Case study #3 - Wal-Mart Stores' Discount Operations
Discount Retailers sell goods to customers in large warehouse-like stores. On average, soft goods in the industry such as: apparel, linen and fabric, account for 35% of sales, and hard goods account for 22%, the rest being foods and other goods. The source of competitive advantage in this industry is cost leadership, and in order to enable low prices, discount stores cut costs to the bone: ancillary services are limited; stores are unluxurious; in-store service is minimal. Furthermore, retailers work with centralized purchasing. The industry is characterized by low profit margins, 10%-15 % lower than its substitutes such as supermarkets, department stores and local retail stores. This industry is cost intensive, with an advantage to scale, requiring efficient distribution chains, large warehouses and store space and complex store operations. As a result, entrance barriers for new entrants are high. Originally, this is what led to consolidation of the retailers into a few nationwide chains: K-Mart, Sears, Target, Caldor, Venture and of course Wal-Mart, making the industry an oligopoly. 2) The key source to Wal-Mart’s competitive advantage was its omnipresence throughout the US including less populated areas. Since few distributors reached these locations, Sam Walton purchased a large warehouse, allowing him to make large orders and consequently lowering cost and providing customers with the same low prices as in larger populated areas. In the 70’s-80’s over half of Wal-Mart’s stores were located in 5,000-25,000 citizen towns, a higher proportion than the rest of the industry. About one third of Wal-Mart’s stores were located in metropolitan areas or counties that were not served by any other competitor. During these years the population had grown faster in the sun belt than in the rest of the US and with it Wal-Mart. When competitors began encroaching Wal-Mart’s locations, Wal-Mart...
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