Wal-Mart’s Sales Strategies Unsustainable

The fallacy in this argument is that it presupposes that cutting prices will only mean that Walmart will sell the same amount of material for less money. Thus their earnings will go down.

Walmart, obviously, thinks otherwise. They are betting that cutting prices on selected items will make their earnings go up. There are two ways this can happen. They can attract shoppers from other stores and thus increase the volume of sales on the selected items, and they can induce shoppers to buy more once they have been drawn in by the sale items.

There is nothing new about using “loss-leaders” to boost traffic. Just last week there was an article about Macy’s misstep when it dropped coupons in some of the newly rebranded stores it has acquired. People need a gimmick to get them into the store.

The real issue with Walmart is that that their prime demographic group is the one being most squeezed by the current economic slowdown. When people have less money to spend all the gimmicks in the world won’t help.

The typical Walmart shopper falls into the $20K range while the typical Target shopper falls into the $40K range. One has discretionary income and one doesn’t.

Walmart hasn’t figured out how to attract the higher income group. That’s their real failing, not tweaking loss leaders.

robertdfeinman in Long Island,N Y: “Walmart hasn’t figured out how to attract the higher income group”...At the risk of sounding condescending,perhaps the reason the higher income group is “higher” is because they may be more intelligent and aware of larger issues and their sense and sense of community is larger than the dimensions of a Walmart shopping cart?

P.S. Sir, I wanted to thank you for the reference sites you have generously shared with all of us here.I have not been posting here all that long myself,but,appreciate your input.And Kenzu,a big^5 to you,too!

ddrb, I think you are barking up the wrong tree here.  Roberdfenman hit the nail straight on the head with his assessment of price cutting as well as target audience.  The only “larger issue” people with more discretionary income pay attention to is the status of their purchasing, which is purely self-serving on their part. 

Companies like Target and Costco market themselves (very well I might add) as the “hip” place to shop.  For people with more discretionary income they don’t mind spending a few more bucks just to say “I shop at Target”.  There’s no sense of community, just pure selfish motives and status symbols.  It’s the american consumer way of life.

The “shopping experience” plays a bigger part as the wealth of the target audience increases. To see the extreme visit Tiffany’s, it’s all hushed tones and soft lighting.

You can buy the same jewelery around the corner on 47th Street for much less, but it’s more like a bazaar atmosphere. And, of course, it won’t have the Tiffany label.

The big box stores had a sort of perverse appeal (especially those using the Costco model) when they started. It was chic to buy there and then brag about the bargains you found. But Walmart can’t play the reverse chic game, and those who don’t need to shop there tend not to.

Many firms when saddled with a downscale image have started up a new brand and kept it at arm’s length from the parent, for example Lexus.

I think Walmart management (that is the Walton family) is too set in their ways to try anything bold. Remember the flap over their hiring of a brash marketing director several month’s ago.

In a normal case Wall Street would force change, but as I keep saying this doesn’t work for Walmart since the Walton’s call the shots.

We’ve been through this whole ‘loss leader’ stategy on multiple occasions. The fact that Wal-Mart’s uptick in same store sales for August was fueled by to-the-bone cuts on back-to-school supplies is a perfect example. Revenues up! Big deal. How about profits?

Keep in mind, last year (’06) Wal-Mart increased sales by $50 billion but only increased profits by $50 million. You do the math.

This is the most efficient corporation on the planet? Wal-Mart is the master of retail strip mining of low-grade ore.

Mary in:Well,Mary thank you for your post,but I can only speak from my choices as to where i choose to shop.I certainly cant speak for what is subjective(someones motivation)but I am curoius as to your degree of certainty about other peoples “reasons.” I personally would not consider Target to be upscale-but you see,its relative,and that makes it subjective,not objective.I reject your assessment that “the only larger issue “ people pay for is status-thats ridiculous-how about paying attention to quality,or paying a little more to support local ly produced foodstuffs so you KNOW where your food is produced.Perhaps thats your mindset,dont assume its a lot of other peoples also.

P.S. Your post,whether intended or not, infers that Mr. Feinman considers people with more discretionary income as status seekers,only-thats not what i deduced from either of his commentaries.

‘The fallacy in this argument is that it presupposes that cutting prices will only mean that Walmart will sell the same amount of material for less money. Thus their earnings will go down…” Feinman

Wrong, Sir, wrong analysis. We are talking economics 101 here.
“…will sell the same amount of material for less money..”

By lowering the price floor, Wal-Mart influences demand structure.
They will likely sell MORE MATERIAL, and have a small incremental profit boost as well. This fits a CVP model well.

Furthermore Wal-mart can well afford the price cuts, as the incremental will not significantly change the overall profit margin of the company.

Also, in respect to competition, I will have to tip my hat to Wal-Mart for I think they realize full well, when it comes to seasonal shopping, the competitive differentials are compressed.
So compressed in fact as to be of no effect.

I think they realize during the ‘Season to be Jolly’, the typical customer is very sensitive to price, and looks to price more than quality in the seeking of ‘Santa’s Goodies’
(For the most part, the MAJORITY part).
By lowering prices during a key event, they forestall consumer migration to competitors.
They in effect raise the barriers of competitive entry into the event.

Now lest anyone think I a lover, or advocate of Wal-Mart, let me state for the record:
I worked for them over 12 years.
I think their Labor Policies, dismal.

But they are not by any means stupid when it comes to economics and strategy.

cazar,

“They will likely sell MORE MATERIAL, and have a small incremental profit boost as well.”

Wasn’t that the Sam Walton concept that led Wal-Mart to the rise to the top, in the first place?  Sell things at a lower price and make up the difference in volume!!  The only way they would make less money, is to sell at cost or below cost!!

Wasn’t that the Sam Walton concept that led Wal-Mart to the rise to the top...?

And it also could be instrumental in Wal-Mart’s demise.

When Wal-Mart lures you into the store with an especially low price on something they’re betting you’re going to buy other stuff. Stuff with a better mark up.

In the old days people trusted Sam to have the lowest prices across the board. That was then, this is now. That trust has been cashed in.

If the Wal-Mart patron returns to the days of comparison shopping, Wal-Mart will remain condemned to grub for pennies. If Wal-Mart’s price is the lowest, buy it! If a competitor has a lower price, buy it at the competitor or, make Wal-Mart match the price.

And use coupons. As many low-profit transactions as possible.  (the overhead remains the same:o)

“I certainly cant speak for what is subjective(someones motivation)”

Well guess what ddrb, I guess we are in the same boat.  I can’t cite any study to prove my point (and I don’t claim to).  It’s just a theory just as yours is.  What I can speak to are all of the conversations I have with my friends on where they shop and why, and going by just that I’ll continue to stick to MY theory.  What I can also speak about are my shopping experiences because I’ve been to Walmart, Target, KMart, Costco, Sams, Safeway etc. and hands down Walmart wins almost all of the time when it comes to prices for the EXACT SAME GOODS.  Why spend $6 at Safeway for a lb of Oscar Myer bacon when I can buy the EXACT SAME THING at Walmart for 1/2 that price any given day.  And that’s just the tip of the iceburg for the things I buy.

Ken V,

“If Wal-Mart’s price is the lowest, buy it! If a competitor has a lower price, buy it at the competitor or, make Wal-Mart match the price. And use coupons.”

That is the best piece of advice you have given in quite awhile!!  People have to start looking out for themselves, not sitting around whining about someone else should do it for them!!  That includes Wal-Mart’s employees, as well as it’s customers!!

And, you are right, the overhead remains the same, whether they sell 100 items at $5.00 each or 500 items at $3.00 each, the only difference is, those 100 items only produce $500.00 in sales while the 500 tems produce sales of $1500.00 or at 5% for the 100, profit is $25.00, while at 3% for the 500, profit is $45.00!!  Your way of thinking is why Sears, K-Mart, Penny’s, etc. got passed up by Wal-Mart!!

Mary in:"Why spend$6.00 at Safeway.......?” Well, there we go again..and much of the choices I concede depend on what outlets are available from which to choose a shopping destination.Ichoose to shop for certain goods at certain stores,I dont attempt to do one stop shopping .I have found that Big Lots has an excellent pantry section in addition to sundry items.Tuesday Morning is nice,I try to shop local produce as often as possible.I have preferred Kmart for years.And of course,the internet is exceptional for many values-I use Bizrate.com to winnow out particular choices-but I will NEVER underwrite the Beast of Bentonville.

P.S. My favorite grocery stores,over the years,have consistently been Kroger’s and Albertson’s-they’re reliably clean,very little crime(at least in my community)and in overall track record,have had little recall on meat items that I can recently remember.

People get on me all the time for quoting so much, but I’ll tell you when I read something that clearly expresses a concept that I share, and I can’t see any way to improve on it, I quote.  Case in point, Markham Lee from Seeking Alpha.

...Wal-Mart is sacrificing earnings to generate revenue growth.

More and more Wal-Mart’s sales numbers are becoming as irrelevant as the “visits” per week figure.

Anyone have a argument with Markham’s comparison ofTarget and the </i>Beast of Bentonville</i>?

**Note to Markham: You might consider cutting back on the use of the word ‘whilst’.

Just check out Couponalbum.com for shop best quality toys, video games, and other accessories...........!!

Ken V,

“...Wal-Mart is sacrificing earnings to generate revenue growth.”

This sounds much the same as what they told Sam Walton when he first started Wal-Mart!!

And, it’s just like you, to quote someone and then chide them for not doing it properly!! 

Like I have said before, it’s easy to sit back and complain about how things are being done, but harder to do it yourself!!  If you know the best way to do things, why aren’t you doing it, where’s Ken-Mart?

If Wal-Mart’s price is the lowest, buy it! If a competitor has a lower price, buy it at the competitor or, make Wal-Mart match the price.

This seems like a fantastically bad suggestion for how to help bring down Wal-Mart. Give them your money?  This is the “race to the bottom.”

Give them your money?

Re above: As many low-profit transactions as possible.

P.S.
And, it’s just like you, to quote someone and then chide them for not doing it properly!!

First time through I was going to let that pot-shot slide, RDS, but upon reflection I feel compelled to point out that statement is so you and your whacked-out ideology. I either buy Markham Lee 110% or not at all. Black or white. All or nothing. Baby out with the bathwater.

The truth be told, I had never heard of Markham Lee prior to reading this piece. While I found Markham’s style easy and fluid, I stubbed my toe on the first whilst, stumbled over the second, and was distracted by the third. Not good.

If Markham’s (or yours) skin is too thin for even minor criticism, you both might want to take up another hobby.

Meanwhile you can call me a nit picker if you like.

Ken V,

“I feel compelled to point out that statement is so you and your whacked-out ideology. I either buy Markham Lee 110% or not at all. Black or white. All or nothing. Baby out with the bathwater.”

This is not MY wacked-out ideology, I was told this by your BUDDY, Screwedby!!  He always sees things in Black or White and has rejected any shades of grey that I presented!!  And, in effect, so do you to a point, when you claim Wal-Mart to be the Beast of Bentonville and find an underlying ‘evil’ in EVERYTHING they do!!

Wal-mart= root of all Evil, no question about it ,the love of money=walmart why can’t you understand that ?

I love Walmart.  Walmart has done more good for our economy than bad.  Walmart has been responsible for keeping inflation in check by providing products and services at very low cost.  While everything else seems to be going up, i.e. the price of fuel, my state and federal taxes, my heating costs, the prices at Walmart have been going down.  How can this be a bad thing?  I think all of you people who are opposed to Walmart are idiots who have nothing better to do than to bitch and complain about a well run, well organized, professional company like Walmart.  Stop wasting your time with this nonsense.  Loosers.

I hate Walmart. Walmart has done more bad for our economy than good.  Walmart has been irresponsible for impoverishing their employees to keep products and services at very low cost.  While everything else seems to be going up, i.e. the price of fuel, my state and federal taxes, my heating costs, the prices at Walmart have been going up as well. How can this be a good thing? I think all of you people who are in love with Walmart are unpatriotic fools who have no ability or desire to figure out what is really going on with a taxpayer subsidies guzzling, tax evading, poverty creating, Chinese communist supporting economic whorehouse company like Walmart.  Start paying attention with a little time to serious corporate malfeasance. America.