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Jack Hubbs: Has Walmart Lost it's Edge?

  Views from Food for Thought

                              This is the 209th edition of Food for Thought 


  Volume 6  Issue 4        By Jack E. Hubbs      February 26, 2013         



            Has Walmart Lost it's Edge?





      Jack E. Hubs




If you think a business associate or friend would find value in this letter please feel free to forward.


   Jack E. Hubbs




  Supermarket Owner



Regional Retail Chain 






   MBA, BA, AA   



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There has been a lot in the news media about Walmart's leaked emails referring to "disastrous" sales start for February.  First reaction referred to the payroll tax increase and the delayed tax returns as the reason.  Often "short term" explanations camouflage true cause and affect relationships. While the payroll tax change and tax refunds have an affect.  The level of this affect should be seen in other retail businesses relative to their historical trends. 


 Often it is said Target which had January comparative store sales increases of 3.1% compared to Walmart's 2.1% enjoy this variance because  the average household income of their shoppers is higher than Walmart.  However, there are other considerations to this oversimplified explanation.  Income averages are a distorted analytical tool.  More likely  the distribution of shoppers income is in the margins.  This could reflect Walmart and Target competing head to head for 60 to 70% of the same income base of customers with Walmart having a higher proportion of lower income shoppers and Target a higher proportion of high income shoppers



The primary explanation for Walmart's struggle to achieve their sales goals may be tied directly to Walmart's decision to shift from being price competitive on the item level to being price competitive at the "market basket level". 


What this does for the Walmart corporate pricing managers and store  managers is to give them more flexibility to increase gross margin by increasing prices.


It also reflects a shift from a customer focused pricing structure to a corporate focus on gross margin.


This shift in focus affects the reaction of their customers, competition and suppliers.


The customers reaction is best described in economics 101.  As the price increases demand decreases.


As Walmart increases pricing they "reduce" the price gap with competition which makes it much easier for competitors to rationalize their pricing to customers.  In fact some retailers are actually running ads with "favorable market basket pricing comparisons with Walmart".  These kind of promotions demonstrates competitors confidence they can compete with Walmart. 


Walmarts volume continues to give them incredible leverage in negotiating prices from suppliers.  In the past suppliers had two incentives one was the volume of Walmart and the knowledge their product would be the lowest price always.  This second incentive is gone.


Shifting the focus from item pricing to gross margin will also affect the decisions made by internal buyers and merchandisers.  If your focus has shifted from an item based pricing emphasis which is customer focused to a gross margin emphasis decisions on choice of assortment and level of pricing now are operating in the arena of "how do I increase gross margin" and no longer are focused on "what are the pricing, quality and branding needs of my customer".  The corporate imposed discipline of having to sale an item at the lowest price is gone. 


This shift from customer based pricing to a gross margin emphasis is best explained by the understanding that the growth of sales in the USA for Walmart  is limited.  Sales growth are limited by the availability of new store sites which have a sufficient customer base to support the building of large stores. Walmart corporate recognized the eventual limitation on growth in the USA years ago and responsibly developed their international division. 


Walmart hasn't lost it's edge but has exhausted it's ability to drive strong sales growth in the USA.  With relatively low sales growth in the USA margins will have to improve to off set expense increases.  However, the sales potential for the total company remains strong as they aggresivley grow thier international market.