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January 11, 2010

How Does David Beat Goliath?

Catherine New
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For many companies, 2009 was not a growth year. For Walmart, however, its revenue grew more than 7 percent from 2008, topping $401 billion.

In the last decade the retailer expanded rapidly in the United States and around the globe. Today it has more than 7,800 locations worldwide. Yet between 1998 and 2005, 65 percent of proposed new stores in the United States that drew protests were never built. That’s a pretty good batting average — for anti-store crusaders. How could the world’s biggest retail chain get derailed by a handful of local activists? It’s part of Walmart’s management strategy, says Professor Paul Ingram.

Building a new retail outlet is not cheap. A store location encompassing tens of thousands of square feet can cost up to $10 million to build. Added to that, the hunt for viable real estate is fraught with uncertainties, particularly when it comes to community support. Ingram says that allowing for a certain number of concessions about location is part of the company’s negotiating process.

Ingram’s research (PDF), which he conducted with Lori Qingyuan Yue of Columbia University and Hayagreeva Rao of Stanford University, provides evidence that Walmart uses low-cost probes, such as filing a building proposal (typically under $15,000), to quietly suss out local support or opposition to a potential new store. Walmart can then withdraw its proposal or rethink its building plan if protests occur. The strategy both limits the company’s expenditure and investment in a new location and minimizes exposure to the news headlines.

“A lot of people make claims on how a corporation should behave,” Ingram says. “Negotiating is part of management. Here is a strategy that accepts concessions as way to manage costs.”

Photo credit: mjb84