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AMES, Iowa - On the heels of Wal-Mart's announcement that it's abandoning its one-size-fits-all approach to retailing in an effort to increase sales, an Iowa State University business professor here who has researched Wal-Mart's success said the strategy entails many risks.
"Wal-Mart officials are realizing that they need to broaden their low-price platform in order to continue to compete in more markets," said Bobby Martens, assistant professor of logistics and supply chain management at Iowa State. "On the other hand, this could easily set them up to price discriminate, especially to their 'rural' group."
Wal-Mart's merchandise will now reflect one of six demographic groups, including African-Americans, affluent, empty-nesters, Hispanics, suburbanites and rural residents. The company also plans to renovate its 3,400 U.S. stores over the next year to reflect the needs of these six different groups.
"This is risky for Wal-Mart," said Martens. "They're changing a supply chain that was developed on low-cost efficiency for a fragmented customer relationship management-based chain. It's also interesting from a standpoint of enabling price discrimination. They could potentially charge rural customers due to market power, especially in grocery, which is characteristic of local markets."
While this strategy shift is a bold move for Wal-Mart, it shouldn't be viewed as a sign of desperation, Martens said -- although he added it could alter the retail giant's efficient supply chain management strategies that have allowed it to offer lower prices to consumers. Wal-Mart is known for driving down prices throughout an area, and driving out some local competition in the process.
"Wal-Mart built itself on being low cost and extremely efficient in supply chain management practices. And they are that. They're the model for the world in terms of retail supply chain management," said Martens.
"There are projections that by 2010, Wal-Mart will control 35 percent of the U.S. food grocery market," he said. "That growth has been brought on by supply chain and logistics advancements, the fact that consumers are looking for one-stop shopping to buy other goods along with their food -- so the convenience factor -- and the fact that consumers are going to grocery stores less often, but buying larger quantities. That is a function of better packaging, the fact that they can go to these one-stop shops, and changing family demographics."
The families and their grocery purchasing habits aren't the only things that have changed with Wal-Mart's penetration into the market. It has also forced other grocery chains to change the ways they do business in order to keep up.
"Wal-Mart has completely changed the grocery playing field," Martens said. "So the traditional grocery retailers like Kroger -- which is the No. 2 -- are very much changing how and what they stock. It's really changing Kroger's life because they need to compete with this one-stop shopping concept, so they're bringing more into their store.
"Another thing that's changing in the grocery industry is that the middle-sized stores are really exiting the market, but there is a surge in the number of convenience stores (non gas station-related) in the United States," he added. "Another opportunity we've been seeing for grocers is specialization -- for example, excellent meat counters, cheese counters, specialty foods. Many of these smaller traditional grocery stores that are surviving have that kind of a niche."
According to Martens, Wal-Mart is on target to open 370 new stores in the United States this year. The retailers said in a news release a few weeks ago that "in coming years" it plans to open 1,500 additional stores.
Martens is working on two related papers from his data titled, "The Effect of Wal-Mart on Retail Grocery Concentration" and "The Effect of Supercenters and Retail Stores on County Level Grocery Sales," which he said he plans to publish in professional journals.