Wal-mart’s cost leadership strategy

 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 o Total Retail Area o Total Employers US $ 313 Billion 663 Million Sq.ft. 1700,000

SALES & INCOME GROWTH (PAST 12 MONTH)

COMPANY

INDUSTRY

SALES GROWTH INCOME GROWTH

12.00% 5.20%

11.50% 5.90%

NET PROFIT MARGINS (%) COMPANY COMPANY 5YEAR AVG. INDUSTRY 3.6% 3.5% 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 priceconscious 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

Other areas where the cost was checked  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

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 interstore 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. STORE

STORE

D.C.

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 fullyautomated 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 1991 1992 1993 1994 1995

Discount Sam’s club stores 1573 1720 1850 1953 1990

Super center 3 6 30 68 143

Neighbourhood markets -

148 208 256 419 428

1996 1997 1998 1999 2000 2001 2002

1995 1960 1921 1869 1801 1736 1647

433 436 443 564 721 888 1066

219 344 441 451 463 475 500

1 1 7 19 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 Total employees across the globe (approximately) Number of stores worldwide Number of new stores opened in 2003 (worldwide) Total number of suppliers Wal-Mart’s rank/position among all retailers across the globe (in terms of sales) Number of pallets shipped by Wal-Mart truck every week (2002) Total occupied floor area of Wal-Mart (2002) Yearly advertising expenditure (2002) Highest one-day sales record till date (November 28, 2003) Number of customers every week at Wal-Mart stores worldwide (approximately) Estimated market capitalization of Wal-Mart in 2020 Source : Wal-Mart Annual Report 2003

$244.5 billion 1.3 million 4,688 274 65,000 1 50 million 18.3 square miles $498 million $1.52 billion 138 million $11.1 trillion

Revenue (%) of the major consumer goods companies in the US through Wal-Mart Company P&G Tandy Brand’s Accessories RJR Tobacco Dial’s Del Monte Foods’ Clorox’ Revlon’s % Share (As a % of total sales) 17 % 39 % 20 % 28 24 % 23 % 23 %

Source : BusinessWeek, October 2003  …. and the journey still continues …

PRESENTED BY :~o o o o o o Prashant Wankhede Prajakta Sane R. Maruthi Yeshwanth Vikram Gharmalkar Mehul Chheda Nitin Agrawal