WAL-MART’S COST LEADERSHIP STRATEGY

HISTORY OF WALMART

1962, Sam Walton starts WAL-MART

In 5 years expanded to 24 stores revenue more than 12.6 million in sales

1972, listed in New York Stock Exchange

MARKETS OF WAL-MART(2003)

o Total Sale of Wal-mart US $ 313 Billion

o Total Retail Area 663 Million Sq.ft.

o Total Employers 1700,000

SALES & INCOME GROWTH (PAST 12 MONTH)

COMPANY INDUSTRY

SALES GROWTH 12.00% 11.50%

INCOME GROWTH 5.20% 5.90%

NET PROFIT MARGINS (%)

COMPANY 3.6%

COMPANY 5YEAR AVG. 3.5%

INDUSTRY 3.6%

WAL-MART TODAY

Operates 6,500 stores in 15 countries Serves more than 176 million customers

around the globe Employs 1.8 million worldwide Health plans insure more than 1 million

people Saves the average American household

more than $2,300 per year

Let us start the journey….

1960’s…..

The Success Term was

EDLP EVERY DAY LOW PRICING

To provide customers – a wide variety of high quality, branded and unbranded products at the lowest possible price, offering better value for their money

EDLP : The strategy

To procure products in bulk at the lowest possible prices from the manufacturers

Sharing the savings with customers Wal-Mart’s products were usually priced

20% lower than its competitors

Wal-Mart’s advertisement describing EDLP said:

“Because you work hard for your every dollar, you deserve the lowest price we can offer every time you make a purchase. You deserve our Every Day Low Price. It’s not a sale; it’s a great price you can count on every day to make your dollar go further at WalMart ”

Explaining his pricing strategy Mr. Sam Walton said:

“ By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price. In retailer language; you can lower your markup but earn more because of the increased volume”

EDLP : WAS A HIT

This led to increase loyalty from price-conscious rural customers.

The surplus generated was re-invested in

- Building facilities of an efficient scale - Purchasing modern business related

equipment - And employing the latest technology

The stores were set up in large buildings, while ensuring that the rent paid was minimal

Not much emphasis was laid on the interiors of the store

Did not invest in standardized ordering programmes Did not even have a standard distribution system in

place Accounting data were manually written-up There was a high check in recruiting the staff

Other areas where the cost was checked

1970’s….

Wal-Mart became public-held company Equipped with funds, it started

reorganizationing its business activities. The foremost challenge was to put in

place a standard distribution and inter-store communication system

So it came up with the most popular Hub And Spoke Structure

The Hub And Spoke Structure Goods were centrally ordered Assembled at the distribution center (hub) From where they were dispatched to the individual

stores (spokes) as per the orders received from stores.

D.C.

STORE

STORE

STORE STORE

The benefits of Hub and Spoke structure

Centralized purchase of goods in huge quantities

Distribution of them through its own fast and responsive logistics infrastructure to the retail stores

By passing all intermediaries, they managed to get the goods at lowest price

The company was able to replenish the store twice a week

In 1978, Wal-Mart became the first company to establish a fully-automated distribution center

Claude Harris once stated that :

“Don’t ever feel sorry for a vendor. He always knows what he can sell, and we want his bottom price. We would tell the vendors ‘ don’t leave in any room for a kickback because we don’t do it here.”

Massive expansion strategy

Strategy was to build stores around the distribution centers

That is to be effectively served by the center and controlled by district managers and to management at Bentonville

The store needs to be a maximum of a day’s drive away from the center

Benefits of massive expansion strategy Wal-Mart was able to accelerate its revenue

growth and reap significant economies of scale

As the number of store increased the popularity of the company increased

Since the company generated tremendous word of mouth publicity, it was able to minimize spending on advertising and promotion activities

1980’s…..

Maintaining cost through re-investment

In 1983, Wal-Mart ventured into the membership club business – called Sam’s Club

Installed the Point of Sale (POS) scanning system to further reduce the cost

Maintaining cost through re-investment (contd.)

In 1987, it installed a Satellite Communication System (SCS)

In December 1987, Wal-Mart opened its first hyper-mart in the US

1990’s…..

Supercenters and Sam’s club were more focused to fuel the growth

In 1994, Wal-Mart bought 99 Pace membership warehouses

Wal-Mart’s store count (1991-2003)

Format________year

Discount stores

Sam’s club Super center

Neighbourhood markets

1991 1573 148 3 -

1992 1720 208 6 -

1993 1850 256 30 -

1994 1953 419 68 -

1995 1990 428 143 -

1996 1995 433 219 -

1997 1960 436 344 -

1998 1921 443 441 1

1999 1869 564 451 1

2000 1801 721 463 7

2001 1736 888 475 19

2002 1647 1066 500 31

2003 1568 1258 525 49

Source : Wal-Mart Annual Report 2003

Employed improved inventory management practices and upgraded its IT systems

Electronic Data Interchange (EDI)

AND THE RESULTS WERE GOOD….

Amount of inventory reduced by an estimated $ 2 billion

Savings of $ 150 million on interest cost were generated

2000’s…..

Wal-Mart launched a programme called ‘Store of the community’

‘Global Sourcing’ was initiated (2002)

Strengths of Wal-Mart

Wal-mart’s SUBSIDIARIES

Discount stores Neighbourhood market

Sam’s Club Super center

Yearly sales $244.5 billion

Total employees across the globe (approximately) 1.3 million

Number of stores worldwide 4,688

Number of new stores opened in 2003 (worldwide) 274

Total number of suppliers 65,000

Wal-Mart’s rank/position among all retailers across the globe (in terms of sales)

1

Number of pallets shipped by Wal-Mart truck every week (2002)

50 million

Total occupied floor area of Wal-Mart (2002) 18.3 square miles

Yearly advertising expenditure (2002) $498 million

Highest one-day sales record till date (November 28, 2003)

$1.52 billion

Number of customers every week at Wal-Mart stores worldwide (approximately)

138 million

Estimated market capitalization of Wal-Mart in 2020 $11.1 trillion

Source : Wal-Mart Annual Report 2003

Revenue (%) of the major consumer goods companies in the US through Wal-Mart

Company % Share

(As a % of total sales)

P & G 17 %

Tandy Brand’s Accessories

39 %

RJR Tobacco 20 %

Dial’s 28

Del Monte Foods’ 24 %

Clorox’ 23 %

Revlon’s 23 %

Source : BusinessWeek, October 2003

…. and the journey still continues …

PRESENTED BY :~

o Prashant Wankhedeo Prajakta Saneo R. Maruthi Yeshwanth o Vikram Gharmalkaro Mehul Chhedao Nitin Agrawal