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250 million reasons for Wal-Mart’s RFID exploits
It’s beginning to look a lot like a Wal-Mart Christmas Ev’rywhere you go;
Take a look in the overcrowded superstore, glistening once againWith checkout lanes and half-price videogames aglow.
It’s beginning to look a lot like a Wal-Mart ChristmasDiscounted toys in ev’ry store
But the prettiest sight to see, is the loads of money that will beOn Wal-Mart’s own front door.
If there are two things that seem to put a smile on Wal-Mart CEO Lee Scott’s face, they are the Christmas shopping season and an economy in crisis.
As other retailers frown over the prospects of massive declines in consumer spending this holiday season, Scott is grinning ear to ear: “This is Wal-Mart time.”
That’s what he recently told analysts, adding, “We see this as an opportunity to widen our moat.”
Last February, when the economy wasn’t doing so hot either, Scott was cautiously optimistic in delivering Wal-Mart’s 2007 fourth-quarter sales and attributed Wal-Mart’s recent holiday sales success to “pricing strategies” and “improved customer service,” citing cleaner stores, fewer out-of-stock products and faster checkout lanes.
He was upbeat about the results but cautious about the future, stating, “We know that the economy remains a critical factor in this new fiscal year.”
During the next nine months, as the credit crunch, Wall Street turmoil and retail sector’s sagging sales gradually worsened, Wal-Mart’s “everyday low prices” became the first (and sometimes only) option for many cost-conscious shoppers. Wal-Mart historically thrives in times of economic uncertainty.
Today, Wal-Mart is also capitalizing on newly-implemented retail applications and a re-invigorated IT strategy that takes advantage of off-the-shelf software.
In October 2007, CIO magazine carried an article on how Wal-Mart’s internal IT department had contributed to the retailer’s fiscal problems, which began with stagnant sales in 2005 and ran into 2006 and 2007.
The article reported that Wal-Mart’s ISD group, as it’s known internally, had distracted itself with a cutting-edge radio frequency identification (RFID) program that frustrated its suppliers.
One initiative for which RFID technology was harnessed was to reduce retail shelf out-of-stocks, and improve inventory profitability.
Wal-Mart’s ISD group had estimated that doing this could generate an additional $250 million in annual sales.
Addressing the Collaborative Supply Chain Forum last year in in Mississauga, Ont. Nicole O’Connor, Director of ISD at Wal-Mart Canada Corp. detailed the tremendous benefits Wal-Mart and all its stakeholders – including anticipated benefits – are experiencing from this technology.
O’Connor’s noted that of the seven million people who shop at Wal-Mart stores each week, an estimated 100,000 needed to make a second trip because the merchandize they sought was not in stock the first time.
“If [by improving inventory management via RFID technology] we could eliminate the extra trip for these 100,000 customers, we could [collectively] save them 15,097 litres of gas – and $5.7 million a year,” O’Connor said.
Wal-Mart’s early adoption of RFID, she said, is inextricably linked to the retailer’s “everyday low price” objective.
“Sam Walton (Wal-Mart founder) said years ago that we [serve as] an agent for our customers. That focus hasn’t changed, and it’s demonstrated in our everyday low price mandate.”
At Wal-Mart Canada, O’Connor said, RFID is being used to execute on that mandate in four key ways:
Reducing out-of-stocks – O’Connor cited findings from a 2003 University of Arkansas 29-week study that RFID enables a 32 per cent reduction in out-of-stocks.
She said Wal-Mart’s U.S. stores have validated this conclusion with their own internal tests that show similar dramatic improvements in stocks through RFID.
This has a powerful and positive impact on sales, the Wal-Mart executive said.
She said studies show out-of-stocks result in a minimum two per cent loss in sales – a significant number given the scope and breadth of Wal-Mart’s operations. (Wal-Mart’s annual sales revenues are estimated at around US$350 billion).
“That is why we are focusing on out of stocks.”
But despite O’Connor’s optimistic words, there were issues with Wal-Mart’s RFID program. In addition, the ISD group had yet to adjust to the realities of the new Web 2.0 world.
Consequently Wal-Mart’s online sales lagged rivals’ efforts, and IT leaders relied too much on homegrown IT systems and shunned retail software, deeming it not scalable enough.
On top of it all, both Wal-Mart corporate and ISD were stuck in a command-and-control mindset that centralized all decision-making and took away the power and flexibility of local managers.
By the end of 2007, however, change had occurred. Wal-Mart announced that it had installed applications it previously seemed unwilling to use.
For example, Wal-Mart bought SAP’s ERP software, and Oracle’s retail price-optimization application and HP’s Neoview data warehousing platform to crunch the data Wal-Mart collects in its 4,000 U.S. stores. Combined, the Oracle and HP tools could offer new and powerful decision-making capabilities for Wal-Mart’s merchandising managers.
Which brings us to today: The combination of a down economy, consumers looking for discounted merchandise and the maturation of Wal-Mart’s new IT applications will likely deliver a very holly, jolly Christmas season for Wal-Mart.
Of course, with all its bravado and good cheer, Wal-Mart has also had to display a modicum of humility in its recent chat with the Wall Street watchers.
Wal-Mart executives repeatedly told analysts at the meeting in Bentonville, Ark., that they did not want to sound “arrogant,” reported The New York Times, though they acknowledged feeling very jubilant about their prospects.
Said Eduardo Castro-Wright, Wal-Mart’s CEO of U.S. operations: “I sleep very well at night.” No doubt nestled all snug in his bed, with visions of half-priced toys dancing in his head.