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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 etn ts See E ares onamnnrorvenwercnsee a | e 304-098-1 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 on 304-098-1 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.

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