Boosting Profitability

Following the Wal-Mart principle

At the root of it all, every company has the same goal — increasing its profits. Books on the topic line library shelves. Colleges teach concepts on how to do it. Economists fill our airwaves with their elaborate theories. It's a complex issue demanding complex answers, right?

Maybe not. We think you can sum up the solution to the profit conundrum with some pretty basic ideas: Understand what drives your profitability. Focus on the area that can quickly boost it. Figure out just how to do. Test it. And if it works, apply it everywhere.

Don't believe it could be that easy? Well, one company outside of ag recently provided a textbook example of how to follow these steps to develop and implement a profit-boosting strategy. That company is Wal-Mart.

No wonder the even the chain's logo looks happy

This spring, Wal-Mart introduced a new program designed to increase profits. The focus of this program? Selling more to its most loyal customers. This "site-to-store" program really makes sense. Here are some key reasons why we think so:

• First, it's more economical to target current users. Why? On average, selling a new product to a new customer takes three times the resources as it does to sell a new product to an existing customer. Probably more in Wal-Mart's case given their phenomenal penetration into US households.
• Second, Wal-Mart's logistics expertise is legendary. So, the retailing giant found a new way to leverage this core competency to bring new products to Wal-Mart stores and avoid the shipping costs typically associated with online orders for merchants and consumers alike. This gives Wal-Mart a price advantage over e-tailers like amazon.com, especially on larger items.
• Third, Wal-Mart tied its traditional and e-distribution channels together. The company can increase overall sales and profits while preventing channels from fighting each other for them — and destroying a great opportunity.
• Finally, Wal-Mart executed its program based on multi-year testing and refinement. Other retailers such as Best Buy have recently launched similar initiatives, but without the extensive legwork. Confusion reigns among Best Buy employees and frustrated customers who experience long waits to pick up their merchandise.

But enough from us ...

To find out more about Wal-Mart's site-to-store program's phased rollout, we recently heard from Raul Vazquez, Walmart.com CEO. Here's what he had to say.

Strategic Agribusiness Review: Can you describe your site-to-store program?

Vazquez: The program is designed to allow customers to come online, buy product that generally is not available in the store and have it shipped into their local Wal-Mart store for free. We've seen strength really across the board — some of our best products have been a Samsung 32" flatscreen TV. A baby crib from Storecraft has done very, very well. There's even a Lightning McQueen bed from the Cars movie that's done really well.

SAR: How is your service different from that of your competitors?

Vazquez: Our site-to-store service is different in that it allows customers to buy products that are not available in your Wal-Mart store, really giving customers access to additional Wal-Mart values. Most of the services that are offered today by competitors give you the option to buy product that is already in the store. So if you're in a situation where you want product that isn't in a store, you have to go to a different store.

SAR: Who is in your target market, and what role did research play?

Vazquez: We've really designed the service with the Wal-Mart customer in mind. Our research indicated that the customer who was using the service is the loyal Wal-Mart customer. Approximately two-thirds of customers are in a Wal-Mart store at least once a week, so there's this great element of convenience because the customers can pick up their site-to-store orders during any of their weekly shopping trips. That's what makes the service compelling — free shipping into your local Wal-Mart that you're going to be in once a week anyway. What we also learned during the trial was that approximately 50% of customers spent an incremental $60 in our stores when they went in to pick up their site-to-store order.

SAR: This program has been rolling out over the spring and will be offered in all of your stores by the end of the summer, but it isn't an overnight wonder, is it?

Vazquez: We've been working on this program for two years. It was really in pilot while we figured out all the operational components to make sure we had great service for our customers. Our extensive testing of the site-to-store service allowed us to create a multi-channel shopping experience that brings additional assortment, convenience and value to our customers.

SAR: What has been the effect on sales?

Vazquez: At Walmart.com, really our vision is to be the premier multi-channel retailer. We want to find a way to allow customers to shop more with Wal-Mart and deepen our relationship with those customers. From a traffic point of view, we are the number one multi-channel retailer. Online, eBay and Amazon still are seeing more traffic than we are, but we have been pleased with the growth in our business over the last few years. Our site-to-store service makes it easier for customers to shop at Wal-Mart, either online, in stores, or a combination of the two channels.

We at Entira often provide the unbiased eyes ag companies need to help evaluate their own businesses and alternatives. Then, we help inject rigor and discipline in the process. If you'd like help boosting your company's profitability, just call me at 815-992-8460 or email me at joy@entira.net.

Editor's note: Wal-Mart has been piloting its new program in a limited number of stores since 2004, during which time site-to-store sales have more than tripled. The company reported record sales and earnings for the quarter that ended April 30, 2007, with net sales of $85.387 billion, an increase of 8.3% over the first quarter of the previous fiscal year. The site-to-store program may receive more attention in the wake of the company's recent announcement of plans to moderate the growth of its U.S. supercenters.