Writing Assignment help on : Wal-Mart

How the case of Citysuper shows that cost leadership is not the only fundamental retailing strategy for new and established retailers

McNair, using his theory of wheel of retailing, attributed the success of Wal-Mart to its cost focus and value pricing. According to McNair, Wal-Mart got unprecedented success in retailing business because of its tight cost control. This tight control gave Wal-Mart cost leadership. It was therefore able to price its products at lower prices than competitors. This value pricing gave Wal-Mart its biggest competitive advantage (Philip Kotler, Kevin Kohler,2000).

Wal-Mart was founded in 1962. McNair used his theory of wheel of retailing to explain the emergence of Wal-Mart. According to the wheel-of-retailing theory conventional retail stores typically increase the quality of their services. They therefore raise price to cover costs of better services delivered to customers. The higher prices charged by established retailers provide an opportunity for new entrants to gain market share by offering lower prices and lower services. Wal-Mart was one such new retailer in 1962 which focused exclusively on cost controlling(Philip Kotler, Kevin Kohler,2000).

McNair has emphasized that cost leadership strategy is most suitable for emerging retail companies. New companies use the cost leadership strategy for entering the retail industry and establishing themselves. Wal-Mart has stuck to this strategy even as it emerged as the world’s biggest retailer.

The basic argument of this paper is that cost leadership is not the only fundamental strategy for entering or operating in the retail industry. Service has been an important and basic component of strategy of retailers around the world. Retailers usually position themselves as offering one of four levels of service:

i. Self service in which the customers themselves carry out the locate-compare- purchase process. It is usually the strategy chosen by retailers which pursue cost leadership. These stores save costs by not offering any service whatsoever. They pass some of these cost savings to customers in the form of discounts and lower prices (Charles Fishman,2006).

ii. Self-selection service is offered by retailers who give the choice to customers to ask for service assistance if they so desire. Retailers having the self selection strategy have a small and very limited element of strategy.

iii. Limited service strategy is offered by retailers who usually have very large operations. Such retailers employ service personnel to enable customers to go through the large amount of merchandize. Wal-Mart currently uses the limited service strategy.  Even its strong cost leadership is supported by a strong element of service.

iv. Full service retail strategy is used by retailers who have service as one of the areas of differentiation and competitive advantage. Sales people are extensively employed by these retailers. These sales people assist the customers at every point of the locate-compare- select process. The cost of this strategy is usually high and so retailers using this strategy do not pursue cost leadership.

Citysuper Hong Kong:

Citysuper Hong Kong is one such retailer which offers full service to its customers. Citysuper (spelled as c!ty’super by the retailer in its brand name) entered the retail sector in 1996, not with cost leadership strategy but with service leadership strategy. Its target segment is high end customers who value service and not lower prices.

Citysuper focused on features like a broad assortment of high end products, store design, product quality, service and brand image. Its cost of operations was high and it also charged high profit margins. The pricing strategy from the beginning is to charge prices which reflect the high product quality and service offered in the stores of the retailer.

Citysuper focused on creating a strong line of in-house brands. Its eponymous “citysuper” brand is for its food market. In the food market high end food items like groceries, gourmet items and wines are sold.  The LOG-ON brand sells lifestyle and household items like kitchenware, stationary, household items etc. The “cooked deli” brand is for readymade delicatessen products.

Citysuper’s success as a retailer is an instance which deviates from the traditional theory of wheel of retailing. It shows that cost control and cost leadership is not the only available strategic option for new and emerging retailers. A retailer can enter and establish itself successfully by using the service leadership or product leadership strategy. Citysuper combines service leadership and product leadership in its operations.

The right strategy for a retailer should be determined by the segment which it is targeting. If the target segment is high end, high income customers then cost leadership strategy is bound to fail because high end customers desire high service quality and high product quality. The high cost of operations here can be covered by charging high prices and profit margins (Sandra Stringer Vance and Roy V. Scott, 1997).

Citysuper has used this strategy since its inception. It has cultivated an exclusive image for itself and tends to operate on a higher margin and lower volume basis. Over the years volumes too have increased and this has made Citysuper a very profitable retailer. It is more profitable than retailers who rely on cost leadership strategy and therefore operate on low margin-high volume basis. Volumes at retailer like Citysuper are driven by higher product quality and higher service quality. Even low income customers, who are not the regular customers of a high end retailer like Citysuper, visit it when they want to buy a high quality product.

The case of Citysuper and other retailers like it refutes the argument that cost leadership is the only basic retailing strategy. For long delivery of superior service quality has been considered as one of the basic retailing strategies. It has been successfully put in practice by the likes of Citysuper.

A retailer should choose its operational strategy depending on the target segment that it tends to cater to. If the target segment values high service and product quality then cost leadership is definitely not the right strategy because service and product quality is bound to be compromised in pursuance of cost control. Like any other business, it is important for a retailer to first understand the profile and characteristics of its potential customers and then devise its retailing strategy according to that (Michael J. Stahl, David W. Grigsby, 1997)

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