304-098-1
ICFAI
Eien eas
Wal-Mart’s Cost Leadership
Strategy
This case wat ertien by Konakanchi Prashanth, under the direction of
Vivek Gupta, ICFAI Center for Management Research (CMR). Its intended t0 be
used as the basis for clase discussion rather than to illustrate etther effective or
ineffective handling of a management situation.
‘The case was compiled from published sources.
ECCH Collection
0H, ICFAI Center for Management Reseach (ICMR), Hyderabad, india
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See E ares
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WAL-MART’S COST LEADERSHIP STRATEGY
“There's nothing ike Wol-Mar. They're so mach Bigger than ay retailer has ever been tha i's
not possible to compare.”
= Ira Kalish, Global
tor of Deloitte Research.
INTRODUCTION
For the financial year ending January 31, 2003, retailing giant Wal-Mart reported revenues of
$24.5 billion, making it the world’s largest company. The company topped Fortune's list of the
‘world’s largest companies for the second year in succession (Refer Exhibit 1). Considering the
modest beginning of this company four decades ago, nobody, including the company officials
‘expected Wal-Mart to emerge such a dominant player in the retailing industry (Refer Exhibit 1),
Wal-Mart's success story is a classic example of a company, which became successful by
rigorously pursuing its core philosophy of cost leadership, right from the day it began operations
in 1962. Wal-Mart was founded by an ambitious entrepreneur, Sem Walton (Welton), who
figured out early that retailing was a volume-driven business, and his company could achieve
success by offering consumers better value for their money.
Wal-Mart’s growth during the first two decades was propelled primarily by following the
strategy of establishing discount stores in smaller towns and capturing significant market share,
‘The company was able to foster its growth in the 1980s by making heavy investments in
information technology (IT) to manage its supply chain and by expanding business in bigger
metropolitan cities. In the late 1980s, when Wal-Mart felt that the discount stores business was
maturing, it ventured into food retailing by introducing Supercenters. In the late 1990s, Wal-Mart
launched exclusive groceries/drug stores known as “neighborhood markets” in the US (Refer
Exhibit ID for the various types of Wal-Mart stores).
‘Though Wal-Mart had achieved huge success over the decades, the company drew severe
criticism from industry analysts for its strategies that aimed at killing competition. At the speed at
which Wal-Mart was growing, analysts feared that the company would soon face at anti-trust
suit’ for its monopolistic practices. Christopher Hoyt, president of Scottsdale, an Arizona-based
supermarket store, Hoyt & Company, said, “The only thing that could stop Wal-Mart is if the
government gets involved, just as it did with Microsoft.”
WAL-MART'S AGGRESSIVE PRICING
On July 2, 1962, Samuel Moore Welton (Welton), a merchant with over 15 years of experience in
retailing, set up his first discount store in Rogers, a small town in the state of Arkansas, US. The
store offered a wide variety of branded merchandise at a competitive price, During the initial
As quoted in the article, “Is Wal-Mart Too Powerful?,” by Anthony Blanco and Wendy Zeliner, in
Business Week, dated October 6, 2003,
* Legal proceodings against companics which achieve a monopoly status in an industry in which they
‘operate, Proceedings can also be filed against corapanies which Use aggressive tactics such as price fixing,
‘which could restrain competitive forces. The purpose of, the antirust policy is w promote aggressive
competition in the markets and to prevent monopolistic ebuses
* As quoted in the article, “Inside the Battle to Beat the Market” by Alice Z, Cuno
‘wwwadage.com, dated October 6, 2008,
, posted on304-098-1
yeers, Walton focused on establishing new stores in small towns, with an average population of
5,000, These towns were largely neglected by Icading retailers like Sears Roebuck & Company,
K-Mart and Woolco, which concentrated more on larger towns and big cities.
this efforts to attract people from the rural areas to his stores, Walton introduced the concept of
every day low prices (EDLP). EDLP promised Wal-Mart's customers a wide variety of high
quality, branded and unbranded products at the lowest possible price, offering better value for
their money. Wal-Mart's advertisement describing EDLP said, “Because you work hard for 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 Wal-Mert."*
From the very beginning, Walton made efforts to procure products at the lowest prices possible
from manufacturers. He always shared these savings with customers by charging them lower
prices, thus giving them the maximum value for their money. Wal-Mart's products were usually
priced 20% lower than those of its competitors. Walton’s pricing strategy led to increased loyalty
from price-conscious rural customers. It-helped the company: to generate more profits due to
larger volumes. Explaining his pricing strategy, Walton said, “By cutting your price, you can
boost your sales to a point where you eam 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 extremely attractive to rural customers and emerged as the key contributor to Ws
Mart’s growth over the years. The strategy of setiing up large discount stores in small towns
‘worked wonders for Wal-Mart. The stores attracted a sizeable customer base. The customers had
1a wide variety of branded merchandize to choose from, that were priced attractively. Wal-Mart,
stores were located at convenient places in dig warehouse-ype buildings and catered to those
‘customers who bought merchandise in bulk.
‘The strategy discouraged competitors since it was impractical for them to compete with Wal-
‘Martin small towns by setting up stores of such size, owing to the lack of volumes. As Wal-Mart
Continued to build on its store count, it ensured that it recruited and retained service-oriented
individuals who were prepared to go the extra mile to serve customers better.
This pricing strategy worked extremely well for Wal-Mart. By 1967, Wal-Mart had 24 stores,
generating total revenues of $12.6 million. In October 1969, Wal-Mart was formally
incomporaied, with its headquarters at Bentonville, Arkansas. By the financial year ending
January 1970, the company’s revenues had crossed $31 million and its store count was 32,
ACHIEVING COST LEADERSHIP
Offering products at EDLP, especially during its early years, when Wal-Mart was not an
established retail player, was quite difficult, The company aggressively followed a cost
leadership strategy that involved developing economies of scale and making consistent efforts 10
reduce costs. The surplns generated was reinvested in building facilities of an efficient scale,
purchasing modem business-related equipment and employing the latest technology. The
investments made by the company helped it to maintain its cost leadership position.
* Ag quoted inthe article, “Pricing Philosophy,” posted on wwwewaimarteom,
5 sg quoted in the article “Pricing Philosophy,” posted on www. walmart.com.