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Walmart's healthy new turn: What it means for IT, competitors

The retailer's recent announcement represents yet another dramatic reinvention of the Bentonville giant.

January 24, 2011

Walmart announced at a Washington, D.C., press conference last week that it will reduce added sugar content by 10 percent and added salt content by 25 percent 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 Walmart run the table?

The new face of the 'Walmart Effect'

The news caused me to think about what Charles Fishman labeled the "Walmart effect" in 2006. He argued that Walmart'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. Walmart 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. This recent announcement takes Walmart 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 for Walmart? A plausible case can be made that Walmart can make 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 poses a systemic risk to our health and well-being. Simply put, if Walmart sells healthier food, a lot of Americans will eat healthier food, and if coupled with other aspects of healthy lifestyles, Walmart'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. Walmart 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 some 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 its urban stores.

Walmart 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 every 12 to 24 months Walmart added gross square feet of sales space equal to the total size of any one of its largest rivals.

About the same time Walmart experimented with a small-box food store concept but, as a senior supply chain executive told me shortly after it stopped the program, "we 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 Walmart 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, Walmart's 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 "Walmart effect," consider that 140 million customers shop its stores each week and Wall Street analysis pegs 51 percent of its sales to grocery. What scale of impact do these dimensions suggest Walmart'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. Its original "meat and potatoes" menu strategy limited the breadth of food product supply chains that felt the full force of its sourcing strategy.

Walmart's initiative promises to be broader—across much wider range of food product categories, e.g., salad dressings, prepared meats, jellies, cereals, pastas 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, Walmart has thrown down yet another gauntlet by moving from solely selling food at cheap prices to selling wholesome 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, Texas, is worried? How long might it be before Walmart 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 Walmart'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, Walmart'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 percent of sugar, 25 percent 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 tracking recipes and ingredients and putting more informative labels on food product packages. It's a sure bet that Walmart's PIM applications will handle nutrition, ingredient, and multi-media label data and that it will require vendors to include the same as they load item information into Walmart's PIM database.

Omnichannel customer engagement

PIM data for labels and ingredients will put Walmart ahead in another important regard. At some point, rest assured, Walmart 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 Walmart fashion when it rolls out these services, Bentonville will have shifted much of the effort required for them onto its supplier base.

Supply chain, logistics, and demand management

Walmart 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 Walmart 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 green-field and brown-field 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 Walmart's success. To level set, however, while a $1 billion claim can catch headlines, it equates to less than a 1 percent reduction in retail food prices at Walmart. Unless there's a dramatic shift from long-term deflationary trends in food costs, Walmart will hit this target with ease. Nevertheless the brand-burnishing effect of attractive produce sections and the profitable merchandising of perishables require specialized capabilities in short-term forecasting, order, specifications, PLU, sourcing, inbound logistics management, and store operations.

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, they are: 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 selection—at 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 travel congestion to and from daytime and nighttime population centers, and the demographic characteristics and shopping behaviors of those populations.

Let me finish

I like to distinguish between two aspects of IT's relationship to business strategy. In its initial handmaiden role, retailers invested in IT to support the growth of a winning business strategy. Think of three retail icons—The Gap, The Home Depot and McDonalds. Each found an unmet consumer need and through great marketing and merchandising acumen created a wholly new segment of retail. Aside from foundational systems like POS, WMS and long list of other TLMs, IT wasn't a core component of the strategic brilliance of each company's breakthrough strategy.

Today, it seems to me, IT often takes on another role in transformational retail innovation, that of co-creation of the new winning strategy.

The brief rundown above of the information technologies at the heart of Walmart's healthy foods and urban store expansion initiatives makes it clear that at Walmart IT is a co-creator of successful business strategy. To be sure it's always used IT in support of growth; after all in 1987 it completed the Walmart Satellite Network, the largest private satellite communication system in the United States, linking all operating units of the company and the Home Office with two-way voice, data,and one-way video communication. If Bentonville runs the table in bringing healthy food to urban America, IT will be the co-creator of that success. 

Greg Girard blogs for IDC Retail Insights. (Photo by mjb84.)