Walmart, the world’s largest retailer, always offers merchandise at relatively low prices as compared to its competitors. Let us see how it manages to keep its prices so low.
Nearly every third person in the United States visits a Walmart store every week, and the reason people flock so regularly to this store is because of its low prices strategy. Ever wondered how Walmart manages to maintain low prices, almost driving away other retail chain stores from the area? Here are some strategies applied by Walmart.
I guess, Walmart will not need any introduction. Still, some readers might want to know the facts given below.
Founded by Sam Walton, and headquartered in Bentonville, AR, the first Walmart opened in Rogers, AR in 1962. It enjoys the unique distinction of being the world’s biggest private employer. It sells everything from general merchandise, to groceries, vegetables, and most stores also house a pharmacy, photo processing center, optical center, a mobile phone store, garden center, pet shop, Tire and Lube Express, and even a fast food outlet.
Strategies Behind the Low Prices at Walmart
Low Cost Leadership
To arrive at such consumer-friendly rates, Walmart focuses on the strategy of low cost leadership. This strategy gives them a competitive advantage over their rivals. It maintains a low cost of operation, and this enables Walmart to produce and sell goods of competitive or even better quality, at lower costs than other retailers. Walmart gradually increased its market share by striving to decrease its cost of operation, even lower than other retail chains. It did so by offering high volumes of basic commodities, and by limiting or cutting back on personalized service. It looks to innovate not by focusing on new product development, but by concentrating extensively on process improvement.
Economies of Scale
Walmart benefits from the concept of economies of scale, which causes its average production costs to dramatically fall, and output to increase. It does this by purchasing materials in bulk from vendors by having long-term contracts in place. Another factor is Walmart tries to obtain low interest rates from banks when it borrows large sums of money. It also tries to reduce its marketing costs by distributing its advertising costs over a wider output range. These factors are instrumental in reducing their average production costs. Targeting the mass market with tried and tested products has always been Walmart’s strategy.
Low Operation and Production Costs
Walmart maintains low operation and production costs by using standard and less number of component parts. It tries to keep overhead expenses to a minimum by offering low wages to workers and leasing sites in low-rent areas. Goods are manufactured in countries where labor is very cheap. To keep up with low operation costs in every aspect of its business, it controls production costs, and limits costs involved in outsourcing, distribution, advertising, and research and development.
Effective Supply Chain Management
Walmart started the EDLP (Every Day Low Prices) approach. To make the most out of this technique, Walmart also has a very effective supply chain management in place, to ensure it keeps its prices low. It maintains a tight control over its logistics, transport, and inbound supplies. Being a tough negotiator, it exerts a fair deal of bargaining power over all its suppliers. It ensures that its suppliers maintain very low production prices and produce items on a large-scale. This enables Walmart to buy bulk quantities of the product at the lowest price possible.
When it comes to transportation of goods, Walmart owns an extensive fleet of trucks which ensures that all products are delivered to its stores through the network of distribution channels in the least amount of time possible. By eliminating middlemen and not depending on external transport supply chains, Walmart cut down heavily on its business costs. Using the technique of cross-docking effectively, Walmart has eliminated any inventory handling, storage, and warehousing costs, ensuring products reach the distribution centers and from thereon, to its vast customer base at a faster rate.
Radio Frequency Identification Tags
RFID (Radio Frequency Identification Tag) tagging, an innovative use of information management, helps Walmart keep an accurate and up-to-date record of its inventory all over the country. Goods are tagged at the time of manufacture, and the sale of goods is relayed to all its distribution centers and suppliers. This means that the goods that are sold are replaced back on the shelf with new products within no time, thanks to the exemplary use of information technology.
With a low cost, high volume strategy, excellent store locations, and exceptional use of economies of scale, Walmart continues to offer low prices on its goods. Little wonder then, the retail giant is able to maintain its stronghold in the marketplace, generating high returns and maintaining a loyal customer base.