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Walmart's cost leadership strategy
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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