American Logistics Association

Exchange Roundtable

What’s Leading Edge With Today’s Leading

Mass Volume Retailers?
March 8, 2005

Dallas, TX

www.hoytnet.com
8912 East Pinnacle Peak Road • Scottsdale, AZ 85255
Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com
Based on most recent research, the top 3 retailers shoppers rank as
literally “indispensable” to their daily lives are Wal-Mart, Target and
Costco:

Meyers Research: “Retailers Consumers Could Not Live Without” (Aug, 2004)

Base: Among those who shop the store

31% Could live
Wal-Mart 31%
without any
specific Costco 17%
retailer
Target 13%
BJ's 11%
69%
Could not Kroger 9%
live
Albertson's 9%
without…
Safeway 8%
Total respondents Sam's Club 7%
CVS 5%
7-Eleven 3%
Dollar General 3%
Walgreens 3%
Rite Aid 2%
Kmart 2%

Source: Meyers Research, Aug, 2004

ALA2005R3.ppt 2
Not coincidentally, Wal-Mart, Target and Costco are also the same
retailers that consumers find the “most fun to shop”:

Specific Retailers Consumers Find Most Fun To Shop

Base: Among those who shop the store

15% Do not find
Target 30%
any specific
retailer fun Costco 30%
to shop
Wal-Mart 28%
85%
SAM’s Club 20%
Find… most BJ’s 11%
fun to shop
Dollar General 6%
Albertson’s 4%
Total respondents Kmart 3%
Walgreens 3%
CVS 2%
Kroger 2%
Family Dollar 1%
Safeway 1%
Rite Aid 1%

Source: Meyers Research, Aug, 2004

ALA2005R3.ppt 3
Today:
 What is it about Wal-Mart and Target that makes them so
successful, not only with shoppers, but from a business
standpoint in general?

 What lessons can Exchanges take away from this, given their
objectives and the constrictions under which they operate?

 Q&A

ALA2005R3.ppt 4
The Leaders –
Snapshot of Current Vital Statistics:

Wal-Mart Target
Sales (U.S. $B) $232.9 $47.1
# Stores (U.S.) 3,711 1,313
Gross Margin 23.9% 32.8%
Operating Expenses 18.4% 22.4%
Proj. CAGR, ‘04 - ‘07 9.9% 8.9%
Positioning “Always Low Prices” “Expect More/ Pay Less”
HH Penetration 86% 62%
Sales/Sq. Foot 439 289
Inventory Turns 7.7 6.3
Days Sales In Net 21 12
Inventory
Merchandising Strategy EDLP Hi/Lo

Source: Company 10Ks & 10Qs; Hoyt & Company, LLC, 2003 - 2004
ALA2005R3.ppt 5
While Wal-Mart and Target are very different retailers, both share
the same objectives as all other retailers– specifically:

Grow profitable sales by aligning and focusing all marketing,

merchandising, buying and logistics functions on one or more of the
following objectives:
Exchanges
 Increase customer count (new customers) X
 Increase trip frequencies (current customers) Yes
 Increase transaction size (current customers) Yes
 Increase productivity (Human and Financial) Yes
 Reduce costs (COG’s and Operations) Yes

As you will see, the paths that Wal-Mart and Target have chosen to achieve
these objectives represent today’s industry Best Practices.

ALA2005R3.ppt 6
 The 800 lb. Gorilla
In Every Retailer’s Living Room!
 $284B – Largest company in the world – greater than the GDPs
of Austria, Colombia, Czechoslovakia, Denmark, Greece,
Norway, Portugal, Sweden, Switzerland, Ukraine and Vietnam
 $20K in profit per minute!
 13% WW CAGR – projected to do $1 trillion by 2014
 $233B U..S. sales – CAGR of 9.9% to 2007
 3,711 U.S. stores:
• 1,706 Super Centers
• 1,370 Discount
• 549 SAM’s Clubs
• 86 Neighborhood Markets
 500+ new stores/remodels planned for 2005
 Objective is to become the largest retailer in every market in
which it operates (now #1 in only two countries out of 10)

ALA2005R3.ppt 7
So what are the key growth drivers that enable Wal-Mart
to sustain the momentum of this juggernaut?

Let’s look at these from the standpoint of what’s relevant

to Exchanges in terms of:

 Marketing and Merchandising

 Buying

 Logistics

ALA2005R3.ppt 8
The key elements of the Wal-Mart marketing mix – elegant and
sophisticated – way beyond just “Always Low Prices”:

1. EDLP made possible by EDLC – Global buying and relentless

pressure on COGs and operating costs
2. Use of consumables (food and non-edible CPG items) to drive
traffic and transaction size
3. “OPP/good/better/best” merchandising ladder (private labels –>
national brands)
4. Localization – Demographic assortments
5. Ancillary businesses – hearing aids, optics, stores within stores,
etc.
6. Consumer-centric versus supplier-centric business model – all
allowances are driven into price and not used to subsidize
operating profits

ALA2005R3.ppt 9
The key elements of the Wal-Mart marketing mix (cont’d)

7. Shop-ability – wide aisles, mucho signage, well lit, easy to navigate

8. Speed to market – new items and promotions – 24/7 + 48 hour
turnaround
9. Community involvement – parking lot extravaganzas, fishing
contests, high school marching bands, etc.
10. Retail-tainment – in-store TV sets, trendy promotions (Shrek 2 and
Britney Spears)
11. EDLP reinforcement – roll backs, action alley, special buys and
multiple clearance items
12. Clicks and bricks synergy – what you can’t get in-store, you can
get online
13. Store managers have broad discretion – can tailor assortments,
authorize local displays and recommend new distribution of local
items

ALA2005R3.ppt 10
Wal-Mart strategy to drive trips/provide one-stop
shopping convenience – sell need (read “food”) items!
Wal-Mart’s March To The Top of the U.S. Food Chain: 2001 - 2010
(Food & Drug Sales Only)

2010
$195B
35%
e d
n d ts!
u e 2007
po ark Bigger than
Com erm $162B Kroger,
ear Sup Albertsons,
/Y o r 2004 Safeway and
0% F Ahold combined
17. .0% $112B
+ .4
Vs 2003 Bigger than Kroger
$95B & Albertsons
Combined
2002
$82B

2001 Surpasses Kroger as the

$63B nation’s #1 food retailer

Source: Retail Forward, Food Industry Outlook, February, 2004; ACNielsen, 2002 and 2003
ALA2005R3.ppt 11
The Wal-Mart Merchandising Ladder

BEST = Typically National Brands

BETTER

GOOD

OPP =
Opening Price Point in the category
(typically, Private Labels)
Source: MVI 10/28/2004
ALA2005R3.ppt 12
Wal-Mart Buying – What lies behind the glitz
Wal-Mart buyer responsibilities:

 Development of innovative merchandising solutions

 Understand customer needs and trends and set the pace of new
product development & brand strategy

 Management of a diverse supplier base – from major brands to own

label

 Achievement of business plan targets

 Development and delivery of the category’s trading strategy

ALA2005R3.ppt 13
Wal-Mart Buying – How Buyers are Measured
Wal-Mart Buyer – Key Performance Measures

 Sales  Less tangible measures:

• Units • Respect for the individual
• Dollars • Service to customers
 Profit dollars • Strive for excellence
 Margin %
 Turns
 Markdowns (e.g., maintained
margin)
 In-stock
 Comparable store sales growth
(in certain categories)

ALA2005R3.ppt 14
To achieve their objectives, Wal-Mart buyers proactively
utilize suppliers to help run their business:
Wal-Mart Buyer –> Supplier Expectations
 Annual plan -- rolling 12 months by month and quarter
• New items
• Tab ideas
• Modular suggestions
• MCAPS -- community store merchandising
 Weekly monitoring:
• Item P&Ls vs. plan
• Sales, initial margin, markdowns, contribution margin
• Problem stores/districts, as well as items
• Competitive situations
 Co-managed Inventory
• Replenishment
• New item/promotional
• Economic order quantities
Source: MVI, Selling Wal-Mart 10/28/2004
ALA2005R3.ppt 15
Wal-Mart Vendor Scorecard
Extensive measurements for Wal-Mart and Suppliers
 Sales Measurements
• Overall % Increase
• Comps
• Avg. Sales/Store
• Sales at Full Price vs. Markdown
 Markdown Measurements
• Markups and Markdowns
(Dollars, Units and %)
• Prior and current retail price
 Inventory Measurements
• Replenishable store inventory
• Non-replenishable store
inventory
• Warehouse inventory
• Lost sales from OOS
• Excess inventory
• DC outs
• Total owned inventory

 Margin Measurements  Return Measurements

• Initial margin • Customer defective returns
• Average retail price • Store Claims
• Average cost
• Gross profit at item level
• Gross profit/item/store
• Margin mix

Source: Hoyt & Company Records

ALA2005R3.ppt 16
Wal-Mart Logistics – How does Wal-Mart stack
up versus its leading competitors?
Wal-Mart has the highest inventory turns…

Wal-Mart Turns vs. Kmart + Target: 1998 - 2003

9
8.1
8 7.7 7.7
7.2
6.9 6.7
7 6.3 6.3 6.3 6.3 6.4 6.3
6
4.9 4.9
5 4.4 4.4
4.1 4.1
4
3
2
1
0
Wal-Mart Kmart Target
1998 1999 2000 2001 2002 2003

Source: Company Reports; MVI, 10/28.2004

ALA2005R3.ppt 17
Wal-Mart Logistics – How does Wal-Mart stack
up (cont’d)
…and the lowest # of days sales on hand:

Wal-Mart vs. Leading Competitors: # Days Inventory On Hand: 1998 - 2003

100
90 88
90 83 83
80 74 74
70
58 58 58 58 57 58
60 53 51 54
47 45 47
50
40
30
20
10
0
Wal-Mart Kmart Target
1998 1999 2000 2001 2002 2003

Source: Company Records; MVI, 10/28/2004

ALA2005R3.ppt 18
Wal-Mart – Key Inventory Management Drivers:
Replenishment & Logistics
 Co-managed/vendor managed inventory
 Two-Tier Distribution (Replenishment vs. Promotional)
 Collaborative Planning, Forecasting and Replenishment (CPFR)
– works with suppliers to determine appropriate levels
 The Future: Radio Frequency IDs (RFID)
Systems
 UCCnet
 Internet EDI
Merchandising Systems
 Modular-based merchandising
 Modular Category Assortment Planning System (MCAPS) /Store of the
Community

ALA2005R3.ppt 19
Why is Wal-Mart so good at logistics?
Because the buyer’s open-to-buy is based on inventory management and
supply chain movement:
Wal-Mart Buyer Open-To-Buy

What the buyer is Depends on how much $ he/she has tied-up in

able to order here these “buckets”

New Item In The DC In Transit In Store

Promotions
Replenishment – PLUS –

Seasonal On Order + In Route

= why suppliers are so eager to work with Wal-Mart

in helping to generate maximum sales off the
lowest possible inventory base.
ALA2005R3.ppt 20
Net on Wal-Mart: EFFICIENCY!
 Consistent, clear positioning – “Always Low Prices” – everyone knows
precisely what Wal-Mart stands for
 Relentless focus on the fundamentals
 Cost suppression and cost reduction is a mantra
 Cooperation with suppliers to achieve mutual objectives
 Combination of food (consumables) and traditional discount creates a
low price one-stop shopping mecca
 Lightning speed to shelf on new items/trendy promotions
 “Fun place to shop” – in-store TV, on trend promotions, parking lot
extravaganzas and tie-ins with local community events
 Fierce competitor – will price comp anything, anywhere
 Store manager discretion means stores can be traited and tailored
demographically

ALA2005R3.ppt 21
 “Expect More/Pay Less”

 $47.1B in ‘04 sales – a 15.1% increase vs. ‘03 (less Mervyn’s and Fields)
 8.9% CAGR between now and 2007 – projected to do $61B versus today’s
$47B
 1,313 stores – 1,177 Targets + 136 Super Targets
 Comparisons to Wal-Mart are dangerous:
• Different business model
• Different consumer
• Different merchandising strategy
• No attempt to compete on same basis
 Is much more like an Exchange in assortment and operations:
• Careful balance of high end vs. commodity merchandise – PLs and
exclusives are key
• Limited CPG food representation (changing quickly)
• Super centers are NOT the primary growth engine
• Distinct department store heritage and orientation

ALA2005R3.ppt 22
Target Challenges:
 Narrow customer base:
• 81% female
= 71% of Trips and 80% of Spending
• 50% between 30 and 44

 Low trip frequencies vs. Wal-Mart, Costco and even Dollar Stores!

 Supercenters behind the curve

 Too “Department Store-y” for a discounter:

• Clean, uncluttered store policy sometimes perceived as sterile and
boring
• Too much emphasis on “want” vs. “need” merchandise – not
enough everyday consumables to drive trips, create excitement or
get shoppers started on the merchandise ladder
 Highly centralized operations – Store Manager’s role is compliance and
execution – no local discretionary authority

ALA2005R3.ppt 23
Target Heavy Shopper Trip Frequencies – Just
Not Enough!

2001 2002 2003

50.0
43.4 45.3
45.0
40.9
40.0
35.0
29.8 30.0
30.0 28.2
25.425.7
25.0 22.1 21.6 22.1

20.0 16.3 16.2 16.9 16.2 15.3 16.1

15.7 15.8 15.1 15.4
13.9
15.0 12.6

10.0
5.0
0.0
Kmart Target Wal-Mart Wal-Mart SAM's BJ's Costco Dollar
Trad. Trad. Trad. SC Club Stores

Source: IRI Panel Data 52 weeks ended Dec 31, 2003

ALA2005R3.ppt 24
Being perceived as more “Department Store-y” than “one-stop
discount/convenience” these days is not exactly on trend:

The U.S. Department Store Death Spiral: 1990 - 2010

Department Store Share of Non-Auto Retail Sales

5.5%
5.3% 5.2%
5.0% 4.9%
4.7% 4.6%
4.5%
4.3%
4.1%
3.8%
3.5%
3.3%
3.1%
2.9% 2.8%
2.6% 2.5%
2.4% 2.3%
2.1%

1990 1991 1992 1993 1994 1995 1996 1997 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Retail Forward, 2003

ALA2005R3.ppt 25
Despite these seemingly core negatives, Target has consistently
out-paced Wal-Mart in both sales and comps ever since it jettisoned
Mervyn’s and Marshall Fields in 2003

Target vs. Wal-Mart sales and comparable store growth – 2004

Sales Growth Sales Growth

20%
Comp Growth Comp Growth

15% 14.5% 14.5%

13.9%
12.6% 12.7% 12.8% 12.8%
12.3%
11.7%
10.5%
9.9%
10% 9.3% 9.4% 9.4%
8.7% 9.0%
8.3% 8.5%
8.0% 7.8%
7.0%
6.6%
6.0% 6.2% 6.0%
5.6% 5.8% 5.6%
4.7%
5% 4.1%
3.6%
3.2%
2.2% 2.4% 2.4%
1.8% 2.0%
1.3%
0.1% 0.3%
0%
Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: Company 10Qs and monthly financial reports—MVI, Dec 09, 2004
ALA2005R3.ppt 26
So what is Target doing to achieve such
exceptional results?
Target keys to success:
 Clear, concise, consistent positioning – “Expect More, Pay
Less”:
• Not just words but the basis for all buying and
merchandising decisions
• The framework for Target’s Merchandising Ladder
• A short, simple slogan that shoppers can remember and
relate-to
 Non-price differentiation – Through captive brands, designer
exclusives, partnerships with other retailers, trendy P.L.
merchandise, celebrity endorsements and “Buzz Marketing”
 Emotional Connection with its customers – “My Target”

ALA2005R3.ppt 27
So what is Target doing to achieve such
exceptional results, cont’d?
 Heavy advertising – Over $1B in 2004 – to heighten awareness,
sell promotions and build equity for the Target name
 Quick response segmented merchandising – To capitalize on
the latest generational and lifestyle shifts – expanded
pharmacies (seniors), Hispanic advertising and Merchandising,
“One Spot” (dollar sections), always on-trend merchandise (soft
goods, apparel and housewares) and seasonal promotions
 Rapidly adding everyday “need” consumables to drive trips and
increase traffic – significantly expanded food sections in all
stores. Recently added extensive wine section.

ALA2005R3.ppt 28
Target Positioning: “Expect More, Pay Less”

EXPECT MORE PAY LESS

Bright, clean
We’re on top of Great quality at a
stores and fast Really low prices
trends so you will low price makes
checkouts make are the number
find the latest and Target
shopping at one reason to
greatest at merchandise a
Target easy and shop at Target.
Target. great value.
fun.

STYLE SERVICE PRICE QUALITY

• Increase share of wallet • Drive trips/build traffic

• Platform for differentiation • Create low price impression
• Fashion/“Want” items • Consumables/”Need” items

ALA2005R3.ppt 29
Target’s “Expect More/Pay Less” Positioning has enabled Target to place
itself squarely between commodity discounters and traditional department
stores and avoid competing with either on their terms:

Target’s Positioning vs. Discount and Department Stores

Drive Value Focus Drive Trend Focus

Discount Stores Department Stores

 Low Margins (23%)  Moderate margins (32%)  High Margins (50%)

 Follow Trends  Trend Seekers  Early Adopters
 Price Sensitive  Quality/Value Sensitive  Quality Sensitive
 Price/Convenience  Trend/Quality/Convenience  Fashion/Selection

This positioning has become a major asset:

 Enables Target to attract a wealthier shopper than traditional discount
stores.
 Improves sales per store, transaction size and gross margins (Target’s are
highest in the channel at 32.8%).
ALA2005R3.ppt 30
Target Buying – Key Levers
 Trend Planning – Crucial to “Expect More”:
• Trend merchandisers travel to seek-out latest colors, fashions and
designs
• Research coordinated across departments
• All items, color schemes, etc. are tested ahead of the season
 Customization – Pressure on suppliers to co-brand or custom-pack
merchandise to reinforce Target’s differentiation objectives
 Competitive Line Reviews – Basically auctions consisting of
competitive bidding for line distribution or promotion support:
• Target even calls these “shoot outs”
• Series of elimination rounds
• Contracts can be up to one year
 Reverse Auctions – Online competition to provide lowest cost for
commodity items or private label consumables
 Global Sourcing/Direct Imports – Target is doing as much as it can to
buy direct from lowest cost producers willing to meet product specs

ALA2005R3.ppt 31
Target Buying – Supplier Mandates
 Reduce cycle times—allow for “just in time inventory”

 Zero tolerance for orders delivered before/after scheduled time

 One Purchase Order per Truck—while trying to reduce overall # of POs

 Tiered in-stock level requirements – identify when Target begins to

lose sales – maintain in-stocks above this level
• 97% “in stock” for top 2500 items

• 92-95% “in stock” for remainder of items

 Perfect match of invoice to receipt of product

ALA2005R3.ppt 32
Target Supplier Report Card
Target’s scorecard is the most complete of the three largest
Discounters:

Buying Logistics Sell Through Administration

 Order fill rate  On-time delivery  Percent of plan –  Perfect order rate
 Turns – rate $s and unit sales  Accurate invoice
warehouse  Order • New items  Deductions
(store?)  Damage rates • Established • Pricing
 Out of stocks –  Lost time items • Advertising
warehouse and  Missed windows • Markets • Other
store lost sales  Backhaul earned • New/old stores  EDI
 Forecast  Bar code  GMROI  Transmit rates
accuracy violations  Share of space,
 Percent orders advertising,
with changes merchandising
(customer) • Facings (slots)
• Ads
• Display
• Multiple
locations
• Signage

ALA2005R3.ppt 33
Target Supply Chain/Logistics Initiatives –
2005 and Beyond:
 SKU Reduction – To facilitate focus on fewer, more important items
and be “more important to fewer vendors”
 Automated Receiving Technology – Electronic labeling system that
utilizes real-time information about where product is needed:
• Automatically labels each carton
• Significantly accelerates the flow of goods
• Eliminates time-consuming, labor intensive procedure
• Rollout starting December, 2004
 DPIA – Direct Import, Pre-distro & Assortment Programs
• Converts indirect imports (no middlemen) to direct
• Have suppliers pack store-specific and store ready pallets,
reducing DC workloads and storage space
• Have suppliers combine multiple items in cartons to reduce the
number of cartons sent to DCs in stores
• Estimated savings of $71MM in 2005
 RFID – Mandatory for pallets and cases by spring, 2007
ALA2005R3.ppt 34
Target From The Supplier’s Standpoint:
 Multiple opportunities to tie-in with Target’s marketing and
merchandising initiatives
• “Expect More/Pay Less” platform
• Target community giving/cause-related sponsorships
• Co-Marketing to build upon each other’s equity
• Current, intense emphasis on “Pay Less”
 Multiple vehicles – Target TV and print advertising, circulars and
website, etc.
 Supplier Aids:
• Partners On Line (POL) – provides suppliers with same data that
buyer has (like Wal-Mart’s Retail Link)
• InfoRetriever – Available to Category Captains and top vendors –
provides a deeper level of information on a more current basis + 2
years of back data

ALA2005R3.ppt 35
Net on Target: EMOTIONAL CONNECTION!
 Non-price differentiation – no attempt to compete with Wal-Mart on its
own terms
 Willing to settle for a piece of the pie rather than going after the whole
enchilada:
• Consumer target is not the universe but primarily women and
young singles
 Clear, precise, consistent positioning that enables Target to fill the
void between commodity discounters and traditional department
stores
 Unique understanding of the needs, wants and aspirations of its target
shopper:
• Designer clothes, soft goods and housewares at great prices
• Clean, uncluttered stores with contemporary colors and thematic
consistency
• Ancillary services that cater to Target shoppers lifestyles, needs
and shopping proclivities (pharmacies, Minute Clinics, photo,
Starbucks and Pizza Hut, etc.)
ALA2005R3.ppt 36
Net on Target: EMOTIONAL CONNECTION
(cont’d)
 Product assortments that cannot be purchased anywhere else –
designer exclusives and captive brands, etc.
 Strong, centralized control to ensure uniformity and thematic
consistency throughout all store presentations and activities
 A conscious policy of transferring as many costs as possible to the
supplier community while, at the same time, offering suppliers a strong
upside through Target’s aggressive advertising, merchandising and
product exclusivity policies
 Awareness of and willingness to react quickly to current issues – for
example, Target’s current campaign to significantly increase its
consumables representation to increase traffic and trip frequencies

ALA2005R3.ppt 37
While Target and Wal-Mart have each chosen to walk different paths on route to their
success, there are certain factors common to both of these retailers that make them
leading edge vs. most others in the retail community.

Ten factors, as follows:

1. Differentiation – Through constant juggling of the following elements:
• Price
• Formats
• Captive Brands
• Designer Exclusives
• Successful Private Label Programs
• National Brand Supplier Customization

2. Use of Consumables – To build traffic and increase trip frequencies.

3. Ancillary Departments – To increase convenience and share of wallet.

4. Fluid Merchandising (rapid ins and outs) – To create excitement, build
trip frequency and reinforce differentiation objectives

ALA2005R3.ppt 38
Ten factors that separate the most successful from the rest, cont’d

5. “OPP/Good/Better/Best” Merchandise Ladders – To trade shoppers

up in almost every category.

6. Speed to Market – Now more important than “Bigness”

7. Relentless Pressure on Costs and Productivity – Both in general and

store-specific

8. Willingness to Experiment – New formats, ancillary businesses,

stores within stores, partnerships, adjacencies, retail-tainment, etc.

9. Global Sourcing – Now direct from the lowest cost producer – no

middle men.

10. Technological Innovation – RFID, etc. to reduce costs/increase

speed

ALA2005R3.ppt 39
Moral of story:

It’s not just price; it’s a combination of

factors, carefully blended and balanced to
satisfy a particular consumer need or
aspiration. Each retailer has to search
within its own strengths to find the right
formula. There are no easy answers.

ALA2005R3.ppt 40
ALA2005R3.ppt 41
A Special Thanks to Sylvia Harris and Cathy Ely
of Luke AFB for their time and hospitality . . .

ALA2005R3.ppt 42
We Appreciate The Time and Attention You Have
Given Us Today

Specifically, we want to thank Frank Jepson and the American

Logistics Association for inviting us and P&G for sponsoring us
and trust that this has been both fun and helpful.

www.hoytnet.com
8912 East Pinnacle Peak Road • Scottsdale, AZ 85255
Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com
 Appendix

Some particulars that may be of interest . . .

ALA2005R3.ppt 44
Target and Kmart U.S. Sales vs. Wal-Mart –
Relatively Small
Wal-Mart vs. Target and Kmart Sales & Growth Projections: 1999 - 2007E
Reported Sales & MVI Projections
CAGR CAGR
(Billions USD)
1999 2000 2001 2002 2003 '99-'03 2004E 2005E 2006E 2007E '04E- '07E
Wal-Mart
Corporation 162.9 180.0 204.2 229.8 256.5 12.0% 289.4 319.4 350.9 382.1 9.7%
Wal-Mart US 134.1 149.3 169.2 189.5 209.5 11.8% 232.9 257.5 283.5 309.4 9.9%
Target
Corporation 33.5 36.7 39.7 43.7 47.7 9.3% 46.6 51.0 55.3 59.5 8.5%
Kmart 35.9 37.0 36.2 30.8 23.3 -10.3% 20.4 19.2 19.1 19.4 -1.6%

$382.1B
Wal-Mart Corporation Wal-Mart US Target Corporation Kmart
$400
$309.4B

$300

$200

$100
$59.5B

$19.4B

1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E

Source: MVI 10/28/2004

ALA2005R3.ppt 45
By mid 2004, Wal-Mart U.S. had achieved 86% household
penetration – almost 25 points more than its next largest competitor
– which translates to over 130MM shoppers per month

Wal-Mart vs. Leading Competitor Household Penetration, Mid 2004

2001 2002 2003

100%
90% 84%
86%
80% 74%
70% 66%
60% 62% 59% 60% 60% 62%
60% 55%
49%
50%
40% 34% 35% 34%
30%
20% 17%
13% 15%
10%
0%
Wal-Mart Wal-Mart Wal-Mart Target Kmart Costco SAM's
Trad. Total SC Total Total Club

Source: IRI Panel Data (all shoppers - Total US)

ALA2005R3.ppt 46
Not content with this, Wal-Mart plans an additional 500 new store
openings plus remodels in 2005, driven primarily by new
Supercenters:

Wal-Mart Domestic Expansion Plans For 2005 – Total U.S.

Supercenters +240 - 250

Discount Stores +40 - 45

SAM’s Clubs +30 - 40

Neighborhood Markets +25 - 30

Total New Stores 335 - 365

Remodels/Relocations 160

Grand Totals 500+

Source: Wall Street Journal, 10/5/2005; Supermarket News, 10/11/2004 + 10/18/2004

ALA2005R3.ppt 47
Wal-Mart’s store expansion strategy is carefully calculated to
capture new consumers at all levels of the income spectrum and to
provide shoppers with easy accessibility:

Wal-Mart Format Expansion Strategy:

Capturing Consumers at All Income Levels
 Different formats:
• Target the same consumer for different trips
• Target new consumers
Consumer by
HH income Format
A 75K+
walmart.com
B 60-75K
SAM’S
C 45-60K N. Mkt
Discount
D 25-45K
Supercenter
E <25K

Source: MVI 10/28/2004

ALA2005R3.ppt 48
Wal-Mart’s latest and greatest
 Stores within stores:
• Kid’s Connection – Candy, soda, clothes, toys
• Personal Business Centers
• Dollar Stores – plastic bunnies, etc.
 Increased focus on soft goods:
• Coordinated lifestyles
• Heavy focus on Wal-Mart brands
• Integrated merchandising – e.g., not just towels but everything for
the bathroom
• In-store TV support for “How to decorate your home”
 Apparel:
• Mary Kate and Ashley exclusives – in-store and online
• Levi Strauss – 2003
• The Wal-Mart “George” line – men, women and children – big push!
• Carter’s line in infants
• Trend alert – partnership with Seventeen Magazine to offer teens
“cool picks” in clothing and electronics
ALA2005R3.ppt 49
Target SuperTarget Growth vs. Wal-Mart
Supercenters – Not exactly NASCAR competitive

Wal-Mart Target
3000
# of Supercenters

2500 2391
2181
1951
2000
1706
1471
1500 1258
1066
1000 888
721

500
93 118 136 150 173 196
16 30 62
0
1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E

Source: MVI, Selling Target, 12/9/2004

ALA2005R3.ppt 50
Target Super Target Issues:
 Traditional Targets are Hi/Lo; Super Targets are EDLP:
• Target dependent on supplier allowances to grow operating profits
• Every time Target converts a traditional discount format to a Super
Target, it loses the benefit of the allowance (which is thereby
driven into price and not op. profits)
• Building too many super centers too fast would severely impact
Target’s financials

 Super Target trip frequencies do not support format productivity

 Super Target layouts do not allow easy transition to the consumables

section and cross-over shopping

ALA2005R3.ppt 51
Expect More – Implementation is all about non-
replicable differentiation
 Department store-like destination departments :
• Apparel • Greeting cards
• Housewares • Infants and toddlers
• Shoes • Seasonal items
 Captive Brands:
• Mossimo • Waverly Garden Room
• Danskin • Liz Lange Maternity
• Philippe Starck • Hello Kitty
 Exclusive Partnerships – Fieldcrest, Boots (HBA and Cosmetics) and
Amazon.com (powers the Target website)
 Private Labels:
• 50% of the store
• Reinforce Target’s brand equity – all have either “Wave” or “Bulls Eye”
• Key contributor to Target’s 32% gross margin
 Synergistic, complementary spin between stores and website :
• Bridal registry, “Target to a T – custom made clothes”
• Red hot shop – hot trendy items – new every week
ALA2005R3.ppt 52
Pay Less – Implementation is all about driving
trips and traffic:
 Price comping – 2002 - Target pledges to match Wal-Mart on price item
for item throughout stores
 Significant expansion of consumables and commodity items starting in
Q3, 2003:
• Based on new P2004 format
• 50% greater space devoted to food, beverages and snacks
• “Consumables World” department placed in front of store
• 70 remodels in 2004 – all remodels and new stores starting in 2005
 “Savings Spot” – In front of store, near registers, introduced 2004:
• Club-like pack sizes
• Paper, household cleaning supplies and pet foods
 “One-Spot” (Dollar departments) now expanding beyond test:
• Kitchen, storage containers, toys, baby products and stationery
• Exceptional value and “Treasure Hunt” items
• Managed by separate buying group
• Does not cannibalize other items
ALA2005R3.ppt 53
Target Ancillary Departments – Return Trip and
Transaction Size Drivers:
 Pharmacies:
• 71% of stores by YE 2003
• Extended hours
• Pharmacy rewards program tied to use of Target Visa card
 “Minute Clinics”:
• 135 sq. ft., staffed by a nurse practitioner
• Treats about a dozen common health problems
• Menu-priced – most services $40 - $45, covered by insurance + co-pay
• Now testing in 8 stores (BM) with plans to expand in metro areas
• 95% of MC patients get prescriptions filled at Target
 Other Services:
• One hour photo labs
• Optical departments
• In-store restaurants – Starbucks, Pizza Hut, Taco Bell
• Lawn and Garden centers
• Portrait studios
• Bridal and baby gift registries
ALA2005R3.ppt 54
Target aggressively advertises its benefits through multiple
vehicles and is, in fact, the largest advertiser of the Big 3

Vehicle Target Wal-Mart Kmart

TV $288 $426 $86
Print $293 $40 $95
Outdoor $19 $14 $8
Unmeasured $483 $198 $223
$1,083 $678 $413
Index (100) (63) (38)

Media Strategy:
 TV is strongly seasonal/holiday oriented
 Heavy print budget is targeted to women and young adults
 “Unmeasured” is circulars and ROP

Source: LNA and MVI, 2003 - 2004

ALA2005R3.ppt 55
Target Buyer Compensation Structure
 85% of buyer compensation:
• Sales
• Contribution Dollars
Including product flow costs…
• Contribution %
• Inventory Turns

 In-Stock % (10%) and personal objectives (5%) round out

compensation

 Senior Buyers are also eligible for a bonus plan that can represent up
to 100% of their base compensation.

 Goals are set every 6 months, not annually.

ALA2005R3.ppt 56