Walmart The Silent Killer

Wal-Mart is now the largest grocery chain in the U.S., with 14 percent of all grocery sales -- nearly twice the sales of Kroger ($95 billion vs. $51 billion). Wal-Mart also does 20 percent of the retail toy business.

Wal-Mart went public on October 1, 1970. Since then its stock has climbed from 5 cents (split adjusted) to a high of $63 in March 2002. Its stock has dropped more than 20% since then, reaching a low price of $42.31 on September 22, 2005.

For the fiscal year ending January 31, 2006, Wal-Mart reported net income of US$11.2 billion on US$316 billion of sales revenue (3.5% profit margin). It is the largest private employer in the United States, Mexico and Canada. It holds an 8.9 percent retail store market share, with $8.90 out of every $100 spent in U.S. retail stores being spent at Wal-Mart.

Different explanations have been offered for this success:

The company has always paid a great deal of attention to site selection; in the company's early years, Sam Walton would fly over small towns in a private plane to identify prospective locations. The company claims it analyzes potential locations to find those that would support "one and a half" stores. Although the intended location was a seemingly small rural town, being up in a plane would reveal a lucrative market if the surrounding communities were taken into account, defying the conventional wisdom that a discount store requires a sizable city. Wal-Mart then promptly moved quickly to pre-empt these discovered locations, since allowing a competitor to locate would likely cause a price war that would make both discount stores unprofitable. Lastly, rural towns were less likely to have organized unions and community activists unlike large urban centers. "This strategy gave Wal-Mart a near monopoly in its local markets and enabled the company to ride out the recessions of the 1970s and 1980s more successfully than its then larger competitors such as K-Mart." [15]

Wal-Mart benefits from economies of scale in manufacturing and logistics; the purchase of massive quantities of items from its suppliers combined with a very efficient stock control system help make Wal-Mart's operating costs lower than those of its competitors. They are leaders in the field of vendor managed inventory--asking large suppliers to oversee stock control for a category and make recommendations to Wal-Mart buyers. This reduces the overhead of having a large inventory control and buying department. Wal-Mart's vast purchasing power also gives it the leverage to force manufacturers to change their production (usually by creating cheaper products) to suit its wishes: a single Wal-Mart order can easily comprise a double-digit percentage of a supplier's annual output.

One particular aspect of the economy of scale is the aggregation effect, used in other business such as The Home Depot and Wells Fargo,