The Future of Successful Retailing Owes a Lot to a Guy Named Sam
Some trends are permanent. Success in the retail business in the 1990s will stem from the same forces that drove the 1980s: “Low profit margins and low costs.”
The words are those of the late Sam Walton, founder and builder of Wal-Mart Stores, who died April 5 at age 74. Walton’s insights built Wal-Mart into the world’s largest retail chain--from nothing to sales of $42 billion--in only three decades.
And whether your viewpoint is that of shopper, investor or business owner, Walton’s ideas will be especially apt in the years ahead as price-cutting trends intensify.
The fastest-growing retailers today are wholesale stores--Home Depot, Price Club and the Wal-Mart company’s own Sam’s Club--which offer deeper discounts than all merchandisers.
Meanwhile, the Wal-Mart chain of 1,573 stores, which built its success in small towns, is invading the Los Angeles and New York markets. Some analysts believe that competition in the big cities will slow Wal-Mart down, but more likely its pricing structure--a markup on merchandise that is less than half that of Sears, Roebuck or of department stores--will make life uncomfortable for other retailers.
To be sure, the shopping mall won’t become totally a grim battle of plain merchandise and warehouse floors. Fashion will still reside in the department stores, although that business will change. Department store companies--many operating in or near bankruptcy--will become lessors of space to apparel makers such as Liz Claiborne and Donna Karan. The dress business thus will become like the perfume business, with apparel manufactures paying the salaries of store clerks in brand name boutique sections.
J. C. Penney will try to stock better merchandise and move away from competition with discounters. Sears, a faded star that was once the nation’s largest chain, will continue to suffer because its costs don’t allow it to compete with the pricing structure of a Wal-Mart.
Simply put, Wal-Mart accepts a lower profit margin so that it can charge lower prices and move the merchandise. The contrast with department store pricing is dramatic. An apparel house will make a blouse of fine material for, say, $11 and sell it to the store for $22, explains George Rudes, head of Los Angeles manufacturer St. Germain Inc. The store will then hang a $44 price tag on the blouse, later perhaps cutting that to $33 in a big sale.
But Wal-Mart will order blouses in carload lots, paying perhaps $11 for plainer blouses that cost $7 to make. It will then put the blouses out for sale at $15--a markup that demands close control of costs.
And the Sam’s Club wholesale stores carry that further, selling goods at just 8.5% over the cost of merchandise. “We don’t make a profit on the sale of merchandise,” says a Sam’s Club spokesman. Instead, the profit is in membership fees from customers and cash rebates from suppliers.
Yet Wal-Mart’s net profit of 4 cents on every sales dollar is well ahead of rivals Kmart and Sears at 2 to 3 cents per dollar--and Wal-Mart is growing faster, taking market share from other stores. How can it do all that?
It benefits from “the productivity loop,” explains analyst Joseph C. Ronning of Brown Bros., Harriman & Co. “The more you lower prices, the more customers you attract and so you achieve more sales-per-square foot of store space, which allows you to further lower prices. . . . “ Meanwhile, competitors with a higher cost structure sink into unprofitability as they try to match the price cuts.
Anybody who thinks about business in the last decade knows the pattern is not confined to retail stores. In the computer and electronics field, they called it learning-curve pricing--as you built sales volume you lowered prices and so built even more sales volume--discouraging potential competitors. Japanese companies used the techniques to take market share in televisions, cars and semiconductors to the consternation of U.S. companies.
There’s a profound global change underlying such patterns. It’s the kind of pricing that can go on in a world in which goods are abundant and available. Walton knew he could buy goods cheaply from suppliers here and abroad--and that all other retailers could too. Therefore, controlling costs was a matter of competitive survival.
The implications apply to every business, even creative ones such as fashion designing. The new designers, according to Forbes magazine, are conscious of keeping high-fashion clothing prices moderate. With department stores in bankruptcy, floor space is likely to diminish--leaving no place for pricey merchandise that is slow to sell.
And the cost-cutting trend applies in every country. Wal-Mart has a joint venture with Aurrera, a major department store chain in Mexico--a country beginning to enjoy rising incomes and purchasing power. But the Mexicans are counting their pesos, just as Americans are watching their pennies. The joint venture has opened two deep-discounting Sam’s Clubs outside Mexico City.
An abundant world is a competitive one.
