walmartRecently, there have been several articles about Walmart’s challenges with keeping its shelves stocked in general and grocery items in particular. This front page article in the NY Times Walmart strains to keep grocery aisles stocked does not reflect well on Walmart’s capabilities in the grocery business in particular.

Walmart entered the grocery market in 1988, realizing that frequent trips by grocery shoppers could help improve traffic. For some history, Walmart’s share of the grocery market in the United States now stands at 25 percent. That’s up from 4 percent just 16 years ago.

Grocery made up 55 percent of Walmart’s United States sales in 2012, flat from the previous year. The company’s grocery prices are usually about 15 percent below competitors’, according to Supermarket News. According to the editor Mark Hamstra “Walmart does well in dry goods, but fresh food requires more manpower to stock and rotate goods, involves more waste and is a higher-cost operation.”

Many blame these issues on cuts in labor in the stores and that could well be part of the problem, but to us Walmart’s challenge seems to be a lack of understanding of the different customer value proposition of fresh produce.

Walmart’s traditional customer value has been “Every day low pricing” and it has built a spectacular supply chain around it with many unique innovations and investments.  According to Operations Rules page 7 “Walmart has built its reputation as the brick and mortar master retailer by focusing on squeezing cost and increasing efficiency in its supply chain, thus providing its customers with competitive pricing but not necessarily with extraordinary service.”

However, fresh grocery buyers look not only for the lowest cost, but also for freshness and attractiveness of the produce they will eat and feed their families. This shifts the customer value to areas where Walmart is not as strong.  And in fact, “According to the notes from the Walmart meeting last month in Orlando obtained by The New York Times, while Walmart has 20 percent of the market share in dry grocery, it has 15 percent in fresh (areas like produce, meat, deli and bakery). Safeway customers are 71 percent confident in its fresh produce, the notes said, while Walmart customers are 48 percent confident in Walmart’s produce.”

According to the NY Times article, Walmart is planning to address these issues with a new inventory management system as well as changing shift responsibilities so fresh food is not stocked overnight and goes out at 10 a.m., not 7 a.m. Also, Walmart will add secret shoppers to check on produce quality weekly, and add “would I buy it?” guides for employees.

Walmart is not the only company struggling with this transition. We see this quite often with companies entering new markets or channels and not realizing that they need to change the way they operate to match the needs of these new ventures. One such example is Dell, known for its innovative configure to order manufacturing that matched its direct business model. Dell was known as a leader in high inventory turns, short response time and negative cash conversion cycle. When it entered the retail channel at the beginning of 2008, using the same strategy became a challenge in a competitive push driven environment. Dell tackled this challenge through understanding its customer segmentation, reducing complexity and creating a new logistics strategy to address the new environment. To read the full Dell case study, click here.

Therefore, we would recommend that Walmart rethink their operations strategy as it relates to selling fresh produce. It would help to study successful fresh food retailers and incorporate some of their know how. By incorporating the appropriate practices and staff levels while accepting that they need a different strategy from dry goods, Walmart can make the fresh groceries sector a success.

   

Written by Edith Simchi-Levi, VP of Operations at OPS Rules Management Consultants