Can Wal-Mart Get Any Bigger?

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As it tries to leverage its size overseas, Wal-Mart may find it difficult to export one of its biggest advantages. Its expertise in managing high-volume inventory and supply networks doesn't work as well in Europe and Asia, where the highway systems aren't as good and stores typically are smaller. So Wal-Mart has to become better at buying, reaching further back into the supply chain to purchase at the factory such products as hardware and apparel that it now obtains from outside vendors and importers. "We realized that, as we continue to expand internationally, the need to leverage international and domestic buying power was key, and the only way to do it effectively is to do it ourselves," says Ken Eaton, who heads global procurement. The idea is to buy goods universally for all stores where feasible, so the 20 locations in Brazil can get the same price as the 3,400 Wal-Marts in the U.S.

The company ended its relationship last year with its longtime outside-buying organization and hired hundreds of that firm's employees to start rounding up fruit and salmon from South America and $6 billion a year in goods from China--everything from clothing to televisions to fans. Wal-Mart has opened 21 offices around the world to oversee its factories.

By becoming contractor, importer and wholesaler, Wal-Mart expects not only to save money on the buy but also to cut down on inventory by speeding up the supply lines. Wal-Mart gets most of its towels from India, and today it reorders once a month. If one pattern gets hot and sells out early, sales are lost. In going direct, however, Wal-Mart will make the factories in India part of its Retail Link system. That allows vendors like Sara Lee (Hanes underwear, Bryan bacon) to dip into Wal-Mart's computers and track sales and replenish supplies constantly. By the same token, Wal-Mart will be held more responsible for these factories' social and environmental policies. As the folks at Nike can tell you, this carries its own risks.

Wal-Mart figures to take 20% of the cost out of procurement over the next five years and improve gross-profit margins by nine percentage points worldwide on general merchandise it buys directly. In retailing, this figure is astonishing. Think about that $6 billion worth of goods from China. Multiply by .09. Take to bank.

Global sourcing can provide the ammunition Wal-Mart will need to wage price wars against such powerful retailers as France's Carrefour, Holland's Royal Ahold and Germany's Makro. Each of these European companies got to foreign markets long before Wal-Mart did.

At ASDA, the British chain Wal-Mart bought in mid-1999, the company was selling men's jeans for about $24 after paying $14 per yd. for 50,000 yds. of material to make them. Then the buy was moved to Bentonville, and the conversation went something like, "We'd like 6 million yds., please. Now what's your price?" Try $4.77 per yd. As a result, ASDA slashed its retail prices in half and upped its annual jeans sales to 1 million, from 174,000. ASDA is acquiring some 2,000 products from Wal-Mart's global network and has become Britain's leading seller of kids' clothes.