This anecdote – now an established part of the company's folklore – serves to illustrate the business strategy that still dictates Wal-Mart's commercial decisions: drive down the cost to your business to drive up the volume of your sales. It is a philosophy that is sending shockwaves through the UK retail sector following Wal-Mart's recent takeover of supermarket chain Asda, triggering a price war as the UK's major players fight to retain their share of the market.
Consumers look set to be the winners in this war, but what about the construction industry? Wal-Mart has a reputation for developing the leanest of supply chains and driving down its supply costs with the promise of access to massive sales volumes. So, what will the future hold for Asda's framework contractors Kajima, Laing, Pearce, HBG and Carillion, and its approved subcontractors and consultants? After all, the company has already said it wants to cut its build costs by 20%. And, in a bid to remain competitive, will the UK's other major food retailers soon be chanting Wal-Mart's cost-cutting mantra to their construction teams?
Bob Simpson, Asda's head of development, has just returned from Bentonville, Arkansas, where he spent two weeks at Wal-Mart's head office. He was impressed with what he saw. "Wal-Mart is the world's largest retailer, and in five years' time it wants to be the world's largest company," he enthuses. "That will mean doubling its current turnover of £85bn." The takeover of Asda in June this year was part of these ambitious expansion plans.
The Wal-Mart effect will soon start to impact on Asda's construction procurement. Simpson's trip across the Atlantic was to meet development managers from other outposts in Wal-Mart's empire. They were gathering to talk about how they could standardise the group's store and equipment specification with a view to buying common items in bulk. "It's a way of using Wal-Mart's massive purchasing leverage," explains Simpson. With so many countries working to so many different standards and planning constraints, the task is not an easy one. However, Simpson is optimistic that a minimum specification can be developed. Individual countries will then be able to add to the specification to meet local regulations.
Cutting costs around the world
One item common to Wal-Mart outlets worldwide is mechanical and electrical plant. Asda is already looking at using M&E equipment bulk-bought in the USA for refrigeration and electrical switchgear. Shelving and racking is another area being looked at. "With a few modifications, buying this from the States will save us a bundle of cash," says Simpson.
And saving cash on construction appears to be top of Simpson's agenda. "We've got to build cheap," he almost chants. In the USA, Wal-Mart builds its stores for 60% of the cost per square metre of Asda's UK outlets, and it does this by constructing "phenomenally simple buildings". Despite Asda's store specification, says Simpson, "designers always want to put their signature on a building".
But what really seems to rankle with him is the fact that facades have to be individually designed to meet local planning requirements. "Next year, most elevational treatments will, in effect, be one-offs that will have to be retendered and will therefore result in higher costs." Needless to say, Asda is now looking at ways of standardising its stores' elevations. "Designers have already been told to go for one type of glazing only," says Simpson.
Sounding more like a Sam Walton clone every minute, Simpson returns to the "build it simple" mantra, using a couple of examples to illustrate just how simply Wal-Mart builds in the USA. "The formwork for the concrete plinth around the car-park lampposts is, in fact, a waste section of downpipe, used for taking rainwater from the roof. It might mean the downpipe is slightly oversized," he explains, "and the plinths don't have the chamfered edges we normally specify, but it does save time and money on expensive formwork."
Permanently low prices, forever
His second example is the use of steel. In the USA, Wal-Mart buys steel in standard sizes and then hands it over to contractors. Often, the steel is oversized for a particular application but, again, because Wal-Mart buys so much, it can drive down the price. It also makes construction simple because the contractor has to deal with a limited range of steel sizes. Simpson is not ruling out the possibility of issuing steel to UK contractors. "We already issue much of the store furniture this way," he says.
Simpson admits that Wal-Mart can afford to work with a minimum of different components because it uses a minimum of different store types – something he admits that "site and planning restrictions are unlikely to permit in the UK". The standard store model also means a store is effectively designed before land is purchased, "which gives a high degree of cost certainty and means the design team can concentrate on the only area of uncertainty – the ground conditions".
In the USA, Wal-Mart builds 280 stores a year, so it has plenty of incentive to get the detailing right. Wal-Mart has an in-house team of designers whose job is to continuously refine and drive down the cost of a standard store, unlike Asda, which expects its framework contractors to provide this service. "'Prototype' and 'adaptation' architects are employed to develop standard details which are issued to the design/construction team for a store. If you change a detail, you do it for the next batch of stores.
"Wal-Mart is quite prescriptive in its specification," says Simpson, talking about how the stores are constructed, "but it does accept liability for all its detailing." And consultants had better make sure they read the specification, as all variation orders are monitored.
"If the details are in the specification and a consultant asks for something relating to a detail to be clarified, then they pay for it," he explains. "Two cock-ups relating to information in the specification and it's off to see the vice-president," he adds, clearly warming to the idea. Asda is looking to follow Wal-Mart's example and become more prescriptive. "We're concentrating on getting our specification right at the moment," Simpson explains. "Then, in about three months' time, we'll run with the design."
To keep costs to a minimum, Wal-Mart tenders everything – including consultants' fees. Simpson admits that the fee level is low for the Wal-Mart construction team but sees this as a benefit to the project. "If you reduce fees, you force the team to work together," he says, a philosophy he seems only too keen to embrace, referring to Asda's plan for a 40% reduction in fees. But Simpson is not only looking at cutting fees on a project, he also wants to reduce his external design team. "We've got too many designers at the moment," he says, "and we need to use them more efficiently."
And if forcing people to work together is likely to lead to a blame culture within the construction team, Wal-Mart has that covered, too. To eliminate the culture of blame, "all roles and responsibilities are specifically defined – the managerial process is very tight".
So what, if anything, can Asda's experience bring to Wal-Mart? "Wal-Mart is running into planning issues in states such as Florida," says Simpson. Asda's experience of dealing with UK planners puts it in an ideal position to advise on such matters. Speed of construction is another area where Asda can offer guidance. Surprisingly, Wal-Mart takes 22 weeks to build a store. "Next year, Asda will be building a supermarket in 12 weeks," says Simpson, proudly.
It will take time for Asda's construction team to reap the full benefits of the Wal-Mart merger, but already the signs are that things will change.
If Wal-Mart is worried that the rest of Asda will struggle to embrace its culture quite as wholeheartedly as Simpson, it can put its mind at rest. Once a month, staff at Asda head office meet to review the month's business and chant the company slogan. But just to make sure, Wal-Mart has issued everyone at Asda with a book on Sam Walton. And if further evidence was needed of the companies' compatibility, it is worth remembering that Asda, too, has saved money on signage. Asda is short for Associated Dairies.
That’s Wal-Mart priceHow does Wal-Mart treat its consultants? It pays low levels of fees, fines them if they have not read the specification and expects them to work as a team. How does Wal-Mart know it is building cheaply? It benchmarks against all its operations worldwide. How will Wal-Mart cut Asda’s construction costs? Wal-Mart will use its purchasing leverage to bulk-buy mechanical and electrical plant in the USA.
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The word from Wal-Mart