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1 8912 East Pinnacle Peak Road Scottsdale, AZ Phone (480) Fax (480) What’s Leading Edge With Today’s Leading Mass Volume Retailers? March 8, 2005 Dallas, TX American Logistics Association Exchange Roundtable

2 2ALA2005R3.ppt Based on most recent research, the top 3 retailers shoppers rank as literally “indispensable” to their daily lives are Wal-Mart, Target and Costco: Base: Among those who shop the store Wal-Mart Wal-Mart31% Costco Costco17% Target Target13% BJ's BJ's11% Kroger Kroger9% Albertson's Albertson's9% Safeway Safeway8% Sam's Club Sam's Club7% CVS CVS5% 7-Eleven 7-Eleven3% Dollar General Dollar General3% Walgreens Walgreens3% Rite Aid Rite Aid2% Kmart Kmart2% Meyers Research: “Retailers Consumers Could Not Live Without” (Aug, 2004) Source: Meyers Research, Aug, 2004

3 3ALA2005R3.ppt Not coincidentally, Wal-Mart, Target and Costco are also the same retailers that consumers find the “most fun to shop”: Base: Among those who shop the store Target Target30% Costco Costco30% Wal-Mart Wal-Mart28% SAM’s Club SAM’s Club20% BJ’s BJ’s11% Dollar General Dollar General6% Albertson’s Albertson’s4% Kmart Kmart3% Walgreens Walgreens3% CVS CVS2% Kroger Kroger2% Family Dollar Family Dollar1% Safeway Safeway1% Rite Aid Rite Aid1% Specific Retailers Consumers Find Most Fun To Shop Source: Meyers Research, Aug, 2004

4 4ALA2005R3.ppt Today:  What is it about Wal-Mart and Target that makes them so successful, not only with shoppers, but from a business standpoint in general?  What lessons can Exchanges take away from this, given their objectives and the constrictions under which they operate?  Q&A

5 5ALA2005R3.ppt The Leaders – Snapshot of Current Vital Statistics: Wal-MartTarget Sales (U.S. $B) $232.9$47.1 # Stores (U.S.) 3,7111,313 Gross Margin 23.9%32.8% Operating Expenses 18.4%22.4% Proj. CAGR, ‘04 - ‘07 9.9%8.9% Positioning “Always Low Prices” “Expect More/ Pay Less” HH Penetration 86%62% Sales/Sq. Foot Inventory Turns Days Sales In Net Inventory 2112 Merchandising Strategy EDLPHi/Lo Source: Company 10Ks & 10Qs; Hoyt & Company, LLC,

6 6ALA2005R3.ppt While Wal-Mart and Target are very different retailers, both share the same objectives as all other retailers– specifically: Grow profitable sales by aligning and focusing all marketing, merchandising, buying and logistics functions on one or more of the following objectives: Exchanges  Increase customer count (new customers)X  Increase trip frequencies (current customers)Yes  Increase transaction size (current customers)Yes  Increase productivity (Human and Financial)Yes  Reduce costs (COG’s and Operations)Yes As you will see, the paths that Wal-Mart and Target have chosen to achieve these objectives represent today’s industry Best Practices.

7 7ALA2005R3.ppt The 800 lb. Gorilla In Every Retailer’s Living Room!  $284B – Largest company in the world – greater than the GDPs of Austria, Colombia, Czechoslovakia, Denmark, Greece, Norway, Portugal, Sweden, Switzerland, Ukraine and Vietnam  $20K in profit per minute!  13% WW CAGR – projected to do $1 trillion by 2014  $233B U..S. sales – CAGR of 9.9% to 2007  3,711 U.S. stores: 1,706 Super Centers1,706 Super Centers 1,370 Discount1,370 Discount 549 SAM’s Clubs549 SAM’s Clubs 86 Neighborhood Markets86 Neighborhood Markets  500+ new stores/remodels planned for 2005  Objective is to become the largest retailer in every market in which it operates (now #1 in only two countries out of 10)

8 8ALA2005R3.ppt So what are the key growth drivers that enable Wal-Mart to sustain the momentum of this juggernaut? Let’s look at these from the standpoint of what’s relevant to Exchanges in terms of:  Marketing and Merchandising  Buying  Logistics

9 9ALA2005R3.ppt The key elements of the Wal-Mart marketing mix – elegant and sophisticated – way beyond just “Always Low Prices”: 1.EDLP made possible by EDLC – Global buying and relentless pressure on COGs and operating costs 2.Use of consumables (food and non-edible CPG items) to drive traffic and transaction size 3.“OPP/good/better/best” merchandising ladder (private labels –> national brands)  Localization – Demographic assortments 5.Ancillary businesses – hearing aids, optics, stores within stores, etc. 6.Consumer-centric versus supplier-centric business model – all allowances are driven into price and not used to subsidize operating profits

10 10ALA2005R3.ppt The key elements of the Wal-Mart marketing mix (cont’d) 7.Shop-ability – wide aisles, mucho signage, well lit, easy to navigate 8.Speed to market – new items and promotions – 24/ hour turnaround 9.Community involvement – parking lot extravaganzas, fishing contests, high school marching bands, etc. 10.Retail-tainment – in-store TV sets, trendy promotions (Shrek 2 and Britney Spears) 11.EDLP reinforcement – roll backs, action alley, special buys and multiple clearance items 12.Clicks and bricks synergy – what you can’t get in-store, you can get online 13.Store managers have broad discretion – can tailor assortments, authorize local displays and recommend new distribution of local items

11 11ALA2005R3.ppt Wal-Mart strategy to drive trips/provide one-stop shopping convenience – sell need (read “food”) items! Source: Retail Forward, Food Industry Outlook, February, 2004; ACNielsen, 2002 and $63B 2002 $82B 2003 $95B 2004 $112B 2007 $162B 2010 $195B 35% Bigger than Kroger, Albertsons, Safeway and Ahold combined Bigger than Kroger & Albertsons Combined Surpasses Kroger as the nation’s #1 food retailer +17.0%/Year Compounded Vs. 4.0% For Supermarkets! Wal-Mart’s March To The Top of the U.S. Food Chain: (Food & Drug Sales Only)

12 12ALA2005R3.ppt OPP = Opening Price Point in the category (typically, Private Labels) GOOD BETTER BEST = Typically National Brands The Wal-Mart Merchandising Ladder Source: MVI 10/28/2004

13 13ALA2005R3.ppt Wal-Mart Buying – What lies behind the glitz Wal-Mart buyer responsibilities:  Development of innovative merchandising solutions  Understand customer needs and trends and set the pace of new product development & brand strategy  Management of a diverse supplier base – from major brands to own label  Achievement of business plan targets  Development and delivery of the category’s trading strategy

14 14ALA2005R3.ppt Wal-Mart Buying – How Buyers are Measured  Sales UnitsUnits DollarsDollars  Profit dollars  Margin %  Turns  Markdowns (e.g., maintained margin)  In-stock  Comparable store sales growth (in certain categories)  Less tangible measures: Respect for the individualRespect for the individual Service to customersService to customers Strive for excellenceStrive for excellence Wal-Mart Buyer – Key Performance Measures

15 15ALA2005R3.ppt To achieve their objectives, Wal-Mart buyers proactively utilize suppliers to help run their business: Wal-Mart Buyer –> Supplier Expectations  Annual plan -- rolling 12 months by month and quarter New itemsNew items Tab ideasTab ideas Modular suggestionsModular suggestions MCAPS -- community store merchandisingMCAPS -- community store merchandising  Weekly monitoring: Item P&Ls vs. planItem P&Ls vs. plan Sales, initial margin, markdowns, contribution marginSales, initial margin, markdowns, contribution margin Problem stores/districts, as well as itemsProblem stores/districts, as well as items Competitive situationsCompetitive situations  Co-managed Inventory ReplenishmentReplenishment New item/promotionalNew item/promotional Economic order quantitiesEconomic order quantities Source: MVI, Selling Wal-Mart 10/28/2004

16 16ALA2005R3.ppt Wal-Mart Vendor Scorecard Extensive measurements for Wal-Mart and Suppliers  Sales Measurements Overall % IncreaseOverall % Increase CompsComps Avg. Sales/StoreAvg. Sales/Store Sales at Full Price vs. MarkdownSales at Full Price vs. Markdown  Markdown Measurements Markups and Markdowns (Dollars, Units and %)Markups and Markdowns (Dollars, Units and %) Prior and current retail pricePrior and current retail price  Margin Measurements Initial marginInitial margin Average retail priceAverage retail price Average costAverage cost Gross profit at item levelGross profit at item level Gross profit/item/storeGross profit/item/store Margin mixMargin mix  Inventory Measurements Replenishable store inventoryReplenishable store inventory Non-replenishable store inventoryNon-replenishable store inventory Warehouse inventoryWarehouse inventory Lost sales from OOSLost sales from OOS Excess inventoryExcess inventory DC outsDC outs Total owned inventoryTotal owned inventory  Return Measurements Customer defective returnsCustomer defective returns Store ClaimsStore Claims Source: Hoyt & Company Records

17 17ALA2005R3.ppt Wal-Mart Logistics – How does Wal-Mart stack up versus its leading competitors? Wal-Mart has the highest inventory turns… Wal-Mart Turns vs. Kmart + Target: Source: Company Reports; MVI, 10/

18 18ALA2005R3.ppt Wal-Mart Logistics – How does Wal-Mart stack up (cont’d) …and the lowest # of days sales on hand: Wal-Mart vs. Leading Competitors: # Days Inventory On Hand: Source: Company Records; MVI, 10/28/2004

19 19ALA2005R3.ppt Wal-Mart – Key Inventory Management Drivers: Replenishment & Logistics  Co-managed/vendor managed inventory  Two-Tier Distribution (Replenishment vs. Promotional)  Collaborative Planning, Forecasting and Replenishment (CPFR) – works with suppliers to determine appropriate levels  The Future: Radio Frequency IDs (RFID) Systems  UCCnet  Internet EDI Merchandising Systems  Modular-based merchandising  Modular Category Assortment Planning System (MCAPS) /Store of the Community

20 20ALA2005R3.ppt Why is Wal-Mart so good at logistics? Because the buyer’s open-to-buy is based on inventory management and supply chain movement: Wal-Mart Buyer Open-To-Buy In The DCIn TransitIn Store On OrderIn Route – PLUS – + New Item Promotions Replenishment Seasonal What the buyer is able to order here Depends on how much $ he/she has tied-up in these “buckets” = why suppliers are so eager to work with Wal-Mart in helping to generate maximum sales off the lowest possible inventory base.

21 21ALA2005R3.ppt Net on Wal-Mart: EFFICIENCY!  Consistent, clear positioning – “Always Low Prices” – everyone knows precisely what Wal-Mart stands for  Relentless focus on the fundamentals  Cost suppression and cost reduction is a mantra  Cooperation with suppliers to achieve mutual objectives  Combination of food (consumables) and traditional discount creates a low price one-stop shopping mecca  Lightning speed to shelf on new items/trendy promotions  “Fun place to shop” – in-store TV, on trend promotions, parking lot extravaganzas and tie-ins with local community events  Fierce competitor – will price comp anything, anywhere  Store manager discretion means stores can be traited and tailored demographically

22 22ALA2005R3.ppt “Expect More/Pay Less”  $47.1B in ‘04 sales – a 15.1% increase vs. ‘03 (less Mervyn’s and Fields)  8.9% CAGR between now and 2007 – projected to do $61B versus today’s $47B  1,313 stores – 1,177 Targets Super Targets  Comparisons to Wal-Mart are dangerous: Different business modelDifferent business model Different consumerDifferent consumer Different merchandising strategyDifferent merchandising strategy No attempt to compete on same basisNo attempt to compete on same basis  Is much more like an Exchange in assortment and operations: Careful balance of high end vs. commodity merchandise – PLs and exclusives are keyCareful balance of high end vs. commodity merchandise – PLs and exclusives are key Limited CPG food representation (changing quickly)Limited CPG food representation (changing quickly) Super centers are NOT the primary growth engineSuper centers are NOT the primary growth engine Distinct department store heritage and orientationDistinct department store heritage and orientation

23 23ALA2005R3.ppt Target Challenges:  Narrow customer base: 81% female81% female 50% between 30 and 4450% between 30 and 44  Low trip frequencies vs. Wal-Mart, Costco and even Dollar Stores!  Supercenters behind the curve  Too “Department Store-y” for a discounter: Clean, uncluttered store policy sometimes perceived as sterile and boringClean, uncluttered store policy sometimes perceived as sterile and boring Too much emphasis on “want” vs. “need” merchandise – not enough everyday consumables to drive trips, create excitement or get shoppers started on the merchandise ladderToo much emphasis on “want” vs. “need” merchandise – not enough everyday consumables to drive trips, create excitement or get shoppers started on the merchandise ladder  Highly centralized operations – Store Manager’s role is compliance and execution – no local discretionary authority = 71% of Trips and 80% of Spending

24 24ALA2005R3.ppt Target Heavy Shopper Trip Frequencies – Just Not Enough! Source: IRI Panel Data 52 weeks ended Dec 31, 2003

25 25ALA2005R3.ppt Being perceived as more “Department Store-y” than “one-stop discount/convenience” these days is not exactly on trend: The U.S. Department Store Death Spiral: Department Store Share of Non-Auto Retail Sales Source: Retail Forward, 2003

26 26ALA2005R3.ppt Despite these seemingly core negatives, Target has consistently out-paced Wal-Mart in both sales and comps ever since it jettisoned Mervyn’s and Marshall Fields in 2003 Target vs. Wal-Mart sales and comparable store growth – 2004 Source: Company 10Qs and monthly financial reports—MVI, Dec 09, 2004

27 27ALA2005R3.ppt So what is Target doing to achieve such exceptional results? Target keys to success:  Clear, concise, consistent positioning – “Expect More, Pay Less”: Not just words but the basis for all buying and merchandising decisionsNot just words but the basis for all buying and merchandising decisions The framework for Target’s Merchandising LadderThe framework for Target’s Merchandising Ladder A short, simple slogan that shoppers can remember and relate-toA short, simple slogan that shoppers can remember and relate-to  Non-price differentiation – Through captive brands, designer exclusives, partnerships with other retailers, trendy P.L. merchandise, celebrity endorsements and “Buzz Marketing”  Emotional Connection with its customers – “My Target”

28 28ALA2005R3.ppt So what is Target doing to achieve such exceptional results, cont’d?  Heavy advertising – Over $1B in 2004 – to heighten awareness, sell promotions and build equity for the Target name  Quick response segmented merchandising – To capitalize on the latest generational and lifestyle shifts – expanded pharmacies (seniors), Hispanic advertising and Merchandising, “One Spot” (dollar sections), always on-trend merchandise (soft goods, apparel and housewares) and seasonal promotions  Rapidly adding everyday “need” consumables to drive trips and increase traffic – significantly expanded food sections in all stores. Recently added extensive wine section.

29 29ALA2005R3.ppt Target Positioning: “Expect More, Pay Less” PAY LESS EXPECT MORE We’re on top of trends so you will find the latest and greatest at Target. Bright, clean stores and fast checkouts make shopping at Target easy and fun. Really low prices are the number one reason to shop at Target. Great quality at a low price makes Target merchandise a great value. STYLE SERVICE PRICE QUALITY Increase share of wallet Platform for differentiation Fashion/“Want” items Drive trips/build traffic Create low price impression Consumables/”Need” items

30 30ALA2005R3.ppt Target’s “Expect More/Pay Less” Positioning has enabled Target to place itself squarely between commodity discounters and traditional department stores and avoid competing with either on their terms: Target’s Positioning vs. Discount and Department Stores Discount Stores  Low Margins (23%)  Follow Trends  Price Sensitive  Price/Convenience Department Stores  High Margins (50%)  Early Adopters  Quality Sensitive  Fashion/Selection Drive Value Focus Drive Trend Focus This positioning has become a major asset:  Enables Target to attract a wealthier shopper than traditional discount stores.  Improves sales per store, transaction size and gross margins (Target’s are highest in the channel at 32.8%).  Moderate margins (32%)  Trend Seekers  Quality/Value Sensitive  Trend/Quality/Convenience

31 31ALA2005R3.ppt Target Buying – Key Levers  Trend Planning – Crucial to “Expect More”: Trend merchandisers travel to seek-out latest colors, fashions and designsTrend merchandisers travel to seek-out latest colors, fashions and designs Research coordinated across departmentsResearch coordinated across departments All items, color schemes, etc. are tested ahead of the seasonAll items, color schemes, etc. are tested ahead of the season  Customization – Pressure on suppliers to co-brand or custom-pack merchandise to reinforce Target’s differentiation objectives  Competitive Line Reviews – Basically auctions consisting of competitive bidding for line distribution or promotion support: Target even calls these “shoot outs”Target even calls these “shoot outs” Series of elimination roundsSeries of elimination rounds Contracts can be up to one yearContracts can be up to one year  Reverse Auctions – Online competition to provide lowest cost for commodity items or private label consumables  Global Sourcing/Direct Imports – Target is doing as much as it can to buy direct from lowest cost producers willing to meet product specs

32 32ALA2005R3.ppt Target Buying – Supplier Mandates  Reduce cycle times—allow for “just in time inventory”  Zero tolerance for orders delivered before/after scheduled time  One Purchase Order per Truck—while trying to reduce overall # of POs  Tiered in-stock level requirements – identify when Target begins to lose sales – maintain in-stocks above this level 97% “in stock” for top 2500 items97% “in stock” for top 2500 items 92-95% “in stock” for remainder of items92-95% “in stock” for remainder of items  Perfect match of invoice to receipt of product

33 33ALA2005R3.ppt Target Supplier Report Card Target’s scorecard is the most complete of the three largest Discounters: BuyingLogistics Sell Through Administration  Order fill rate  Turns – warehouse (store?)  Out of stocks – warehouse and store lost sales  Forecast accuracy  Percent orders with changes (customer)  On-time delivery rate  Order  Damage rates  Lost time  Missed windows  Backhaul earned  Bar code violations  Percent of plan – $s and unit sales New itemsNew items Established itemsEstablished items MarketsMarkets New/old storesNew/old stores  GMROI  Share of space, advertising, merchandising Facings (slots)Facings (slots) AdsAds DisplayDisplay Multiple locationsMultiple locations SignageSignage  Perfect order rate  Accurate invoice  Deductions PricingPricing AdvertisingAdvertising OtherOther  EDI  Transmit rates

34 34ALA2005R3.ppt Target Supply Chain/Logistics Initiatives – 2005 and Beyond:  SKU Reduction – To facilitate focus on fewer, more important items and be “more important to fewer vendors”  Automated Receiving Technology – Electronic labeling system that utilizes real-time information about where product is needed: Automatically labels each cartonAutomatically labels each carton Significantly accelerates the flow of goodsSignificantly accelerates the flow of goods Eliminates time-consuming, labor intensive procedureEliminates time-consuming, labor intensive procedure Rollout starting December, 2004Rollout starting December, 2004  DPIA – Direct Import, Pre-distro & Assortment Programs Converts indirect imports (no middlemen) to directConverts indirect imports (no middlemen) to direct Have suppliers pack store-specific and store ready pallets, reducing DC workloads and storage spaceHave suppliers pack store-specific and store ready pallets, reducing DC workloads and storage space Have suppliers combine multiple items in cartons to reduce the number of cartons sent to DCs in storesHave suppliers combine multiple items in cartons to reduce the number of cartons sent to DCs in stores Estimated savings of $71MM in 2005Estimated savings of $71MM in 2005  RFID – Mandatory for pallets and cases by spring, 2007

35 35ALA2005R3.ppt Target From The Supplier’s Standpoint:  Multiple opportunities to tie-in with Target’s marketing and merchandising initiatives “Expect More/Pay Less” platform“Expect More/Pay Less” platform Target community giving/cause-related sponsorshipsTarget community giving/cause-related sponsorships Co-Marketing to build upon each other’s equityCo-Marketing to build upon each other’s equity Current, intense emphasis on “Pay Less”Current, intense emphasis on “Pay Less”  Multiple vehicles – Target TV and print advertising, circulars and website, etc.  Supplier Aids: Partners On Line (POL) – provides suppliers with same data that buyer has (like Wal-Mart’s Retail Link)Partners On Line (POL) – provides suppliers with same data that buyer has (like Wal-Mart’s Retail Link) InfoRetriever – Available to Category Captains and top vendors – provides a deeper level of information on a more current basis + 2 years of back dataInfoRetriever – Available to Category Captains and top vendors – provides a deeper level of information on a more current basis + 2 years of back data

36 36ALA2005R3.ppt Net on Target: EMOTIONAL CONNECTION!  Non-price differentiation – no attempt to compete with Wal-Mart on its own terms  Willing to settle for a piece of the pie rather than going after the whole enchilada: Consumer target is not the universe but primarily women and young singlesConsumer target is not the universe but primarily women and young singles  Clear, precise, consistent positioning that enables Target to fill the void between commodity discounters and traditional department stores  Unique understanding of the needs, wants and aspirations of its target shopper: Designer clothes, soft goods and housewares at great pricesDesigner clothes, soft goods and housewares at great prices Clean, uncluttered stores with contemporary colors and thematic consistencyClean, uncluttered stores with contemporary colors and thematic consistency Ancillary services that cater to Target shoppers lifestyles, needs and shopping proclivities (pharmacies, Minute Clinics, photo, Starbucks and Pizza Hut, etc.)Ancillary services that cater to Target shoppers lifestyles, needs and shopping proclivities (pharmacies, Minute Clinics, photo, Starbucks and Pizza Hut, etc.)

37 37ALA2005R3.ppt Net on Target: EMOTIONAL CONNECTION (cont’d)  Product assortments that cannot be purchased anywhere else – designer exclusives and captive brands, etc.  Strong, centralized control to ensure uniformity and thematic consistency throughout all store presentations and activities  A conscious policy of transferring as many costs as possible to the supplier community while, at the same time, offering suppliers a strong upside through Target’s aggressive advertising, merchandising and product exclusivity policies  Awareness of and willingness to react quickly to current issues – for example, Target’s current campaign to significantly increase its consumables representation to increase traffic and trip frequencies

38 38ALA2005R3.ppt While Target and Wal-Mart have each chosen to walk different paths on route to their success, there are certain factors common to both of these retailers that make them leading edge vs. most others in the retail community. Ten factors, as follows: 1.Differentiation – Through constant juggling of the following elements: Price Price Formats Formats Captive Brands Captive Brands Designer Exclusives Designer Exclusives Successful Private Label Programs Successful Private Label Programs National Brand Supplier Customization National Brand Supplier Customization 2.Use of Consumables – To build traffic and increase trip frequencies. 3.Ancillary Departments – To increase convenience and share of wallet. 4.Fluid Merchandising (rapid ins and outs) – To create excitement, build trip frequency and reinforce differentiation objectives

39 39ALA2005R3.ppt Ten factors that separate the most successful from the rest, cont’d 5.“OPP/Good/Better/Best” Merchandise Ladders – To trade shoppers up in almost every category. 6.Speed to Market – Now more important than “Bigness” 7.Relentless Pressure on Costs and Productivity – Both in general and store-specific 8.Willingness to Experiment – New formats, ancillary businesses, stores within stores, partnerships, adjacencies, retail-tainment, etc. 9.Global Sourcing – Now direct from the lowest cost producer – no middle men. 10.Technological Innovation – RFID, etc. to reduce costs/increase speed

40 40ALA2005R3.ppt Moral of story: It’s not just price; it’s a combination of factors, carefully blended and balanced to satisfy a particular consumer need or aspiration. Each retailer has to search within its own strengths to find the right formula. There are no easy answers.

41 41ALA2005R3.ppt

42 42ALA2005R3.ppt A Special Thanks to Sylvia Harris and Cathy Ely of Luke AFB for their time and hospitality...

43 We Appreciate The Time and Attention You Have Given Us Today Specifically, we want to thank Frank Jepson and the American Logistics Association for inviting us and P&G for sponsoring us and trust that this has been both fun and helpful East Pinnacle Peak Road Scottsdale, AZ Phone (480) Fax (480)

44 44ALA2005R3.ppt AppendixAppendix Some particulars that may be of interest...

45 45ALA2005R3.ppt Target and Kmart U.S. Sales vs. Wal-Mart – Relatively Small Source: MVI 10/28/2004 Wal-Mart vs. Target and Kmart Sales & Growth Projections: E $100 $200 $300 $ E2005E2006E2007E Wal-Mart CorporationWal-Mart USTarget CorporationKmart $19.4B $59.5B $309.4B $382.1B

46 46ALA2005R3.ppt By mid 2004, Wal-Mart U.S. had achieved 86% household penetration – almost 25 points more than its next largest competitor – which translates to over 130MM shoppers per month Wal-Mart vs. Leading Competitor Household Penetration, Mid 2004 Source: IRI Panel Data (all shoppers - Total US)

47 47ALA2005R3.ppt Not content with this, Wal-Mart plans an additional 500 new store openings plus remodels in 2005, driven primarily by new Supercenters: Wal-Mart Domestic Expansion Plans For 2005 – Total U.S. Supercenters Discount Stores SAM’s Clubs Neighborhood Markets Total New Stores Remodels/Relocations Grand Totals Source: Wall Street Journal, 10/5/2005; Supermarket News, 10/11/ /18/2004

48 48ALA2005R3.ppt Wal-Mart’s store expansion strategy is carefully calculated to capture new consumers at all levels of the income spectrum and to provide shoppers with easy accessibility: Wal-Mart Format Expansion Strategy: Capturing Consumers at All Income Levels  Different formats: Target the same consumer for different tripsTarget the same consumer for different trips Target new consumersTarget new consumers Format Consumer by HH income A B C D E 75K K 45-60K 25-45K < 25K Discount Supercenter N. Mkt SAM’S walmart.com Source: MVI 10/28/2004

49 49ALA2005R3.ppt Wal-Mart’s latest and greatest  Stores within stores: Kid’s Connection – Candy, soda, clothes, toysKid’s Connection – Candy, soda, clothes, toys Personal Business CentersPersonal Business Centers Dollar Stores – plastic bunnies, etc.Dollar Stores – plastic bunnies, etc.  Increased focus on soft goods: Coordinated lifestylesCoordinated lifestyles Heavy focus on Wal-Mart brandsHeavy focus on Wal-Mart brands Integrated merchandising – e.g., not just towels but everything for the bathroomIntegrated merchandising – e.g., not just towels but everything for the bathroom In-store TV support for “How to decorate your home”In-store TV support for “How to decorate your home”  Apparel: Mary Kate and Ashley exclusives – in-store and onlineMary Kate and Ashley exclusives – in-store and online Levi Strauss – 2003Levi Strauss – 2003 The Wal-Mart “George” line – men, women and children – big push!The Wal-Mart “George” line – men, women and children – big push! Carter’s line in infantsCarter’s line in infants Trend alert – partnership with Seventeen Magazine to offer teens “cool picks” in clothing and electronicsTrend alert – partnership with Seventeen Magazine to offer teens “cool picks” in clothing and electronics

50 50ALA2005R3.ppt Target SuperTarget Growth vs. Wal-Mart Supercenters – Not exactly NASCAR competitive Source: MVI, Selling Target, 12/9/2004

51 51ALA2005R3.ppt Target Super Target Issues:  Traditional Targets are Hi/Lo; Super Targets are EDLP: Target dependent on supplier allowances to grow operating profitsTarget dependent on supplier allowances to grow operating profits Every time Target converts a traditional discount format to a Super Target, it loses the benefit of the allowance (which is thereby driven into price and not op. profits)Every time Target converts a traditional discount format to a Super Target, it loses the benefit of the allowance (which is thereby driven into price and not op. profits) Building too many super centers too fast would severely impact Target’s financialsBuilding too many super centers too fast would severely impact Target’s financials  Super Target trip frequencies do not support format productivity  Super Target layouts do not allow easy transition to the consumables section and cross-over shopping

52 52ALA2005R3.ppt Expect More – Implementation is all about non- replicable differentiation  Department store-like destination departments: ApparelApparel HousewaresHousewares ShoesShoes  Captive Brands: MossimoMossimo DanskinDanskin Philippe StarckPhilippe Starck  Exclusive Partnerships – Fieldcrest, Boots (HBA and Cosmetics) and Amazon.com (powers the Target website)  Private Labels: 50% of the store50% of the store Reinforce Target’s brand equity – all have either “Wave” or “Bulls Eye”Reinforce Target’s brand equity – all have either “Wave” or “Bulls Eye” Key contributor to Target’s 32% gross marginKey contributor to Target’s 32% gross margin  Synergistic, complementary spin between stores and website: Bridal registry, “Target to a T – custom made clothes”Bridal registry, “Target to a T – custom made clothes” Red hot shop – hot trendy items – new every weekRed hot shop – hot trendy items – new every week Greeting cardsGreeting cards Infants and toddlersInfants and toddlers Seasonal itemsSeasonal items Waverly Garden RoomWaverly Garden Room Liz Lange MaternityLiz Lange Maternity Hello KittyHello Kitty

53 53ALA2005R3.ppt Pay Less – Implementation is all about driving trips and traffic:  Price comping – Target pledges to match Wal-Mart on price item for item throughout stores  Significant expansion of consumables and commodity items starting in Q3, 2003: Based on new P2004 formatBased on new P2004 format 50% greater space devoted to food, beverages and snacks50% greater space devoted to food, beverages and snacks “Consumables World” department placed in front of store“Consumables World” department placed in front of store 70 remodels in 2004 – all remodels and new stores starting in remodels in 2004 – all remodels and new stores starting in 2005  “Savings Spot” – In front of store, near registers, introduced 2004: Club-like pack sizesClub-like pack sizes Paper, household cleaning supplies and pet foodsPaper, household cleaning supplies and pet foods  “One-Spot” (Dollar departments) now expanding beyond test: Kitchen, storage containers, toys, baby products and stationeryKitchen, storage containers, toys, baby products and stationery Exceptional value and “Treasure Hunt” itemsExceptional value and “Treasure Hunt” items Managed by separate buying groupManaged by separate buying group Does not cannibalize other itemsDoes not cannibalize other items

54 54ALA2005R3.ppt Target Ancillary Departments – Return Trip and Transaction Size Drivers:  Pharmacies: 71% of stores by YE % of stores by YE 2003 Extended hoursExtended hours Pharmacy rewards program tied to use of Target Visa cardPharmacy rewards program tied to use of Target Visa card  “Minute Clinics”: 135 sq. ft., staffed by a nurse practitioner135 sq. ft., staffed by a nurse practitioner Treats about a dozen common health problemsTreats about a dozen common health problems Menu-priced – most services $40 - $45, covered by insurance + co-payMenu-priced – most services $40 - $45, covered by insurance + co-pay Now testing in 8 stores (BM) with plans to expand in metro areasNow testing in 8 stores (BM) with plans to expand in metro areas 95% of MC patients get prescriptions filled at Target95% of MC patients get prescriptions filled at Target  Other Services: One hour photo labsOne hour photo labs Optical departmentsOptical departments In-store restaurants – Starbucks, Pizza Hut, Taco BellIn-store restaurants – Starbucks, Pizza Hut, Taco Bell Lawn and Garden centersLawn and Garden centers Portrait studiosPortrait studios Bridal and baby gift registriesBridal and baby gift registries

55 55ALA2005R3.ppt Target aggressively advertises its benefits through multiple vehicles and is, in fact, the largest advertiser of the Big 3 Media Strategy:  TV is strongly seasonal/holiday oriented  Heavy print budget is targeted to women and young adults  “Unmeasured” is circulars and ROP VehicleTargetWal-MartKmart TV$288$426$86 Print$293$40$95 Outdoor$19$14$8 Unmeasured$483$198$223 $1,083$678$413 Index(100)(63)(38) Source: LNA and MVI,

56 56ALA2005R3.ppt  85% of buyer compensation: SalesSales Contribution DollarsContribution Dollars Contribution %Contribution % Inventory TurnsInventory Turns  In-Stock % (10%) and personal objectives (5%) round out compensation  Senior Buyers are also eligible for a bonus plan that can represent up to 100% of their base compensation.  Goals are set every 6 months, not annually. Including product flow costs… Target Buyer Compensation Structure


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