Harvard Business Review

Outsmarting Wal-Mart

Don't fear the bear. Run with it.

By Darrell Rigby and Dan Haas

Published on December 01, 2004
min read


For a lot of retailers, the notion of competing against Wal-Mart seems daunting, if not futile. Yet a few are quietly and systematically doing just that. The CEO of one successful competitor described his strategy by citing an old saw: "It's like the two outdoorsmen who wake to find a raging bear at their campsite," he said. "One camper slowly stands and backs away; the other starts to lace up his sneakers. 'You can't outrun that bear!' whispers the first. 'I don't have to,' replies the second. 'I just have to outrun you!'" Rather than trying to outrun Wal-Mart, as it were, companies like this CEO's are both exploiting the weaknesses of other Wal-Mart competitors and simply maneuvering around the bear. Consider HEB and Publix in grocery stores, Best Buy in consumer electronics, Walgreens in pharmacy products, PETsMART in pet supplies, and Target in discount stores. All are managing to coexist and even thrive in the same forest with Wal-Mart. The Wal-Mart threat shrinks into proper perspective when you segment the market along the lines of quality, service, convenience, selection, and price and then look closely at where the retail giant really dominates. Wal-Mart clearly wins on price and, to a lesser degree, selection?" but nowhere else. Price isn't everything. Two-thirds of shoppers find Wal-Mart's assortments, middling product quality, and limited services not worth the savings. That means, regardless of Wal-Mart's proximity, there are plenty of customers looking for alternatives. Our research shows that Wal-Mart's competitors succeed by doing four things well: First, they aggressively build local market share. Profitability in retail is strongly determined by regional share. When Wal-Mart enters the scene, a shakeout begins. Savvy retailers know that market share will change hands like never before. They add stores as competitors' sales decline?" either by building new ones or by buying the assets of dying rivals. By being prepared to capture share just as rapidly as Wal-Mart does, aggressive competitors end up even stronger than before. Target has used this approach to attract and keep customers who once patronized now-defunct Ames, Bradlees, Venture, Jamesway, and Caldor. Next, winning competitors carefully segment their customers and then wow the ones that matter most. They cater to targeted segments, expanding signature categories, customizing local assortments, and raising loyalty benefits. Because Wal-Mart seldom takes even as much as 30% of any regional market, 70% or more of the market remains for fairly priced competitors to serve in ways that Wal-Mart can'tâ?"whether it's with personal attention or ten types of tomatoes. Winners also develop more rigorous pricing strategies. Wal-Mart's entry marks the end of hunch-based pricing, since it puts price gaps so squarely in the spotlight. Successful competitors therefore sharpen their analysis of price elasticity curves, geographic pricing zones, and the implications of everyday pricing versus high-low promotions for each product category. They expand and accelerate the gathering of competitive intelligence and train local store managers to quickly identify pricing opportunities or vulnerabilities. Finally, because market prices generally decline as much as 10% when Wal-Mart enters a market, winning competitors scrutinize their supply chains, store labor deployment, marketing programs, and overhead costs to eliminate every wasted dollar. Competing against a behemoth enjoying 22% lower costs than an average retailer is tough. The key to survival? Play the bear's game while others become it.

For a lot of retailers, the notion of competing against Wal-Mart seems daunting, if not futile. Yet a few are quietly and systematically doing just that. The CEO of one successful competitor described his strategy by citing an old saw: "It's like the two outdoorsmen who wake to find a raging bear at their campsite," he said. "One camper slowly stands and backs away; the other starts to lace up his sneakers. 'You can't outrun that bear!' whispers the first. 'I don't have to,' replies the second. 'I just have to outrun you!'"

Rather than trying to outrun Wal-Mart, as it were, companies like this CEO's are both exploiting the weaknesses of other Wal-Mart competitors and simply maneuvering around the bear. Consider HEB and Publix in grocery stores, Best Buy in consumer electronics, Walgreens in pharmacy products, PETsMART in pet supplies, and Target in discount stores. All are managing to coexist and even thrive in the same forest with Wal-Mart.

The Wal-Mart threat shrinks into proper perspective when you segment the market along the lines of quality, service, convenience, selection, and price and then look closely at where the retail giant really dominates. Wal-Mart clearly wins on price and, to a lesser degree, selection?" but nowhere else. Price isn't everything. Two-thirds of shoppers find Wal-Mart's assortments, middling product quality, and limited services not worth the savings. That means, regardless of Wal-Mart's proximity, there are plenty of customers looking for alternatives.

Our research shows that Wal-Mart's competitors succeed by doing four things well: First, they aggressively build local market share. Profitability in retail is strongly determined by regional share. When Wal-Mart enters the scene, a shakeout begins. Savvy retailers know that market share will change hands like never before. They add stores as competitors' sales decline?" either by building new ones or by buying the assets of dying rivals. By being prepared to capture share just as rapidly as Wal-Mart does, aggressive competitors end up even stronger than before. Target has used this approach to attract and keep customers who once patronized now-defunct Ames, Bradlees, Venture, Jamesway, and Caldor.

Next, winning competitors carefully segment their customers and then wow the ones that matter most. They cater to targeted segments, expanding signature categories, customizing local assortments, and raising loyalty benefits. Because Wal-Mart seldom takes even as much as 30% of any regional market, 70% or more of the market remains for fairly priced competitors to serve in ways that Wal-Mart can'tâ?"whether it's with personal attention or ten types of tomatoes.

Winners also develop more rigorous pricing strategies. Wal-Mart's entry marks the end of hunch-based pricing, since it puts price gaps so squarely in the spotlight. Successful competitors therefore sharpen their analysis of price elasticity curves, geographic pricing zones, and the implications of everyday pricing versus high-low promotions for each product category. They expand and accelerate the gathering of competitive intelligence and train local store managers to quickly identify pricing opportunities or vulnerabilities.

Finally, because market prices generally decline as much as 10% when Wal-Mart enters a market, winning competitors scrutinize their supply chains, store labor deployment, marketing programs, and overhead costs to eliminate every wasted dollar. Competing against a behemoth enjoying 22% lower costs than an average retailer is tough. The key to survival? Play the bear's game while others become it.