In a society that has seen such a drastic downturn in the economy, people are searching for the best possible bargains they can find. People across the United States are looking for ways to save money; thus, searching for stores that will provide them with everything they need at a lower cost. Companies all over the United States are fighting to stay competitive and are seeking ways to restructure their company and still provide for consumers the best possible prices. Companies such as Wal-Mart do not have to change their structure to fit the demands of consumers because it already offers its customers brand name items at lower prices. Wal-Mart’s basic structure has helped make it a powerful retail business, and a place consumer’s love.
Wal-Mart Stores Inc. opened its first discount store in 1962, Sam Walton had no idea his business would be the success that it is today. The reason for Wal-Mart’s success is their ability to create a basic structure for their business. Wal-Mart offers a variety of well-known brands and sells them at about 5-10% cheaper than other retailers. This makes Wal-Mart a powerful force in the retail business. Wal-Mart Stores is considered an oligopoly market structure. Colander (2008) defines oligopoly as a market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors. With their continued success, Wal-Mart’s market structure could also be considered a monopolistic competitive structure. Wal-Mart has all the characteristics of a monopolistic competitive structure as described by Colander (2008), they have many sellers, offer differentiated products, and they exhibit multiple dimensions of competition. Wal-Mart’s success lies in their product differentiation through advertising. Although advertising has a wide range of costs and benefits, it is common with differentiated consumer products.
There are various forms of advertising, such as, television, radio, direct mail, billboards, etc. Wal-Mart’s ability to advertise their products with minimal cost has increased their longevity in the world’s market. Wal-Mart uses advertising to foster competition by giving more information on pricing and availability. Wal-Marts’ advertising strategies reveal a signal of quality; because their willingness to spend money to advertise products is a sign that Wal-Mart has confidence in its quality. This makes it easier for consumers to purchase products from Wal-Mart even if the content of its ads is minimal.
Impact of New Companies Entering the Market
Currently, there are over 7,800 Wal-Mart stores worldwide and they are in 16 different markets throughout the world. Throughout the company, Wal-Mart employs over 2 million people and serves over 100 million customers a year. Any new company who wants to enter in the same market as Wal-Mart needs to be careful. With the reputation that Wal-Mart has established, they take much of the business away from other companies. As for those other companies having an impact on entering the same market, it will be minimal or non-existent unless the new company is specialized in something that Wal-Market does not offer. Now that Wal-Mart is branching out into other areas of the market, such as groceries, it is going to have a bigger impact on smaller local grocery stores that are in the same area.
Wal-Mart consistently advertises their low prices. When consumers visit Wal-Mart’s website or the store in person, they do find the prices at Wal-Mart to be more competitive. An advantage of Wal-Mart’s low prices is that it helps to keep the prices low of other competitors in the market. Consumers also find this store to be very convenient. Since many of Wal-Mart’s locations are becoming super centers, people can do most of their shopping in one trip. By keeping its prices low, Wal-Mart is helping its consumers to buy more for less. This keeps the consumer coming back. However, since Wal-Mart is a large retailer and it operates in a perfect competitive market, it has to be a price taker. Even with its increased sales, Wal-Mart has no control over prices. The company has to be very careful about its prices in order to maintain the market share. The prices cannot be too high or too low. If the prices are too high, Wal-Mart will lose its customers. This will result in losing sales as well as market share because there are many other competitors in the market that offer the same product. Too low prices will not produce any profit or market share gains for Wal-Mart. Thus, Wal-Mart must go with the market-based pricing approach.
Wal-Mart uses a wide range of technology. When a company fails to recognize the importance of technology, the company runs the risk of being overtaken by competition. It uses a merchandise scanning system that let the managers or employees know if the stock on a shelf is getting low so they can be responsive to consumers’ buying habits, and make sure the items they are looking for are there for them (Solman, 2004). Another recent technology that Wal-Mart has implemented is self-checkout registers. This technology has made it easier and faster for consumers. Instead of waiting in long lines, they can just check themselves out and save some time. As this technology replaces employees, Wal-Mart can save the money that they paid to their cashiers. This could help the company to keep its prices low and attract more consumers. This will also help Wal-Mart stay ahead of the competition, like Target, who has not yet implemented this new self-checkout system yet.
Having a payroll of 2 million people there are some issues with diminishing marginal productivity, but Wal-Mart is not concerned with output. There primary goal is to save the customer money and uphold the highest level of customer service that they possibly can. That is why they sacrifice their overall productivity for the customer. Wal-Mart will even create jobs that do not necessarily help in their productivity, but do in customer service such as the greeter. The greeter will stand at the front door and greet customers as they enter the store. The primary purpose of the greeter is to make the customers experience a more enjoyable one. This will entice the customer to return or spread the word on how great Wal-Mart treats their customers.
Many aspects affect the cost structure of a company. One of them would be economy. Wal-Mart offers low wages and benefits to its employees. When the economy is in a slump, consumers tend to be very careful with where they shop. This is when Wal-Mart takes advantage of the demand for low prices. Downturns in the economy, allows Wal-Mart to pay lower wages and provide fewer benefits to their employees. There are several costs associated with operating a business. Some of these costs are fixed costs and others are variable costs. Fixed costs are costs that do not change. Variable costs change according to a companies business activities. “Wal-Mart has fairly low levels of fixed costs, while its variable costs are large. Merchandise inventory represents Wal-Mart’s biggest cost. For each product sale that Wal-Mart rings in, the company has to pay for the supply of that product (McClure, 2009).” However, Wal-Mart is always careful about monitoring its costs so that it could pass the savings to the consumers.
Price Elasticity of Demand
Colander (2008) defines price elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. Wal-Mart’s presence in various communities across the nation affects their price elasticity of demand. Factors that affect Wal-Mart’s price elasticity of demand include the location of their store, the income level of the consumers, and the location of their competitor’s stores. Wal-Mart offers a wide variety of goods and services, as do their competitors, like K-Mart and Target. However, consumers tend to purchase goods and services from Wal-Mart’s competitors when the consumer’s income increases. This is due to the quality of the goods and services offered by competitors. Wal-Mart seems to increase their revenues when the consumer’s income decrease, that is Wal-Mart’s prices are less elastic with respect to income than prices at other stores. Because Wal-Mart’s revenue is based on consumer’s income, it could be considered inelastic. Whereas, the percentage changes in quantity is less than the percentage change in price (E< 1).
Wal-Mart faces limited competition. Because of the company’s size and sheer volume, it is very hard for any corporation or business to compete globally. Wal-Marts’ main competitors include other discount and wholesale retailers such as Target, Kmart, and Costco, with Target being the front-runner. Though Target competes with these companies nationally, Wal-Marts’ sales are
almost triple of that of Target alone. This does not include Wal-Marts’ global stores. Wal-Mart has recently taken a large amount of flack for being a conglomerate and coming in to communities and putting small businesses out of business for good. The company is able to go to vendors and demand prices lower than other retailers because of their size. This causes prices to go up for small businesses and of course consumers flock to the lower prices Wal-Mart offers. There is no true competition for the company at this time.
Supply and Demand Analysis
Wal-Mart has much purchasing and bargaining power because of how much it is able to sell. The corporation is able to negotiate much more with suppliers because of its size and how much product it has proven to be able to move. Wal-Mart has the ability to change prices based on demand because its customer base will still buy. Wal-Marts’ supply and demand process is known to be one of the best in the industry. “It gives the company total supply chain visibility, faster receiving and shipping, improved quality inspection, fewer out-of-stock items – resulting in improved shopper satisfaction, greater predictability in product demand, and a better value for the customer as the supply chain becomes more efficient.”(Langford,Simon)
Impact of government regulations
Government regulations have affected Wal-Mart greatly. The company ensures it complies with all environmental regulations and has even gone a step further by improving its processes to go green. “The Global Innovation Project, another of Wal-Mart’s green initiatives, focuses on minimizing the use of non-renewable energy in the products it sells. (5) For example, in the case of home electronics, next year suppliers must complete scorecards to evaluate their products’ energy efficiency, durability, and upgrade-ability and end-of-life solutions. (6) The products therefore will be ranked against their competitors on these metrics and cradle-to-grave issues. Scorecard results can be displayed on the packaging at point of sale, influencing the consumer.” (Kromidas,Ebert,2007)
This is just one of Wal-Marts’ ways of complying with government regulations. Wal-Mart also has implemented a new policy for all chemical products they sell. It undergoes a Chemical Assessment process. This definition of a chemical product puts cosmetics on par with household cleaners, and lawn, garden, and car care products. This Wal-Mart initiative is designed to enhance its current compliance process and assist in furthering its environmental sustainability efforts. (Kromidas, Ebert 2007).
When stores like Wal-Mart provide for its consumers brand name items at retail prices, consumers will find it very hard to find stores that will compete with Wal-Marts’ prices. Wal-Mart is a powerful retail store that will always remain at the top of people’s list. Its structure is one that is dominant and has the consumer’s best interest at heart.
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