Wal-Mart, Sam's Club, and Costco: A Key Strategy Lesson

The Wall Street Journal published an article today (by Sarah Nassauer) titled "Sam's Club Aims to be Less Like Wal-Mart."   The article quotes the Rosalind Brewer, chief executive of Sam's Club:  "“We want to be less of a Wal-Mart."  The article goes on to explain Brewer's thinking:

The new strategy means carrying fewer products that appeal to households that earn $45,000 a year—Wal-Mart’s sweet spot—in favor of targeting wealthier shoppers with more organic food, brand-name clothes and 1,000-thread count Egyptian cotton sheets, she said during a recent interview.  Sam’s struggle to shake an early focus on mainstream consumers has become a liability as club stores have evolved into a favorite among more affluent shoppers who are able to pay a membership fee for access to discounts on items from large screen TVs to bulk boxes of peaches. At the same time, big- box retailers and grocery stores have embraced discounted bulk sizes, without a membership fee. Rival Costco Wholesale Corp. has thrived, building stores in wealthy enclaves and delivering strong annual sales gains.

The story of Costco and Sam's Club offers a key strategy lesson for all managers.   Think about the wholesale club business for a moment.  Who is the typical consumer?  The data show that they have a substantially higher income than the usual Wal-Mart customer.  Does that surprise you?  Consider the wholesale club business for a moment.   You have to pay an annual membership fee.   You buy in bulk.  Therefore, while you may save on a per unit basis, the total cash outlay on a typical shopping trip is quite high.  You need an SUV to get the goods home, because they are bulky.  Moreover, you need a good-sized house with an ample pantry space to store the goods.  In short, the wholesale club model is more attractive to customers with a higher level of disposable income than many Wal-Mart shoppers.

Consider Costco's success.  They figured out who the customer was in this business, and they tailored their entire business model to this consumer.   For that reason, Costco locates in wealthier suburbs, and they offer premium goods in many categories.  They have become the largest retailer of wine in the country.  They know their customer.   Why has Sam's Club stumbled a bit in the past?  Wal-Mart built Sam's Club and tried to leverage all that was successful and effective about their value chain in the discount retailing business.  However, the activities and choices that were well-suited for discount retail were not necessarily tailored effectively to the wholesale club  business.  You see the temptation though.  Successful firms want to leverage their existing capabilities, choices, and activities when they move into a new market segment.  Yet, that effort to leverage what they do well may become a stumbling block if the new segment has some crucial differences for which they should account. Costco could build a business model well-suited to the more affluent customer because they were building from scratch. 

Target: Recovering from a Straddle

This week's issue of Fortune has a cover story about Target's new CEO, Brian Cornell.  He has made some bold moves in the initial months of his tenure, including a complete exit from the company's costly failure in Canada.   The article sheds some light on a key reason why Target struggled in recent years.  We all know about the Canadian troubles and the major security breach.  Beyond that, however, the company faced some more fundamental issues in its US business.  Check out this excerpt from the article:

The Great Recession threw the company off its stride. Being trendy seemed like an indulgence in a time of depressed wages and underemployment. Target’s marketing began echoing Wal-Mart’s dogma of frugal prices rather than fun and flair. Target cut back the shelf space it was devoting to unique, unproven merchandise—whether it was home goods or clothing—and reduced the quality of some of its apparel to keep costs down. Meanwhile, Macy’s, Kohl’s, and H&M were imitating the company with their own designer collaborations.  Target was standing out less and less. To generate visits the company added more groceries, but without any distinctive touch to set it apart. By 2013 food, a notoriously low-margin business, had grown to a fifth of its revenue. Target had concentrated too much on the “pay less” part of its mantra and not enough on the “expect more” part.

This excerpt suggest that Target moved away from its differentiated positioning during the economic downturn, as it tried to compete more on price because consumers were hurting.  However, it found itself straddling its longstanding position as a highly successful differentiated player in the mass merchandiser market and the low cost position occupied by players such as Wal-Mart.  It was in no man's land - not the most efficient, frugal, low cost and low price player... nor the hip, cheap chic, fashionable player it once was.  Cornell seems to be moving aggressively to fix the problem.  

Target succeeded historically because it chose to stand out from other mass merchandisers, differentiating slightly from the low cost pack.  Expect more, pay less.  It didn't become Nordstrom, but it was clearly not Wal-Mart.  JetBlue has tried to do the same thing in the airline industry.  It's a tricky strategic position though, because you can't completely ignore cost and efficiency.  You cannot have the cost structure of a luxury retailer.  When recessions hit, it can become tempting to compete more aggressively on price so as to retain customers.  However, that can damage the firm's differentiated positioning in the long run.  Full disclosure here... Target is a great partner of Bryant University.  I'm rooting for Cornell and the entire team to continue to reinvigorate the organization. 

Retailers, Showrooming, and Mobile Apps

Keith Anderson of RetailNet, a leading retail market research firm, tweeted an interesting story today about Wal-Mart's mobile app.   We all know that brick-and-mortar retailers have been fighting a growing "showrooming" trend - the notion that consumers visit stores to see, touch, and interact with a product, but then purchase on-line from an e-commerce company such as Amazon.   Retailers have been working hard on strategies to counter that threat.  Wal-Mart recently updated its app to improve the "Store Mode" element.   That aspect of the mobile app tries to help consumers navigate the store to find what they desire.  The "Store Mode" includes the local advertising circular, a shopping list function, maps of the store layout, and a QR code scanner.   What is interesting about the results to date for this updated app?  According to this article, Wal-Mart reports  that, "12% of its m-commerce sales occur while customers are in stores, showing that consumers are using their smartphones to buy from Wal-Mart what Wal-Mart does not have in stock, or perhaps purchase an item they don’t feel like carrying home, like a big-screen TV."   In sum, a strong mobile app may help protect against the tendency for consumers to drift toward Amazon or another online player for their purchases.

We all know that many retailer apps left a great deal to be desired over the past few years.  However, they have been improving.  Retailers have added functionality that does help consumers navigate the stores more easily and much, much more.  For instance, take this initiative at Nieman Marcus, described in this article on springwise.com:

The US luxury retail store is now trialling its NM Service app, which provides sales associates with consumer data they can act upon in real time. Developed by Signature Labs Inc, the app can be downloaded for free from the App Store. Customers can then select to “opt-in” to participate in the service, and a sensor at a Neiman Marcus store will detect when they walk through the door and launch the app. NM Service will provide information on new products and future events taking place at the outlet, as well as listing the sales staff currently instore. Those sales assistants can also have a version of the app tailored to them, alerting them when a participating customer enters the store. Sales assistants will also be presented with information on the customer’s previous purchases at Neiman Marcus outlets and their online shopping history, and the app will display an image from the customer’s Facebook page so that they can be easily identified. Both customers and sales associates are able to send messages to each other.

These two examples stand at opposite ends of the spectrum: Wal-mart is the classic low-cost player, while Nieman Marcus is a highly differentiated luxury retailer.  However, these examples demonstrate that mobile strategies can be used not only to protect against the disruptive threat of online commerce, but also to enhance the in-store shopping experience.  People still enjoy visiting brick-and-mortar stores to see, feel, and try on items.  If retailers can enhance that visit and provide customers the information they want when they want it, they can compete more effectively not only against online players, but also against their direct brick and mortar rivals.