Walmart Readies Smaller Stores for Smarter Growth

The productivity loop is back at Walmart, and that could have a big impact on retailing if the company accomplishes its goal of maintaining store growth while cutting critical costs.

As Mike Duke, Walmart CEO, described it at Walmart’s analyst meeting last week, the productivity loop is the company’s model for identifying and squeezing inevitable expenses to generate greater efficiency. Of course, the idea of driving down costs to improve results and improve its competitive position isn’t at all new at Walmart. The Project Impact program it has been focused on over the past couple of years got a lot of attention improving store appearance by lowering shelves and uncluttering sales floors. However, an important part of the initiative was reducing the product assortment around the best selling items, which allowed Walmart to move inventory through its stores more efficiently.

As it is accomplishing its inventory goals with Project Impact, Walmart is looking at other operations where it can make improvements. The productivity loop is a concept Walmart has applied to selling, general and administrated expenses and, as it tightens down once again, Duke promised,  “We’ll drive further productivity and efficiency throughout the system.”

In this go around, the productivity loop is being applied with a particular emphasis on making store growth more cost effective. Of the three priorities Duke outlined for Walmart at the meeting, growth, leverage and return on investment, leverage is where the productivity loop operates and it will play a central role in helping Walmart execute on its other priorities. Despite the recession, Walmart has continued to add new locations, but it now plans to shift the method of its expansion through 2011, executives noted at the meeting, adding stores consistently but at a diminishing rate of square footage growth. Walmart plans to reduce average new store square footage by eight percent in fiscal year 2011, even after two previous years during which it will accomplish small but significant size reductions. In doing so, it will improve prospects by squeezing more efficiency out of – and so better leveraging – the stores that it’s adding, which will allow the retailer to boost its return on its investments and sweeten the results for shareholders.

Bill Simon, Walmart’s executive vp and chief operating officer, told the meeting that the retailer already is enjoying benefits from its focus on reducing new store size and cost, and it will manage its growth to capitalize on market conditions and its own internal capabilities as it opens stores. He said:

The average cost per unit is down about 22 percent. That’s the convergence of the technology, the process and the commercial real estate impact. So we expect the cost of those units to come down along with the average cost per square foot, down 16 percent, allowing us to deliver improved asset efficiency and a better spend, and better utilization of our capital, all focused on the productivity loop leverage in driving ROI.

An advantage of growing with smaller stores is Walmart’s ability to operate cost effectively in more densely populated urban environments where real estate and other fixed costs are relatively high. Smaller stores make more neighborhoods more profitable for the retailer.

The cost savings that come from greater growth efficiency will make Walmart more competitive. Indeed, vice chairman Eduardo Castro-Wright asserted that the retailer has the systems, processes and people in place to boost efficiencies to unprecedented heights. Even a modest reduction in store size can contribute cost savings that can be applied to another goal the company has in mind, Castro-Wright noted: greater price separation from its competitors.

That, in turn, puts Walmart in a better position to capture more business in a marketplace that will develop around a shopper made more frugal by the recession, perhapspermanently. Duke likes to call the market that will evolve around such a consumer the new normal, and Walmart plans to be as effective as possible in the future he envisions. But more of that in posts to come.