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Posted by: Bruce Nussbaum on November 30, 2006
Wal-Mart may be facing a crisis in its business model as its low-price strategy appears to hit a wall, with the company posting the smallest December sales gain since 2000. This comes after Wal-Mart’s worst monthly performance in 10 years in November. Meanwhile Target is doing much better. What’s going on?
I think Wal-Mart, like Dell, is seeing the commoditization of price erode its competitive edge and reduce the value it brings to shareholders and consumers. The great supply-chain innovation that drove Wal-Mart’s success is being replicated by others. Competing on price doesn’t do it in the marketplace for Wal-Mart. It needs to compete on product differentiation—design and innovation—and here Wal-Mart needs lessons from Target. Wal-Mart’s efforts at selling fancier fashion are disappointing to date.
In fact, Wal-Mart’s retreat from Germany and Korea imply that it is having problems moving away from its core culture of selling low-cost products in the US south and West. It appears to be doing well in Mexico with its low-cost approach and perhaps in China, although that remains unclear. But it hasn’t hit the sweet spot in the more sophisticated cities of America because it doesn’t “get” urban cultures.
Wal-Mart is now trying to move into India and faces similar issues. Indian middle class consumers tend to buy on brand, not just price and expect great personal service.
Dell is pushing hard into design and is making great efforts to learn more about consumer cultures. It is moving away from its own supply-chain innovation, which has become commoditized, to focus on empathy, authenticity and individualization. Wal-Mart needs to make a similar effort to learn about consumers cultures. It’s original price-based business model is eroding. It needs to adopt a design/innovation-based business model now.
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