There is no question that we have written many articles on Wal-Mart. Recently, however, we have written four pieces focused on change that is transforming produce procurement at Wal-Mart:
Then on Wednesday, February 3, 2010, the domestic buying apparatus that had been assembled mostly by Ron McCormick was “blown up.”
It appears there were two conference calls that day… one for the few who “made the cut” and the other to discuss how people could pick up their severance packages.
Confusion still exists. It appears that Procurement will be divided into three sectors: Global Procurement, Merchandising and Local Sourcing.
Financial Planning (Budgeting), Pricing, Customer Experience (Modulars) and Replenishment all seem to be separate pieces of the puzzle, not integrated fully with Procurement.
It is a big change and not just in personnel. It is a new model for doing business, and it raises at least five immediate questions we can try to answer:
A. What is the new business model?
It is hard to understand. Details are very sparse. As far as US Operations are concerned, the country has been divided into thirds. There is an Executive Vice President in charge of each area, and they are located in the field. We mentioned above how procurement will be divided up, but that is very sketchy at present. We have received calls from people in Wal-Mart looking for clarification. Those whose jobs were retained don’t know what they are supposed to do. Those who have been displaced don’t understand why. No clear sense of direction is apparent at the moment, although one would suspect that a few individuals know what they are trying to do and, presumably, that will become more clear with the passing of time.
B. Does the new business model offer the hope of a sustainable business advantage for Wal-Mart?
We heard that McKinsey was hired to help draft this program, although were not able to get confirmation on that. Without a doubt, though, the consultants and key individuals at Wal-Mart who have decided this course should be pursued believe this to be true. However, the final outcome is uncertain.
C. Does this adoption of a new business model create opportunities for competitors? If so, what are those opportunities?
We can already see that huge opportunities are being created for competitors. We don’t know what Wal-Mart will gain through the adoption of this new business model, but we clearly can see what Wal-Mart has lost. A supplier community that was once deeply dedicated to seeing Wal-Mart succeed now has ZERO trust in Wal-Mart — at least for right now. The Pundit rarely goes a day now without speaking to a vendor strategically looking to diversify business away from Wal-Mart. That being said, Wal-Mart is still a huge receiver, and its checks can be cashed. Wal-Mart will not go without produce and, if Wal-Mart keeps growing, it will be hard for suppliers to diversify away from such a large and growing buyer. It is a key factor to recognize, though, that no one seems willing to believe that Wal-Mart is a long term strategic partner.
This means, of course, that the best brands, the best suppliers, are open to be strategic partners with other retailers in a way they have not been for over a decade.
D. Where do suppliers of various types fit into the new model? Is there a place for brands? Is there a place for superior quality? Is the procurement of produce now strictly a matter of price?
Brands are clearly playing a diminished role. The current leadership believes that private label is the way to differentiate, much as the Western European retailers believe this. No surprise in this, as Jack Sinclair is from Western Europe. But more importantly, Wal-Mart is now purely a “margin play”, so private label and F.O.B. price are the priority. With regards to “quality,” there are indications that Wal-Mart executives are in a state of denial. They believe that their global procurement of produce has had no impact on quality. They also believe their Great Value is equal to national brand quality. And, what may portend a big problem in years to come, there are indications that top Wal-Mart executives are not open-minded on this subject. In fact we understand that at least some Wal-Mart executives fear that were they to suggest that this may not be the case, they would be perceived as being “old school” and might lose their opportunity for advancement or even their job.
E. In produce they just fired a load of people. How does this impact the implementation of this new business model?
This is an important point. Experience used to be valued at Wal-Mart. Now it seems to be regarded as being “out of touch”. Pam Kohn and DeDe Priest are not recognized as highly knowledgeable produce experts. It seems as if the few remaining executives with in-depth produce knowledge are marginalized with regard to decision-making. When you are the biggest buyer in the world, one doesn’t have to know anything. But the biggest buyer in the world should want its people to know everything. Ignorance allows others to slip things by and means one won’t recognize opportunities.
We began this series by pointing out that this new approach was the end of the Peterson era. That was true and made sense in speaking to the produce industry, which is still filled with folks who joined with Bruce Peterson 20 years ago to build Wal-Mart’s produce operation from scratch.
Yet, this is all taking place within a context much broader than produce or perishables. Most of what Bruce Peterson did was not original. What he mostly did was take the concepts that Sam Walton had developed in general merchandise and apply them to produce.
So what is really happening goes way beyond dismantling Bruce Peterson’s produce-buying procedures; what is really signified by all this is the end of the Sam Walton era at Wal-Mart.
All the things that Sam Walton believed in: EDLP. Item Merchandising, Interactive Supplier Interface, National Brand Merchants, etc., are all being dropped in favor of a different model.
Now we have to be careful. We cannot simply assume that the new model is wrong. There are many companies that were felled because they kept doing what made them great, even when circumstances changed.
Yet other companies were ruined by departing from core values. History will speak to this point.
The key is to recognize that a new culture exists at Wal-Mart. Like all corporate cultures, this one will have its strengths and its weaknesses; therein lies the opportunity and the risks for Wal-Mart associates, Wal-Mart’s competitors and Wal-Mart’s vendors.