What Wal-Mart buys, America eats: How IT sets the table

IDC Retail Insights Community –

Wal-Mart announced yesterday at a Washington, DC press conference that it will reduce added sugar content by 10% and added salt content by 25% and remove all remaining industrially produced trans-fats and partially hydrogenated oils in its private label food products by 2015. Michelle Obama was there to draw attention to the news' relevance to her campaign against childhood obesity.

Bentonville needs IT to set the table. Will Wal-Mart run the table? Here's our assessment.

The New Face of the Wal-Mart Effect

The news caused me to think about what Charles Fishman labeled the Wal-Mart effect in 2006. He argued that Wal-Mart's influence on America was a net negative, justifying in his view a call for popular and political action to cajole America's largest company to change its ways.

What a difference five years make. Wal-Mart has been on a campaign to mend its ways and change its image with justifiable evidence ever since. Its efforts have ranged from greening its stores, reducing the carbon footprint of its supply chain, improving working conditions and employee benefits, supporting healthcare reform, putting it at odds with the NRF's initial stand on the issue, and advancing corporate social responsibilities in its vendor management programs. Yesterday's announcement takes Wal-Mart a lot farther, and I'd say it signals a step-change in its behavior.

Might it be said, flipping and paraphrasing a GM executive's testimony to Congress more than fifty years ago, that what's good for America is good Wal-Mart? A plausible case can be made that Wal-Mart can made the claim at least in terms of the typical American diet. Not to be too political about it, but I think it's fair to say that what America eats posses a systemic risk to our health and well-being. Simply put, if Wal-Mart sells healthier food, a lot of Americans will eat healthier food, and if coupled with other aspects of healthy lifestyles, Wal-Mart's move should put downward pressure on our national healthcare costs. Whether it's a case of selling what you can buy or buying what you can sell, it's good news. Wal-Mart deserves kudos.

Small Box Urban Stores

Policy wonks and public health officials speak of urban areas as "food deserts" where the poor lack easy access to affordable healthy food. With a large share of its store fleet located in those areas and its avowed strategy to be small footprint general merchandise stores, Walgreens announced late last year that it is expanding its food business in it urban stores.

Wal-Mart is coupling its healthy food initiative with its renewed push into small-format stores and a new urban store fleet expansion strategy. The latter is off to a relatively slow start, measured in dozens of stores this year, a fraction of its annual new store counts in its halcyon growth days. Back then I estimated that it was building new stores at a rate that added gross square feet of sales space equal to the total size of any of its largest rivals every 12 to 24 months.

About the same time Wal-Mart experimented with a small-box food store concept but, as a senior supply chain executive told me shortly after it stopped the program, it "couldn't get the economics" of the box right. It's doubtful that that lesson has been forgotten in Bentonville, and it's a good bet that Wal-Mart will get labor, category management, inventory, real estate, and supply chain economics right this time around.

Supply Chains: More than Meat and Potatoes

Like Walgreens' move, Wal-Marts' makes sound business sense. It is aiming to use its supply chain muscle to reduce prices on fresh fruits and vegetables to save consumers about $1 billion a year. It will develop "strong criteria" for simple front-of-package seals that would help consumers identify healthier foods, including whole-grain cereals, whole-wheat pastas or unsweetened canned fruit.

Returning to the "Wal-Mart effect," consider that 140 million customers shop its stores each week and Wall Street analysis pegs 51% of its sales to grocery. What scale of impact might these dimensions suggest Wal-Mart's healthy food initiative will have on food products supply chains?

To gauge that impact, recall that McDonalds transformed the hamburger and French fry potato supply chains with the sheer volume of its purchasing power and stringent raw material specifications. While McDonalds' impact went deeply into those supply chains, even affecting Argentinean cattle husbandry, it was narrow. It's core "meat and potatoes" menu strategy limited the breadth of food product supply chains that felt the full force of its sourcing strategy.

Wal-Mart's initiative promises to be broader across much wider range of food product categories, e.g., salad dressings, prepared meats, jellies, and sweet and salty snacks. It will be transformational in at least another important regard setting the de facto standard for more descriptive and informative food labeling practices.

Specialty Retailers Beware

To be sure, Wal-Mart has thrown done yet another gauntlet by moving from solely selling merchandise at cheap prices to selling what could amount to good food at cheap prices to customers who care about what they eat as much as they care about their weekly food bill.

Is it too far-fetched to wonder if the Whole Foods Market senior executive team in Austin, TX is worried? How long might it be before Wal-Mart becomes the world's largest retailer of organic food? After all, it already ranks first in merchandise categories ranging from apparel, consumer electronics, and toys to dog food.

Retail Technologies the Key Dependencies

If you've read this far, you may wonder how does all of the above relate to Wal-Mart's use of information technologies. Furthermore, it's legitimate to ask what all of this has to do with how other retailers should or could use their information technology assets to reposition themselves.

My answers to both questions are the same a hell of a lot! Simply stated, Wal-Mart's IT assets are critical to its healthy food initiative and its expansion of small-footprint stores into urban America. Here's a quick rundown by application class and infrastructure.

Vendor Management, PLM, and PIM

Vendor certification, product formulation, and specifications management are fundamental to taking 10% of sugar, 25% of salt, and all trans-fats and partially hydrogenated oils out of its private label food products.

Vendor certification, product lifecycle management for package specification, and production information management (PIM) are essential to putting more informative labels on food product packages. It's a sure bet that Wal-Mart's PIM applications will handle nutrition and ingredient data and that it will require vendors to include the same as they load item information into Wal-Mart's PIM database.

Omnichannel Customer Engagement

This will put Wal-Mart ahead in another important regard. At some point, rest assured, Wal-Mart will enable its grocery shoppers with an omnichannel facility to manage shopping lists, health- and lifestyle-related food preferences, and side- by-side product comparisons. Groupe Casino, the world's 18th largest grocer and leading hypermarket operator in France, is already delighting customers with such capabilities in a pilot program. To do this Group Casino has had to overcome the lack of product information relevant and important to customers in its PIM databases. In typical Wal-Mart fashion, expect Bentonville to shift much of the effort required to do the same onto its supplier base.

Supply Chain, Logistics, and Demand Management

Wal-Mart needs superb supply chain, logistics, forecasting, store ordering, replenishing, planograming, and labor and task management capabilities to make its new small footprint stores profitable. Taking a clue from apparel logistics, it's a good bet that Wal-Mart could look at case-pack optimization to improve distribution center flow-through with cases sized for the sell-through and shelf-capacity profiles of these stores. Shelf-sets and department layouts in its urban stores will vary much more widely than those of its bread-and-butter supercenter stores. This presents a host of new challenges at the nexus of at least space planning, economic order quantity calculations, and inbounds transportation routing.

Fresh Item Management

Carrying fresh produce on a cost basis that saves consumers $1 billion annually represents another challenge where IT will be critical to Wal-Mart's success. To level set, however, while a $1 billion claim can catch headlines, it equates to less than a 1% reduction in retail food prices at Wal-Mart. Unless there's a dramatic shift from long-term deflationary trends in food costs, Wal-Mart will hit this target with ease. Nevertheless the profitable management of perishables requires specialized capabilities in short-term forecasting, order, specifications, PLU, sourcing, and inbound logistics management.

Location Intelligence

Building out an urban fleet of small footprint stores is another area where predictive analytics will play a key role, in this case three tiers of capabilities in location intelligence. From top to bottom, market analysis which markets to enter and in what order; store network design how many stores will each market support and in a rough-cut approach, where should they be located to efficiently serve different trade areas; and site selectionat a micro-level, on which parcels or at which intersections should each store be placed? This kind of location intelligence requires gravity modeling to measure the relative attraction of each store or store location option in view of the drawing power of nearby complementary attractions and the strength of competitors' stores, the impedance caused by distances and ease of travel to and from daytime and nighttime population centers, and the demographic characteristics and shopping behaviors of those populations.

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