’s growth the same way supercenters had over the previous decade.

Sam smiled again, this time wryly. Of course growth was the goal! Wall Street analysts always wanted to see what the next big thing at Walmart would be. Growth in the stock price demanded big growth in sales and profits—a daunting challenge in a saturated and intensely competitive market. Thus, from the time Sam had joined the Strategy and Business Development team back in 2008, he and his colleagues had examined Walmart and the marketplace from every angle possible, looking for growth opportunities. Endless hours of analysis and unending travel had led the team to the Express format. The numbers had undercut every other option the team had identified. So, Sam was thrilled with the early success of Walmart Express.

Even so, Sam knew that opening a few successful pilot stores was a very different task from rolling out hundreds of profitable Express stores a year. Everything about Walmart was big—from its $400 billion dollars in annual sales to its massive cross-dock distribution centers to its 185,000-square-foot supercenters. By contrast, the Express format was small. Each store was only 10,000 to 15,000 square feet. Walmart’s vaunted distribution network was simply not built to support a small-store format.

Deploying Express as Walmart’s new growth vehicle would require a new approach to store fulfillment. Everything—order quantities, delivery frequency, truck size, routing, picking and packing, and supply relationships—would need to be different. Despite his confidence in Express’s potential, Sam wondered how Walmart would adapt the systems that had driven Walmart’s success for over 20 years. Building a network to support Express’s growth would be a bigger and more formidable challenge than his team’s task of bringing Express from concept to market.

Walmart’s Origins—A Retail Giant Is Born

Walmart’s roots reach to Arkansas entrepreneur Sam Walton, who founded Walton’s Five-and-Dime in tiny Bentonville, Arkansas, in 1945. Walton opened the doors of his first discount department store, called Wal-Mart, in Rogers, Arkansas, in 1962. He quickly discovered that his store was too small and too rural to do business as usual—at least, not if he wanted to compete with big chain stores.

Challenging circumstances, strong will, and a quest for growth forced Sam Walton to think differently about the Wal-Mart business model. He forged new relationships with his suppliers, bypassing the wholesalers that were prevalent in his day. He then started his own trucking unit to make sure that his stores, which were often located in the middle of nowhere, could keep stock on their shelves—where customers expected to find it. He instituted a policy of everyday low prices (EDLP), passing savings on to his customers and helping suppliers grow their business. Constant innovations followed and by the late 1980s, sales began to accelerate dramatically. From 1986 to 2000, sales grew an average of 23 percent per year (see Figure 5.1).

By 2008, Wal-Mart (now branded Walmart) was the largest company in the world with almost $375 BILLION dollars in sales. Walmart’s 7,500 stores employed over 2,000,000 employees worldwide, making Walmart the largest private employer in the U.S., Canada, and Mexico. In America alone, almost 200 million customers walked into a Walmart store each week, making an average purchase of about $30. Yet, Walmart’s growth engine, the supercenter, was running out of steam—and room for expansion. No longer could the company count on opening 200-plus supercenters per year to drive sales growth. Moreover, competition was intensifying. As a result, sales growth from 2000 to 2008 had declined to 10 percent per year. For the first time in Walmart’s history, sales growth was less than 10 percent for two years in a row, in 2007 (8 percent) and 2008 (7 percent). Moving forward, it would be difficult to fulfill Sam Walton’s mission: to lower the cost of living for the people of the world.

Figure 5.1: Walmart Sales Growth (in millions of dollars)

Supersizing Growth and Enduring Cannibalization

Although American shoppers typically think of Walmart as they picture huge stores that sell almost everything, Carrefour, a French retailer, introduced the modern hypermarket in 1963. By the late 1980s, Walmart began to experiment with the hypermarket concept, which can be characterized as a large grocery and a department store under a single roof. Walmart’s early efforts to operate a hypermarket profitably were disappointing. Indeed, Walmart lore notes that at one point, Sam Walton was ready to pull the plug on the concept. However, by Walton’s death in 1992, Walmart operated 13 supercenters.2

By 1994, Walmart was firmly committed to growing the business through the expansion of its supercenter operations. In that year, Walmart first separated out the number of supercenters from its regular discount stores in its annual report, noting that it operated 70 of these one-stop shopping centers. By 1997, Walmart was opening almost 100 supercenters per year, hitting a peak of almost 300 new supercenters in 2007 (see Figure 5.2). Of note, the rapid rollout of supercenters helped Walmart become the largest food retailer in America by 2001, when its grocery sales exceeded $56 billion.3

Figure 5.2: Walmart Supercenter Growth (by number of stores opened per year)

However, profitable supercenter growth is limited by economic and demographic considerations. For example, Walmart’s core customer base—households with under $70,000 income—faces intense spending pressure during economic slowdowns. Even during periods of economic prosperity, these consumers have only so much disposable income. Thus, a large number of households are needed to support a single 100,000- to 200,000-square-foot supercenter.

With this fact in mind, as the new millennium began, analysts began to forecast the demise of Walmart’s growth. They estimated that Walmart needed a 40-mile radius to drive profitable traffic through a supercenter. Based on this estimate, analysts began to forecast Walmart’s potential for sustainable growth, noting that Walmart’s prospects for expansion were limited. One result: after attaining exponential price appreciation through the second half of the 1990s, Walmart’s stock price stagnated in the early 2000s (see Figure 5.3).

Figure 5.3: Walmart Historical Share Price

Undeterred by the analysts’ pessimism, Walmart pushed forward with plans to flood metropolitan areas with supercenters. From 2004 to 2007, Walmart opened more than 200 supercenters per year. In many communities, supercenters can be found within 6–10 miles of each other. This intense building program delivered two vital but contrasting results:

  1. The concentration of Walmart supercenters left little room for competitors to open competing hypermarkets. For example, Sears introduced its hypermarket concept, Sears Grand, in 2003 as it opened a 225,000-square-foot store at Jordan Landing in West Jordan, Utah. Over the next four years, Sears opened 75 Sears Grand hypermarkets but found it difficult to operate them profitably. Sears has since begun closing stores, with only 33 still operating in 2012. Walmart’s continued investment has led to a simple truth: with a Walmart supercenter anchored every 10 miles in metropolitan areas across the country, minimal room for new Sears Grands or Super Targets exists.

  2. Walmart became its own biggest competitor. Although each new store generated enough traffic to grow profitably, comparable same-store sales (for stores open at least one year) began to decline. When new stores opened in markets with existing supercenters, same-store sales growth averaged two percent below comparable sales growth for stores free from new, competing supercenters. By 2006, average comparable same-store sales dropped below two percent for the first time since the supercenter concept was launched. As a result, Walmart’s return on capital spending—a measure of how much Walmart earns for each additional dollar spent on expansion—began to fall.4 Stock analysts pointed to this sales cannibalization and diminishing return on capital spending as evidence that their earlier claims regarding Walmart’s growth constraints were accurate. Walmart’s stock price remained mired in the $40–$50 range, down from a high of over $90 in 1999.

The bottom line: Senior leaders at Walmart began to fear that analysts might be right. Maybe Walmart had hitched its growth wagon to a one-trick pony. A new growth engine was needed.

Fending Off Fierce but Diverse Rivals

Even as supercenter-based growth opportunities diminished, the competitive retail landscape became more hostile. Diverse threats emerged from a variety of dissimilar rivals—both familiar and new—complicating Walmart’s competitive response. Analysts expressed dismay at Walmart’s seemingly slow response.5

Target’s “Cheap Chic” Challenge

From its inception in 1962, Target positioned itself as an upscale, fashion-forward discounter. Target’s strategy was to attract affluent, educated, and discriminating customers. The pseudo-French pronunciation “Tar-zhay” emerged almost immediately. Already known for its cheap-chic cache, Target reinforced its upscale image in the early 2000s via exclusive deals with designers such as Michael Graves and Mossimo Giannulli.

Target’s success as the upscale discounter led to rapid growth in same-store sales, cementing Target’s position as “the hottest retailer in the world” and the darling of stock analysts during the mid-2000s. Using Target as a reference point and focusing on year-to-year same-store sales growth, analysts began to openly criticize Walmart’s strategy and performance. (Figure 5.4 and Figure 5.5 compare Target’s and Walmart’s comparable sales and stock prices, showing how closely these two financials track one another.) Retail experts argued that Walmart’s stores had begun to look a “little tired” and that it had “nearly tapped out its middle-class base and must attract consumers who love Target and Costco but not Walmart.”6

Figure 5.4: Share Price: Walmart vs. Target
Figure 5.5: Comparable Sales: Walmart vs. Target

No longer able to avoid the comparisons to Target’s cache, clientele, and investor popularity, Walmart leadership responded in 2006 with rather dramatic shifts in competitive focus. Walmart tried to go upscale and appeal to a more affluent shopper. To do this, Walmart undertook a multipronged approach. Specifically, Walmart:

  1. Brought in a new marketing team with more experience with affluent customers, fashion items, and promotional practices.

  2. Sought to create a more pleasant shopping experience by renovating 1,800 stores. Aisles were widened, shelving lowered, and thousands of stock-keeping units eliminated. The goal was to reduce clutter and mitigate the pedestrian feel of the classic Walmart store.

  3. Expanded its product line to include more electronics, upscale bed and bath items, and a range of fashion clothing including George, Metro 7, and No Boundaries lines.

  4. Engaged focused groups of “selective shoppers” to define the upscale experience. With these insights in hand, Walmart opened a test store in Plano, Texas, “with an expanded selection of high-end electronics, more fine jewelry, hundreds of types of wine ranging up to $500 a bottle, and even a sushi bar.”7

However, these efforts not only failed to entice more affluent customers to frequent Walmart, but they also alienated Walmart’s core customer base. By the spring of 2011, after seven consecutive quarters of sales declines, Walmart leadership launched a promotional campaign called “It’s Back” to inform core customers that it had learned its lesson and was returning “heritage” merchandise back to the shelf.8 The gambit to drive growth by expanding Walmart’s market had crashed and burned.

Unfortunately, Walmart’s reputation as THE price leader had been damaged in its flirtation with well-heeled shoppers. To increase margins, Walmart had experimented with promotional pricing—advertising deals on certain items even as it quietly raised prices on other products. As Walmart drifted away from its long-standing EDLP strategy, customers noticed! Wendy Liebman, a retail consultant, had surveyed 1,500 Walmart shoppers and found that 86 percent no longer were confident that Walmart always offered the lowest prices.9 Shoppers had discovered better deals at rivals like Aldi, Dollar General, Amazon, and even Target. With the aura of price leadership diminished, executives strongly encouraged store managers to be more vigilant in price-checking neighboring retailers to ensure that Walmart prices were lower. To further persuade shoppers that they could always count on Walmart for the very best deals, Walmart introduced a price-matching policy.10

The British Are Coming

In February 2006, Britain-based Tesco, the world’s third-largest retailer at the time behind America’s Walmart and France’s Carrefour, announced it would soon enter the large and lucrative U.S. grocery market. Tesco’s reputation as an aggressive retailer guaranteed rivals would pay close attention to Tesco’s rollout. Speaking to Tesco’s tenacity, retail guru Kevin Coupe warned, “There isn’t a place in the world where Tesco has gone one-on-one with Walmart and Tesco hasn’t won.”11

By November 2007, Tesco began opening its innovative, small-format Fresh & Easy stores across Southern California, Nevada, and Arizona. Tesco’s expansion was expected to be quick. David McCarthy, head of equity research for Citigroup, estimated that by 2010, Tesco would have 500 stores with U.S. revenue of $5 billion.12 Bryan Roberts, research director at Planet Retail, was even more optimistic, forecasting that by 2020, Tesco could have 5,000 U.S. stores with sales of $60 billion.13

Tesco’s goal was to change the way Americans shop. To assure Tesco got the formula right, it hired a research firm to shadow 60 American families, filming their daily shopping, cooking, and dining behavior. The result: a 10,000-square-foot store with low shelves, wide aisles, limited inventory (3,500 SKUs), fresh and natural products, and self-checkout. Not only was it convenient to shop at Fresh & Easy but prices were also up to 20–30% lower than rival grocers. Tim Mason, Fresh & Easy’s CEO, said, “We’ve created the 21st century market for the 21st century American.”14

Walmart’s response was quick. Knowing that Tesco would bring a unique shopping experience to the U.S. market, Walmart set up a “skunkworks” team in San Francisco—home to Aldi’s highly successful specialty retailer Trader Joe’s and the largest market for Whole Foods.15 The mandate was to develop a new and innovative small-store format not only to go head-to-head with Fresh & Easy but also to succeed in the California market. The team was headed by David Wild, senior vice president of new business development, and was given autonomy, its own budget, and “license to fail.”

On October 4, 2008, Walmart opened four Marketside neighborhood groceries in the Phoenix Metropolitan area. Marketside was Walmart’s own small, upscale format offering fresh food and convenient shopping. The original plans called for additional test stores in Phoenix and San Diego as well as the introduction of a Marketside store brand of fresh, prepared food.

Although the store brand did launch in 2009, no additional stores ever opened. Marketside failed to hit key financial targets, friction developed between the “start-up” group and leadership back in Bentonville, and bad economic times led to improvements at Walmart’s core business. Ultimately, the Marketside concept never caught on in Phoenix or in Bentonville and was shuttered in October 2011.

One additional fact may have led to Marketside’s demise: despite the hype, deep market research, and intensive investment, Fresh & Easy got off to a stumbling start. Sales were so disappointing that by 2008, Tesco announced a delay in store openings. By 2009, Fresh & Easy had altered its ambitious strategy. The U.S. recession had battered the core geographic areas where Tesco had hoped to woo affluent consumers. To adjust, Fresh & Easy launched a budget store brand, Buxted, and introduced “Everything under $1” displays.16 By 2012, Fresh & Easy operated only 185 stores—far fewer than analysts had forecast. Fresh & Easy had not emerged as the existential threat Walmart had feared.

The Rise of the Deep Discounters

The “Great Recession” of 2007 changed retail rules, if only temporarily, giving the deep discounters a chance to step onto the competitive stage as legitimate threats. Shoppers—constrained by a shrinking dollar—started to look for new options where they could buy the essentials. Often, their goal was simply to get by until the next paycheck. Dollar stores, led by Dollar General and Family Dollar, met this need by opening small stores with a limited but deeply discounted product selection. Further, because these stores were built in local neighborhoods, they offered both convenience and an opportunity to save gas—a key advantage when gas prices bordered on $4.00 a gallon.17 In fact, analysis showed that the average round trip to a dollar store was just 6 miles versus 30 miles required to shop at Walmart.18 The result: from 2000 to 2012, dollar store sales skyrocketed (3.8x at Dollar General; 3x at Family Dollar).

If increasing price pressure from the dollar stores was not enough, Aldi, Germany’s dominant deep discounter, seized on the economic downturn to entice shoppers into its U.S. outlets. Further, the deep discounter increased its U.S. investment, building stores at both a faster pace and in previously untouched markets like New York City. Such investments did not go unnoticed in Bentonville. After all, Aldi was an old Walmart nemesis whose pricing prowess is so renowned that the Wall Street Journal described the chain as follows:

German store chain Aldi is so cheap that Wal-Mart Stores Inc. closed its discount outlets in Germany two years ago partly because shoppers found the U.S. giant too expensive in comparison.19

Indeed, market analysis has shown that Aldi’s prices are often 15–20% lower than Walmart’s and 30–40% less than regional grocers.20 Such pricing strength comes from Aldi’s ability to pinch pennies—everywhere! Aldi’s 17,000-square-foot stores are Spartan, but they are clean, well lit, and open. Shelving—except for refrigerated and frozen goods—is negligible, with most products displayed in the boxes they are shipped in. SKUs are kept to a minimum. The typical store may sell only 1,100 items. And shoppers provide much of the labor within the store. Specifically, although Aldi has cashiers, shoppers box their own groceries, often using empty boxes found in the store. Shoppers also rent their shopping carts and must return them to a rack located by the front door if they want to get their quarter back.

Aldi’s secret, however, is its reliance on store-brand merchandize. Ninety-five percent of the products Aldi sells are its own branded goods.21 By contrast, despite an increased presence of store brands on U.S. retailer shelves, store brands account for less than a quarter of sales. Thus, for most products, Aldi sells a single, store-branded SKU. This reality enables Aldi to contract with high-quality, name-brand manufacturers to produce Aldi’s store brand in large volumes—and very low prices.

Much to their chagrin, Walmart leadership knew they had no answer for the Aldi challenge. The “Great Recession” had brought more shoppers in Aldi’s doors and many discovered that they liked the Aldi experience. Indeed, if a customer is looking for one of the 1,000 SKUs Aldi sells and is willing to live with a high-quality, store-branded product, Aldi’s business model is very tough to beat.

Seeking a Growth Engine

When Sam Bernards joined the Business Development team in November 2008, the team’s focus had been working on the Supermercado de Walmart—a Neighborhood Market to appeal to Hispanic communities within the U.S. With that project nearing launch, the team was retasked with finding a growth engine that could rev up U.S. store growth at a faster pace. The challenge was embedded in the magnitude of the math. To move the sales needle on a $400 billion dollar company, the team needed to find big prospects. That is, a single percent bump in sales required a $40 billion dollar sales vehicle. In 2008, that kind of incremental sales was the equivalent of a Fortune 50 company, such as Safeway ($42 billion), Lockheed Martin ($42 billion), Pepsico ($39 billion), Intel ($38 billion), or Kraft Foods ($37 billion). Such sales drivers were hard to find—a reality that fascinated Sam’s penchant for big thinking and deep analysis.

Early Analysis

Walmart’s existing efforts to drive growth focused on the question, “Who else could Walmart attract to its stores?” Such a question was typical when companies sought to grow or extend their brand. However, in Walmart’s case, nearly 180 million shoppers (about half the U.S. population) already visited Walmart every week. The nation’s wealthy were the only viable demographic and psychographic segment not already served by Walmart. Of course, stock analysts had frequently reminded Walmart leadership of this fact every time they compared Walmart to Target. Thus, efforts to move Walmart upstream and lure new, more affluent customers to the stores had already been put in play. The team needed to look elsewhere.

Because efforts to attract affluent shoppers to Walmart had required entry into new product categories like high-end electronics and fashion clothing, the team naturally asked, “What other product categories might drive substantial new growth?” A wide range of items like specialty meats, organic foods, and autos were all evaluated. However, after assessing market size and growth potential, evaluating competitive intensity, and studying Walmart’s own capacities, the team had determined that no product category could meet the established growth and profitability targets.

Having performed far-reaching analysis without finding a growth driver, the team turned to the map to see if opportunities to build supercenters had been overlooked. Figure 5.6 shows the location of all Walmart supercenters and the geographic reach of each store. Supercenters already dotted the nation. The only white space left tended to be places like the deserts of Nevada or the high plains of Montana. Regrettably, population densities and distances found in “white-space” areas made supercenters infeasible. The team quickly realized that there was nowhere to go—at least not in a way to drive big growth. Expansion via supercenters was destined to slow. Moreover, each new supercenter would cannibalize sales at existing stores at a higher rate, decreasing return on invested capital.

Figure 5.6: Map of Walmart Stores

Opportunity Found

Then, the team experienced an epiphany. What would the map look like if they focused on population density instead of geography? Figure 5.7 depicts what the team saw when they flipped the map. When the team dug a little deeper, looking at retail footage per capita, it was clear that a variety of large markets were dramatically underserved. The team identified 15 cities that were “grocery deserts.” That is, these 15 urban settings provided consumers little access to a wide selection of affordable, healthful foods. They also happened to be cities where Walmart had minimal presence.

Figure 5.7: Urban Markets/Grocery Deserts

This realization was critical to making the business case for targeting cities like Boston, Chicago, Detroit, Los Angeles, Philadelphia, and Washington, D.C. Across all 15 cities, Walmart owned an average market share of only 3 percent. This compared to about an 11 percent share across the rest of the country. The delta between 3 and 11 percent meant that $80 billion of growth potential was open for development. The team had found the solution to its growth dilemma.

The team quickly realized, however, that good reasons existed for why Walmart had only a three percent share of these urban markets. That is, it wasn’t as if Walmart hadn’t tried to enter some of these markets previously. Three issues had kept Walmart out of these markets.

  1. Land Availability. Land in each of these urban centers was not just scarce; it was also very expensive. On average, real estate costs across the 15 urban centers would be six times higher than Walmart’s average (the range was 3 to 100 times higher in Manhattan). Indeed, in cities like Chicago and New York, individual drivers were often willing to pay $15,000 a year for a downtown parking spot. Even if Walmart could find 20 acres on which to build a supercenter, the building costs would completely undermine Walmart’s EDLP advantage.

  2. Political Opposition. The need for more affordable and healthier foods in these 15 urban settings was widely recognized. For example, in New York, city officials were gravely concerned with high obesity rates but were stymied in their efforts to bring weights down. Consumers simply did not have access to affordable food. One city official remarked, “When a candy bar costs less than a banana, what are you going to do?” Therefore, some city officials greeted Walmart with open arms, saying, “We can support 100 more groceries right here in Queens.”

    However, not all decision makers were equally welcoming. One New York City councilwoman simply said, “Over my dead body will Walmart ever get into New York City.” Walmart had encountered similar opposition throughout New England, Chicago, and California. As Figure 5.8 communicates, key decision makers in these 15 cities often perceived Walmart as persona non grata. Given the number of permits required to build a supercenter, even minority opposition could halt investment in its tracks and keep Walmart out.

  3. Logistics. Even if Walmart could find the land and overcome political opposition, its existing logistics systems are designed to move large quantities of goods with ruthless efficiency. Keeping the shelves of a supercenter stocked requires frequent deliveries of large quantities of product. A typical supercenter might receive up to seven fully loaded semitrailers every day. Yet, a single tractor-trailer rig would snarl traffic in the typical urban center. Simply stated, the highly congested, inadequate infrastructures common to large urban centers prohibit Walmart’s approach to fulfillment.

Figure 5.8: Persona Non Grata

Taken together, real estate prices, political opposition, and poor logistics infrastructures promised to stymie any attempt by Walmart to enter these 15 underserved, densely populated markets—at least via Walmart’s existing formats.

Developing the Express Format

The answer seemed obvious: develop a small-format store to enter these urban markets. One fact, however, stood starkly—like a roadblock—before the team. Walmart had not developed a highly successful new format since it began building supercenters in 1988. Walmart’s Neighborhood Market, a 40,000-square-foot grocery designed to fill in the gaps between supercenters, had been met with limited success, providing only tepid returns.22 As a result, only 210 Neighborhood Markets had been built through January 2012 (see Figure 5.9).

Figure 5.9: Total Neighborhood Markets by Year

As the team began to explore the small-format idea, they quickly learned that they were not the first to come up with the idea. In the early 2000s, another team had pitched the small-format idea all the way up to the board of directors. However, with supercenters soaking up capital investment, the board decided that the time for a small format had not arrived. Sam’s team found evidence that a couple of years later, a second team had tackled the concept—even building a test store in Oklahoma. Yet, the scale differences between Walmart’s day-to-day operations and a pilot convenience store doomed the project. Of note, the second effort never leveraged the learning from the first team’s analysis. That learning had been buried and forgotten. Sam promised to avoid making the same mistake.

One important fact had changed, however: the timing! By late 2009, Walmart’s leadership was under siege by analysts on Wall Street who impatiently demanded to see a growth strategy from the company. Needing a growth vehicle to sell to analysts, Eduardo Castro-Wright, CEO of Walmart’s U.S. operations, accepted the team’s proposal for a small-store format. He gave the Business Development team explicit marching orders: “Okay, now figure out a go-to-market strategy.”

Having been promoted to a director-level position in the spring of 2010, Sam accepted the mandate to move the small-format idea from whiteboard to market. With a large capital budget and carte blanche to design the small-format team and pick its members, Sam was ready to go to work. What Sam didn’t have was the autonomy that David Wild’s Marketside team enjoyed. The Marketside experience had soured Bentonville leadership on freely operating skunkworks teams. Sam knew that he and his team would need to build enthusiasm and support for the small-format concept from the inside out. Sam took another learning point away from the Marketside experiment: any new small format needed to be true to the Walmart brand. Another upscale deli targeted at urban markets was unlikely to get the green light.

Defining Profitable Small-Format Operations

To get the small-format equation right, Sam’s team undertook an extensive three-step scanning effort. The first step was to identify key decision makers throughout the corporation who would influence the development and execution of the small-format strategy. These decision makers were asked two questions: (1) If you were to build a small-format operation, what would you do? (2) What wouldn’t you do? These discussions helped make the need for a small-format growth engine visible and thereby swing key executives to support the idea.

The second step involved an in-depth competitive analysis. The team crisscrossed America, looking at a variety of formats smaller than 45,000 square feet. The team compiled data on grocery stores, convenience stores, specialty stores, and drug stores. Some of the standouts included Walgreens, CVS, Wawa, Whole Foods, Dollar General, Family Dollar, and Aldi. Big-picture issues such as differentiation drivers and delivery approaches were evaluated. The team found the drive-through concept particularly interesting. Customers order online and pick up their prefilled carts in the parking lot. Likewise, detailed cost comparisons were made. The team dove down to a SKU-by-SKU analysis of price points on some competitors. Two key learning points emerged: (1) Aldi was best in class across a variety of dimensions, and (2) nobody had truly cracked the code to profitable urban stores. Walmart may have fallen behind in the small-store segment, but the game was far from over.

The final step took Sam and his team on a world tour. After all, within Walmart’s own ranks, many brands had been competing aggressively and profitably in large, urban markets for years. The team visited Mexico to examine the Bodega family of markets including Bodega Aurerrá Express. Other stops included Costa Rica, England, Belgium, and France. The most unique format, which was not owned by Walmart, was Krono Express, a French drive-though concept. Two visits led to eye-opening and format-defining learning opportunities.

Asda Supermarket

At Asda, a British retailer that Walmart had acquired in 1999, Sam’s team learned that savings in capital and labor costs could help offset high urban real estate prices. Asda had established the supermarket division to extend Asda’s reach into cities where its supercenters could not compete. The 25,000-square-foot stores were needed to grow in markets dominated by Tesco.

Unfortunately, initial efforts had failed to provide profitable growth. Profits started to emerge when Asda brought in a manager who scrutinized every capital investment, requiring that every penny be justified. A second breakthrough occurred when one of the stores went through a staffing crisis caused by an ethics violation that required Asda to replace the entire staff. Rather than leave the store closed during the transition, the decision was made to open it with a skeleton crew of 15 instead of the normal 60. To everyone’s surprise, the skeleton staff got the job done. By reducing capital and labor costs, Asda Supermarket could deliver profitable growth.

Supermercados PALi de Costa Rica

At Supermercados PALi, Sam and his team found a best-in-class player that optimized operations to minimize costs. PALi’s tagline was “Bienvenido a los PRECIOS MAS BAJOS” (“Welcome to the LOWEST PRICES”). Intrigued by PALi’s approach, the team invited the COO to spend six months in Bentonville teaching them how to take costs out of small-format store operations. Two vital takeaways emerged.

  1. First, leadership style is critical. Small formats need leaders who roll up their sleeves and get their hands dirty—right alongside their coworkers. Resource constraints mean everyone has to be willing to pitch in wherever needed to get the job done. Sam liked to describe these managers as follows: “They bring two sets of clothes to work because by the time customers start to come through the doors, they have grimed up and sweated through their first set of clothes.” Moving store managers from supercenters to an Express format was a recipe for failure.

  2. Second, simplicity and discipline are everything to a small format. Every store manager brings a stopwatch and a tape measure to work. They time cashiers and help them improve their efficiency. Cashiers are expected to do about 60 scans per minute—an incredibly fast pace. The tape measure is used to measure store displays and assure that everything is in the right place. Employees learn that low prices are essential, but a good customer experience is also expected.

Every learning point was incorporated into the operations for an Express format.

Ultimately, Sam’s team proposed a 12,000–15,000-square-foot store that was true to the Walmart brand and culture. Each store would carry a selection of about 12,000 SKUs that a customer might need on the spur of the moment, including grocery items, ready-to-go prepackaged meals, health care items, and even a few home goods. Critically, the Express format fits the urban market where space is at a premium and customers demand convenience. It also offers the size, efficiency, and convenience needed to locate in rural areas that can’t support a supercenter but that are the incubation zone of the deep discounters like Aldi and dollar stores.

Gaining Merchandising Support

Sam and his team had learned that ideation and execution are two very different beasts. To win in new-format design, the team would need to slay both. Unfortunately, despite their efforts to be inclusive and to build buy-in throughout the development process, merchandising wasn’t fully on board as the Express concept was reaching the test stage.

Why was this a big deal? Walmart was designed for the masses. For example, the typical Walmart supercenter sells around 150,000 SKUs. Having the right 150,000 SKUs is very different from having the right 10,000–15,000 SKUs. Having the right SKUs on the shelf at the right price was equally important, especially given the possibility that Aldi might locate one of its own small-format shops nearby.

The Aldi effect gave Sam’s team an idea. They built a mock grocery aisle just outside their war room. The aisle was stocked with almost 500 different nonperishable SKUs. Four different brands of each SKU sat side by side: Aldi, Save-A-Lot, Walmart’s Great Value, and Walmart’s national brand equivalent. Little cards with price points, percent differences, and a bright sticker were posted next to each product. Aldi’s color was yellow, Save-A-Lot’s pink, and Walmart’s blue.

With the display—and the facts—in place, Sam’s team invited Walmart’s executive team in for a quick tour. When confronted with a “sea of yellow,” Lee Scott, former CEO and member of the board, said, “This is heartbreaking.” Within days, the merchant team was touring the mock store. The goal: figure out how to work with the supply base to restore Walmart’s price position and enable Express to go head-to-head with Aldi.

Establishing Scalable Replenishment

To support Express pilot stores, Sam’s team set up a fulfillment zone within a Walmart cross-dock DC. The 1,000,000-square-foot host DC (about 18 football fields under one roof) dwarfed the 10-by-10 foot Express replenishment operation. In this setting, where the desire to do things on a grand scale was ever present, Sam and his team had to constantly remind themselves that the amount of dog food or the number of apples that would sell in a day at a supercenter would stock an Express store for two months.

Within the DC, product flowing to a supercenter moved from full inbound trailers to waiting outbound trailers on 10 miles of conveyor belts at about six miles per hour. Star scanners read each carton’s bar code, routing it automatically to the right store. Twenty years of optimization had created a synchronized—and very efficient—operation. This efficiency was critical for Walmart’s frequent deliveries and EDLP strategy. By contrast, product sent to an Express store was handpicked and moved by pallet jack to the staging area where delivery pallets were hand stacked. These storebound pallets were so undersized that it was sometimes difficult to shrink-wrap them securely.

Of course, Walmart’s remarkable replenishment efficiencies did not stop at the dock door. Each 53-foot trailer’s 22 pallet positions were loaded to optimize for cube and weight. Up to seven trailers might deliver to a supercenter each day, allowing 5,000 cases of merchandise to be shelved overnight. Such scale was completely missing at the Express outlets. Two pallets looked a little silly sitting in an empty 53-foot trailer. But Walmart’s fleet of 6,500 tractors, 55,000 trailers, and more than 7,000 drivers was supersized for massive deliveries—not for keeping the shelves of a mom-and-pop-sized store full.23 Indeed, a 53-foot trailer couldn’t even navigate the streets in the urban centers the Express format was designed to serve.

The bottom line: replenishment costs per unit were much higher for Express than for any of Walmart’s other physical formats. This reality could be tolerated during the market-proving stage of the Express concept, but it wasn’t scalable. If Bill Simon wanted to build hundreds of Express stores per year, Sam and his team needed to come up with an efficient and scalable replenishment model.


  1. How did Walmart—the world’s largest retailer and one of the world’s best learning organizations—fail to see the threat small-format deep discounters would bring to the market?

  2. How well will the Express format meet its core goals of (1) acting as a growth vehicle, (2) helping Walmart enter urban markets, and (3) blunting the Aldi challenge? What would you change?

  3. What recommendations do you have regarding a scalable and efficient replenishment system for the Express format?

Action Activity

Prepare an after-action report for the development of the Express small-format store. Remember, an after-action report answers three vital questions:

  1. What was done well?

  2. What could have/should have been done differently?

  3. What should the forward-looking plan of action look like?