The Structure of Wal-Mart: Consumer Factors

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Wal-Mart is one of the largest companies in the world and is a global leader in retail sales. Consumer demand for low prices had led to unique structural elements which Wal-Mart employs in order to reduce overhead and overall costs. Some scholars have noted unfair labor practices in place at Wal-Mart such as the prevention of union formation, denial of hours, proper employment status, and benefits (Greenwald, 2005). Though Wal-Mart has its detractors, no one can argue with the fact that strong sales and growth cement Wal-Mart’s status as a pervasive, effective retailer (Greenwald, 2005). Currently the world’s biggest retailer, Wal-Mart took in nearly $17 billion in net income from $420 billion in revenue in 2011 (Sethi, 2013). Wal-Mart also employs more people than any other company with 2.1 million employees worldwide in 2010 (Sethi, 2013). 200 million customers visit Wal-Mart each

From its humble origins in Bentonville Arkansas, Wal-Mart has grown beyond anyone’s expectations and penetrated new sectors such as grocery and new markets including Mexico and other places worldwide. CEO C. Douglas McMillon is leading Wal-Mart in a direction which is focused primarily on lowering costs and increasing investor earnings. One roadblock to Wal-Mart’s discount strategy is that some consumers no longer see Wal-Mart as a low-price leader (Study: Walmart, 2011). Consumer loyalty has a strong effect on the success or failure of large businesses and is a prime drive behind the design of marketing and the pricing and availability of different products. Viewed through a microeconomic lens, Wal-Mart offers both complementary and substitute goods to consumers. When assessing the nature of Wal-Mart’s effect on consumer behavior, it is useful to examine the history, structure, and relevant consumer and supplier data.

History of Wal-Mart

Walmart was founded by businessman Sam Walton in 1962 and was formally incorporated in 1969. He had an ingenious idea on how to succeed in previously underserved markets: decrease mark-up and keep costs low by increasing sales volume to attain profits. He started Wal-Mart as a small discount retailer but expanded within Arkansas and across the U.S. Wal-Mart experienced rapid growth in the discount retail sector and pioneered many important aspects of mass retail methods. When Wal-Mart expanded to dominance in the discount sector, “the primary casualties were small chains and sole proprietorships” which were forced out of the market by the volume and low-prices which dictate Wal-Mart’s strategy (Ellickson & Grieco, 2013).

Structure of Wal-Mart

Wal-Mart is a large online and big box-based retailer who sells a variety of products and services to consumers through its international chain of locations. There is a semi-hidden logistical behemoth of communication, transport, and tracking networks which facilitate the low prices on the shelves. Wal-Mart has been a pioneer in the technique of cross-docking, whereby trucks are loaded with goods directly from other trucks with no lag created by warehouse storage. Information from supplier estimates, expected demand and instantaneous internal estimates of inventory are used to direct the transportation of items to the highest priority outlet. This rapid movement of goods is transparent to consumers, but allows for extremely high volume, turnover, and the ability to supply goods at lower prices than competitors, particularly where consumer demand is high. Wal-Mart is a model for structuring relationships between vendors, business, and consumers on a massive scale. By connecting the point of supply to the point of sale quickly and cheaply, Wal-Mart profits from each successful microeconomic transactions it facilitates. Although all employees and stores ultimately answer to the management at the headquarters in Bentonville, AR, the decentralized approach to managing the movement of goods has been a tremendous boon for the ability to deliver low consumer prices.

How Consumer and Supplier Behavior Affects Supply and Demand

In a model which large corporations such as Wal-Mart and McDonalds have used in the past, but others have maligned, the large corporate retail buyer dictates the terms, conditions, and scale of the relationship between buyer and seller from above. Wal-Mart is able to leverage its ability to ship huge amounts of product to demand low prices from its suppliers and manufacturers (Bloom & Perry, 2001). Suppliers can countervail against Wal-Mart’s negotiating power by “leveraging a well-known brand name or capitalizing on consumer loyalty” to the specific supplier’s brand itself (Bloom & Perry, 2001).

Since the 1990s, Wal-Mart has diversified its retail offerings by adding groceries and other services including automotive, and partnerships with other businesses such as nail salons, fast-food restaurants, and optical specialists. However, the high transport cost and perishable nature of groceries mean that Wal-Mart is less able to use its advantages in economies of scale to leverage success in this sector (Ellickson & Grieco, 2013). Wal-Mart’s efforts toward diversification have the main goal of attracting and retaining consumers to their stores and online retail presence.

Consumer behavior has a major impact on the supply and demand curves of various commodities. Consumers desire low prices, convenience, and good customer service. Certain demographics of consumers have different needs and wants, such as baby boomers vs millennials, men vs women, and high-income vs low income. For example, many modern consumers desire an environmentally conscious component to the goods and services they purchase. Wal-Mart responded to this demand in 1989 by increasing the supply of green goods and branding and marketing initiatives to portray their products as environmentally friendly (Plambeck & Denend, 2008). However, this backfired because of lacking quality controls. In recent years, Wal-Mart has continued to commit to providing sustainable consumer goods by reducing environmental impact of its stores, relying on renewable energy sources, and finally, to sell eco-friendly products (Plambeck & Denend, 2008).

By retailing organic cotton T-shirts and sustainably harvested fish, Wal-Mart has provided some goods aimed directly at environmentally conscious consumers which are slightly more expensive, but still cheap (Block, 2013). Even Greenpeace has argued that Wal-Mart’s brand lends legitimacy to the sustainable aquaculture initiative, though they remain skeptical of the company’s environmental practices as a whole. This introduction of substitute goods for high priced organic and green categories means that Wal-Mart may increase the demand for these goods if they can bring them to market under the price of their competitors. Recognizing the need to adapt to changes in consumer habits, Wal-Mart has introduced strategies to cull “legacy and slower-moving items such as boom boxes and landline phones…and an enhanced web strategy” (Wolf, 2011). Putting the items customers want to see on the shelves is step one in connecting suppliers to consumers. Consumer behavior with regards to brand experience and loyalty are important to Wal-Mart’s ability to meet their demands.

Consumer Brand Loyalty

Consumers are loyal to brands they perceive as meeting their needs in different areas such as price, quality, convenience, and other economic and psychological facets (Brakus, Schmitt & Zarantonello, 2009). Consumers identify with Wal-Mart’s brand experience, which has multiple factors including “sensory, affective, intellectual, and behavioral” areas, has an indirect and direct effect on “consumer satisfaction and loyalty” (Brakus, Schmitt & Zarantonello, 2009).

Some consumers, up to nearly 10% of Wal-Mart customers, have stopped shopping there because of concerns about Wal-Mart’s corporate ethics including environmental flubs (Plambeck & Denend, 2008). As opposed to Target’s strategy of emphasizing their brand’s connection to “bright, comfortable stores, apparel selection, and fast checkout,” Wal-Mart has chosen a strategy that places “price leadership” first above all other factors (Berry, 2000). If other retailers try to compete with Wal-Mart on price alone, they will compromise other positive aspects of their brand, even if those added values cost significant money (Berry, 2000).

Wal-Mart has its own substitute brand for many goods including groceries called “Best Value,” which epitomizes the mission of the company and the line itself: products of equivalent quality at a lower price. Consumers are loyal to brands which provide a quality experience, including intellectual perceptions such as price, and emotional considerations such as ease of use . Changes in the price of Wal-Mart’s substitute brand will affect the demand for similar products, generally driving it down and leading to a change in the supply-demand equilibrium. The service received at Wal-Mart is also an intrinsic part of brand experience for customers (Berry, 2000).

Customer Service

A re-organization in 2007 created two new internal departments within Wal-Mart:

“’consumer experience’ and planning, pricing, and replenishment (Wolf, 2007). Customer service is an important part of Wal-Mart’s business model. Wal-Mart places pricing ahead of customer service, but as consumers realized this, management responded with increased efforts to provide high quality service. Customer service is integral to brand management, and the experiences a customer has on the store and shelf level impact sales, growth, and revenue on the larger scale (Bloom & Perry, 2001).

How Suppliers Influence Cost Within the Industry by Offering Discounts and Incentives to Their Customers

Discounting is the primary way that Wal-Mart historically generated massive growth in both purchasing power from suppliers and consumer sales, though at the cost of wages and, in some cases, supplier employee wellbeing (Greenwald, 2005). The Wal-Mart “Low price guarantee” tells consumers that they offer lower prices than any competitor. In terms of suppliers of goods and raw materials, whereas in the past large companies like Wal-Mart chose partners solely “on the basis of the cost and quality of their products,” resulting in “relationships with suppliers” which are “transactional and short-lived” (Plambeck & Denend, 2008). Some suppliers suffered from this style of business relationship, particularly if they identified Wal-Mart as their primary customer (Bloom & Perry, 2001). In part because of these failures to help suppliers succeed along with Wal-Mart as purchases and consumer sales increased, a new strategy has been developed to engage suppliers in a more holistic way. For example, Wal-Mart “shares daily sales information and works with P&G [Proctor & Gamble] in product warehousing and replenishment” so that consumers can receive goods at their desired price (Prahalad & Ramaswamy, 2000).

Now, Wal-Mart is going beyond discounting by looking at the factors of human capital in supplier sales. Employing buyers for long time periods encourages supplier loyalty and allows for a closer working relationship between Wal-Mart and its vendors. Wal-Mart has transformed its vendor relationships by widening the number of employees involved in a sale and the length of contact with a supplier, working to engage every level of relevant staff in both organizations. Discounts offered on substitute goods lead to decreased opportunity costs, so given equal satisfaction, demand for higher priced goods will decrease accordingly. Wal-Mart exerts control over its trade partners and even consumers by consistently negotiating the lowest price for a given product or contract (Bloom and Perry, 2001).

Wal-Mart is able to impact this pricing equilibrium by driving prices down and demanding that vendors charge less for larger amounts of goods, this leads to decreased consumer costs and increased profits. Generally, high demand will lead to a decrease in supply of lower cost substitutes, and thus a price increase and retraction in demand for this substitute. However, Wal-Mart’s pioneering use of logistics, inventory tracking, and ability to predict consumer demand means that supply generally meets any demands placed on it by consumers, leading to a stable or decreased price for many products.

Conclusion

Wal-Mart is the largest retail operation and employer on Earth. It has used this economy of scale to bring nearly every type of consumer product to market at a lower price than competitors. Its own efforts at branding and building loyalty to the Wal-Mart brand have had some setbacks, but are indicative of an overall trend of persistence, resiliency and growth over time. Consumers love the options and choices provided by Wal-Mart in terms of low cost and wide availability, but some customers have ethical qualms about employee treatment and environmental impact, which lower demand regardless of price. Small suppliers have been concerned about their being ignored, but Wal-Mart’s management has attempted to stave off these issues by strengthening vendor relationships. The main goals of Wal-Mart as a company remains the same as it was when Sam Walton founded it: low price, low markup, high volume. This has led to different effects on consumer and supplier behavior, both negative and positive and Wal-Mart has an ongoing process of adjusting strategies accordingly in order to keep customers and vendors happy and meet the bottom line. Future changes in the market such as 3-d printing may lead Wal-Mart to further evolve their logistical model to accommodate consumer needs.

References

Berry, L. L. (2000). Cultivating service brand equity. Journal of the Academy of Marketing Science, 28(1), 128-137.

Block, B. (2013). Wal-Mart scrutinizes supply-chain sustainability. Worldwatch Institute. Retrieved from http://www.worldwatch.org/node/6200

Brakus, J. J., Schmitt, B. H., & Zarantonello, L. (2009). Brand experience: What is it? How is it measured? Does it affect loyalty?. Journal of Marketing, 73(3), 52-68.

Bloom, P. N., & Perry, V. G. (2001). Retailer power and supplier welfare: The case of Wal-Mart. Journal of Retailing, 77(3), 379-396.

Ellickson, P. B., & Grieco, P. L. (2013). Wal-Mart and the geography of grocery retailing. Journal of Urban Economics, 75, 1-14. Study: Walmart no longer perceived as low-price leader. (2011, August 22). Home Textiles Today.

Greenwald, R. (Director). (2005). Wal-Mart: The high cost of low prices [Motion picture]. USA: Brave New Films and Disinformation Company.

Plambeck, E. L., & Denend, L. (2008, Spring). The greening of Wal-Mart. Stanford Social Innovation Review, 0. Retrieved from http://www.ssireview.org/articles/entry/the_greening_of_wal_mart

Prahalad, C., & Ramaswamy, V. (2000). Co-opting customer competence. Harvard Business Review, 79-87.

Sethi, S. P. (2013, May 8). The world of Wal-Mart. The World of Wal-Mart. Retrieved from https://www.carnegiecouncil.org/publications/ethics_online/0081

Wolf, A. (2011, June 6). Walmart balancing mass and class amid long recession. TWICE.

Wolf, A. (2007, February 12). Wal-Mart reorganizes merchandising, marketing structure. (Wal-Mart Stores Inc.). TWICE.