Bentonville, Arkansas 2010: After years of hard work, the format development team of the world’s largest retailer has just made an important breakthrough in the top-secret Alice in Wonderland project. In Walmart’s quest to shrink its successful 180,000-square-foot Supercenter format into a 12,000-square-foot Express format, it has finally cracked the code: The aptly named Down the Rabbit Hole formula has finally been perfected! This formula enables the retailer to successfully emulate the Supercenter shopping experience and store efficiency using the current supply chain capabilities in a store a fifteenth the size.
The formula unlocked the next phase of growth for Walmart, and between 2012 and 2015 the retailer used it to roll out 102 Express stores.
Sound too good to be true? Well, perhaps it was. Turns out there never was an Alice in Wonderland project or a Down the Rabbit Hole formula. In 2016 the retailer announced that it planned to close all of the Express stores. So what happened? Why did Walmart open the Express stores? Why didn’t the move work? And what should the retailer have done?
First, the original plan was to deliver a Supercenter experience in a smaller format, but this was unsuccessful because Express shoppers are on a different shopping trip than Supercenter shoppers. Second, Walmart’s very efficient logistics operation had difficulty supplying this much smaller format. And finally, the retailer known for its price leadership failed to achieve a similar level of profitability from its Express stores because it didn’t adapt its pricing strategy to the smaller format. In short, the smaller format didn’t fit Walmart’s positioning or its capabilities, and the retailer was unable to adapt to make it a success.
With limited growth in most consumer goods categories, many other retailers are looking to find new sources of growth outside their traditional core business. Examples include format differentiation, international expansion, stocklot sales (e.g., DIY retailers selling shampoo), and offering services closely or remotely related to their products business. The drive to sell more is very much in the DNA of a retailer, resulting in brand extension after brand extension.
But there is now an increasing number of high-profile retailers reducing non-core activities (see Examples) in the face of growing market pressure. Why they are stopping with these non-core activities, and why they are focusing on the core?
Testament to these advantages are the ample examples of very successful retail and food chains that have effectively focused on evolving and improving their core instead of business model diversification. Ikea has perfected the big-box furnishings retail concept, which it started with in 1943; Aldi and Lidl have retained the relatively hard grocery discounter format they shook up the grocery retailing market with; and Starbucks and McDonald’s have grown to truly worldwide companies sticking to their respective focuses on coffee bar and fast-food restaurant core concepts.
The word “core” is key here. In order for a retailer to understand which activities to focus on and which not, it must understand what its core is.
The difficulty with this involves achieving a mutually agreed-on definition of what defines the retailer’s core activities and withstanding the pressure to deviate from the core during trying times that will come from all the (e-commerce) format directors, marketing managers, and senior company leadership, including growth-craving CFOs and CEOs.
There will be a gray area, but when non-core activities are ended, the general culprits will be either known to all or hiding in plain sight.