Tag Archives: WMT

Wal-Mart Case Study Part 3


Part 3:Valuation of WMT,

Part 2:  http://wp.me/p2OaYY-2nB and

Part 1:  http://wp.me/p2OaYY-2np

Stock Splits

Wal-Mart Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On a purchase of 100 shares at $16.50 per share on our first offering, the number of shares has grown as follows:

2:1 Stock Splits Shares Cost per Share Market Price on Split Date Record Date Distributed
On the Offering 100 $16.50
May 1971 200 $8.25 $47.00 5/19/71 6/11/71
March 1972 400 $4.125 $47.50 3/22/72 4/5/72
August 1975 800 $2.0625 $23.00 8/19/75 8/22/75
Nov. 1980 1,600 $1.03125 $50.00 11/25/80 12/16/80
June 1982 3,200 $0.515625 $49.875 6/21/82 7/9/82
June 1983 6,400 $0.257813 $81.625 6/20/83 7/8/83
Sept. 1985 12,800 $0.128906 $49.75 9/3/85 10/4/85
June 1987 25,600 $0.064453 $66.625 6/19/87 7/10/87
June 1990 51,200 $0.032227 $62.50 6/15/90 7/6/90
Feb. 1993 102,400 $0.016113 $63.625 2/2/93 2/25/93
March 1999 204,800 $0.008057 $89.75 3/19/99 4/19/99

So the price on August 1974 when a 2 for 1 stock split occurred was $23.

What price would I have paid? I would see 38% ROE with little debt ($10.5 mil.) with 40%+ growth. If I paid 4 times the book value of approx. $31 mil. Plus the debt of $10.5 million ( I would not subtract the cash since I assume it is all needed as working capital) or $124 mil. plus $10.5 mil. or $135 million. Divide by $6.542 mil. shares or $20.63 per share or $21 to round up. $23 to $25 was near the highs for 1975 in the fourth quarter but the price was below $20 in the first quarter of 1975. Could I have bought right after the largest decline in stock market history after the Great Depression and with inflation raging? If I knew the value and rarity of an emerging franchise perhaps. But I doubt it.

I would have paid 4 times book value (better is replacement value but this is back of envelope investing) to garner a 9% return but the long term growth of 5% to 6% would give me my required 15% return. Obviously, if I had paid double, that would have been fine.

The key is in recognizing the source of WMT’s competitive advantage and how large the market opportunity to exploit that advantage. The secret is on page 10 of the 1974 WMT annual report 1974-annual-report-for-walmart-stores-inc and on page 11 here: WAL-MART CASE STUDY on Discount Operations 1986 (email aldridge56@aol.com if that link is taken down) and ask for the case study.

Note that you would have had to hold on through thick and thin without selling on numerous “market” scares, crashes and fears.  You have the key to becoming rich in investing but now you know why investing is SIMPLE BUT NOT EASY!

If you have questions post them on this blog do NOT email them to me. Thanks.

Wmt vs. Cost Analysis; A History of Debt and Gold in Charts


Back to School!

The key is not to predict the future but to be prepared for it.–Pericles

Wal-Mart vs. Costco

Data         WMT      Cost Difference
Supercenters 3158 448
Discount Stores 561 0
Sam’s Clubs 620 0
Neighborhood Mkts 266 0
Foreign Stores 6,148 174
    10,753 622 17.3 times
Employees 2,200,000 147,000  14.97 times
Stock Keeping Units (SKUs) 70,000 3,600  19.4 times
Revs. ($bil.) 495 107       4.63 times
Return on Tot. Cap (VL) 15% 13% 2%
Ret. On Equity (VL) 22% 14.50% 7.50%
Gross Profit Margin 24% 10% 140%
Oper. Income/Margin 5.90% 2.85% 100%
Sales per square foot 437 976 110%
Book Value $25 $25 0%
Price Aug. 2 $78.55 $119.10
P/BV 3.1 4.8 55%
Debt 37000 4800
Equity 82,500 13,825
Debt to Equity 45% 35%
Est. Growth
     Sales 6.50% 8.50%
     Earnings 9% 11%

cost vs wmt

sm cost vs wmt


I think when you compare numbers, what strikes you is the difference in # of SKUs between retailers. WMT’s business model is much more labor intensive coupled with a lower-income customer. The squeeze on the middle class has crimped WMT.  You would think with WMT’s higher ROC and ROE compared to COST’s that WMT would not be lagging CostCo’s in share price performance but remember that COST is growing faster above its cost of capital and has more room to grow than behemoth, Wal-Mart. In other words, CostCo can redeploy more of its capital at higher rates than WMT can (grow its profits faster).

That said, the market knows this and has handicapped Costco with a higher price to book and P/E ratio than WMT’s. As an individual investor, your time might be better spent looking at smaller, more unknown companies to find mis-valuation. Also, when a company gets as big as WMT (1/2 TRILLION $ in sales), the law of large numbers sets in and the company becomes a magnet for social engineering and protest. But if you had to have me choose what company to own over the next ten years, I would choose COST because its moat is stronger (greater customer captivity) shown by its huge inventory turns/high sales per square foot plus greater PROFITABLE growth opportunities.  However, I do see WMT becoming more focused rather than expanding overseas where their local economies of scale are lessened.

My analysis is cursory, but for those that picked out the main differences, you have a better grasp of whether WMT can raise its employees’ wages to the level of Costco’s. It can not unless it reduces its SKUs and employees.

More analysis from others:

Why Wal-Mart Will Never Pay Like CostcoBloomberg writer Megan McArdle hits the nail on the head with her analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we’ve been treated to a lot of impassioned reheatings of that old standby: “Costco shows it’s possible” for Wal-Mart to pay much higher wages. The addition of Trader Joe’s and QuikTrip is moderately novel, but basically it’s the same argument: Costco/Trader Joe’s/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it’s meant — that Wal-Mart could increase its wages by 50 percent and still prosper?Upper-middle-class people who live in urban areas — which is to say, the sort of people who tend to write about the wage differential between the two stores — tend to think of them as close substitutes, because they’re both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart’s customer base, that’s where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That’s Costco’s business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.

As it happens, that matters a lot.  Costco has a tiny number of SKUs in a huge store — and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.

But what about QuikTrip and Trader Joe’s? I’m going to leave QuikTrip out of it, for two reasons: first, because they’re a private company without that much data, and second, because I’m not so sure about that statistic. QuikTrip’s website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce.

Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older). “Within a 15–minute driving radius of a potential site,” one expert told a forlorn Savannah journalist, “there must be at least 36,000 people with four–year college degrees who have a median age of 44 and earn a combined household income of $64K a year.” Costco is similar, but with an even higher household income — the average Costco household makes more than $80,000 a year.

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea, because no person could master 108,000 SKUs. Even if Wal-Mart did pay a higher wage, you wouldn’t get the kind of easy, effortless service that you do at Trader Joe’s because the business models are just too different. If your business model inherently requires a lot of low-skill labor, efficiency wages don’t necessarily make financial sense.

If you want Wal-Mart to have a labor force like Trader Joe’s and Costco, you probably want them to have a business model like Trader Joe’s and Costco — which is to say that you want them to have a customer demographic like Trader Joe’s and Costco. Obviously if you belong to that demographic — which is to say, if you’re a policy analyst, or a magazine writer — then this sounds like a splendid idea. To Wal-Mart’s actual customer base, however, it might sound like “take your business somewhere else.”
Read more at http://globaleconomicanalysis.blogspot.com/2013/08/wal-mart-is-not-costco-so-why-should-it.html#s5mT9QlDRl4fqLdG.99


From www.Morningstar.com

Concentrating on fewer stock-keeping units generates buying power for Costco on par with, or perhaps even greater than, larger mass merchants. At first glance, excluding gasoline, at about $60 billion in U.S. sales Costco seems at a scale disadvantage against Wal-Mart’s WMT $265 billion domestic purchasing power. However, Costco concentrates its merchandise purchases on 3,300-3,800 active SKUs per warehouse, compared with the average 50,000-75,000 SKUs at a Wal-Mart superstore. As an illustration, if we assume a straight average, that calculates to more than $16 million in sales per SKU at Costco compared with just over $3.5 million-$5 million per SKU at Wal-Mart. Moreover, the company limits its buys to only specific, faster-selling items. Costco turns its inventories in less than 30 days. This variable cost parity with larger mass merchants, along with the little or zero mark-up requirement of its membership business model, produces price leadership for Costco on the products it chooses to sell.

Note sales per square foot: http://www.wikinvest.com/stock/Costco_Wholesale_(COST)/Data/Sales_per_sq._ft

Unlike its big-box peers, Costco’s international operations generate returns above its cost of capital. The company owns about 80% of its properties, operates its business at an EBIT margin below 3%, and is at the earlier stages of international expansion but still generates on average 12% returns on invested capital because of its low fixed asset base. In its fiscal 2012 year, just 439 domestic warehouses generated roughly $60 billion in revenue (excluding fuel). That calculates to $135 million in sales per unit, or $960 per square feet, which we estimate is about 2.3 times higher than Wal-Mart supercenters. That powerful unit model also works in international markets, where sales productivity levels remain high at $900 per square feet. As result, despite likely lacking logistical scale, returns on net assets for operations outside of North America are roughly 12%, above the company’s cost of capital. This is in contrast to the 6%-7% RONA range for Wal-Mart’s international operations over the past decade.
Economic Moat 05/09/13

We assign Costco a narrow economic moat. We base this on its business model’s loss-leader capabilities and ever-increasing buying power. Membership fees are the main driver of operating profits, so Costco has the ability to sell virtually any consumer product at wholesale rather than retail prices. This makes it very difficult for other retail concepts to compete with Costco on price. Moreover, its price leadership position is reinforced because the company concentrates its merchandise buys on much fewer and faster-turning SKUs, which generates disproportionate purchasing power for its size. Additionally, the company does not advertise and its austere warehouse format requires much lower maintenance capital expenditures. Therefore, the membership wholesale business model has a sustained cost advantage versus other retail operators that sell the same product categories.

Costco WalMart Case   The document to read

COSTCO_Why Good Jobs Are Good for Retailers_ZTon

WMT Annual Report 2013  and Costco 2012 Annual Report (7)


For those who feel they DESERVE a prize simply email me at aldridge56@aol.com with PRIZE in the subject heading.

Gold, Debt and History


Note page 10, the Stock to flow ratio for gold is 65 years compared to about a year for both oil and copper. Gold is money.

Pages 60 to 61, how Austrian Economics is applied.

Notes: I hope to post my rough draft of the CSInvesting Analysis Handbook by the end of the week.  I have a book recommendation coming…….


Case Study on Business Models: Wal-Mart vs. Costco


Cost and WMT_CS for background

WMT Logo


Can you tell me the key differences between Wal-Mart’s (not just Sam’s Club) and Costco’s business models?  Could Wal-Mart raise it’s minimum wage to Costco’s higher level without effecting profits. Why or why not.

This case gives you a way to learn about different retail business models.  How would you go about answering this question?

HINT: What would be the big difference between a Wal-Mart and a Costco store as soon as you entered?

If a union leader from Wal-Mart wanted to have its members have the same wage rates as Costco, how would you advise?

I am not asking for a valuation, but an analysis of the differences between retail models. Is one better than the other?

Harvard Business School Magazine December 2006

The High Cost of Low Wages

by Wayne F. Cascio

Executive Summary from Harvard Business School 

Wal-Mart’s legendary obsession with cost containment shows up in countless ways, including aggressive control of employee benefits and wages. Managing labor costs isn’t a crazy idea, of course. But stingy pay and benefits don’t necessarily translate into lower costs in the long run.

Consider Costco and Wal-Mart’s Sam’s Club, which compete fiercely on low-price merchandise. Among warehouse retailers, Costco—with 338 stores and 67,600 full-time employees in the United States—is number one, accounting for about 50% of the market. Sam’s Club—with 551 stores and 110,200 employees in the United States—is number two, with about 40% of the market.

Though the businesses are direct competitors and quite similar overall, a remarkable disparity shows up in their wage and benefits structures. The average wage at Costco is $17 an hour. Wal-Mart does not break out the pay of its Sam’s Club workers, but a full-time worker at Wal-Mart makes $10.11 an hour on average, and a variety of sources suggest that Sam’s Club’s pay scale is similar to Wal-Mart’s. A 2005 New York Times article by Steven Greenhouse reported that at $17 an hour, Costco’s average pay is 72% higher than Sam’s Club’s ($9.86 an hour). Interviews that a colleague and I conducted with a dozen Sam’s Club employees in San Francisco and Denver put the average hourly wage at about $10. And a 2004 Business Week article by Stanley Holmes and Wendy Zellner estimated Sam’s Club’s average hourly wage at $11.52.

On the benefits side, 82% of Costco employees have health-insurance coverage, compared with less than half at Wal-Mart. And Costco workers pay just 8% of their health premiums, whereas Wal-Mart workers pay 33% of theirs. Ninety-one percent of Costco’s employees are covered by retirement plans, with the company contributing an annual average of $1,330 per employee, while 64 percent of employees at Sam’s Club are covered, with the company contributing an annual average of $747 per employee.

Costco’s practices are clearly more expensive, but they have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year, close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.

In return for its generous wages and benefits, Costco gets one of the most loyal and productive workforces in all of retailing, and, probably not coincidentally, the lowest shrinkage (employee theft) figures in the industry. While Sam’s Club and Costco generated $37 billion and $43 billion, respectively, in U.S. sales last year, Costco did it with 38% fewer employees—admittedly, in part by selling to higher-income shoppers and offering more high-end goods. As a result, Costco generated $21,805 in U.S. operating profit per hourly employee, compared with $11,615 at Sam’s Club. Costco’s stable, productive workforce more than offsets its higher costs.

These figures challenge the common assumption that labor rates equal labor costs. Costco’s approach shows that when it comes to wages and benefits, a cost-leadership strategy need not be a race to the bottom.

Have a GREAT WEEKEND and HAPPY LABOR DAY to those in the U.S.

Best response gets a choice of prizes.


 Why the U.S. IS Using Syria as a Pre-Text to War


Always ask, “Qui Bono?” Who benefits from a Mid-East War?

The U.S. needs to attack Syria to stop Russian pipelines from feeding Europe and hastening the fall of the Petrodollar:  http://www.tfmetalsreport.com/podcast/5015/holiday-tradition-fresh-jackass

Capitulation! Throwing in the Towel to Ride the Bull

Ride the BullWMTForget owning gold bullion and “cheap” precious metals mining companies  that are priced for bankruptcy or dissolution. The pain of temporary underperformance is too great. I have always liked franchise-type companies and now it is time to ride the trend. I will buy these companies this morning. How will I fare over the coming years?





How do you think these investments will turn out? Why? Will this happen?

FALLING OFF TRHE BULLNot a chance with the Fed guarantee of any buy the dip strategy. What alternative do you have than buying Fed-juiced stocks?

See Video below. Schiff gets laughed at for suggesting gold.

When the Fed gets the economy to “escape velocity” then it will be able “exit” QE-to-infnity. Yes, when we see a herd of elephants flying over New York City, then we will know that day has come.

I don’t want to be like Seth Klarman–foolishly conservative: http://www.zerohedge.com/news/2013-05-05/seth-klarman-expains-when-investing-its-hardest-and-why-he-not-joining-momentum-trad

Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bemanke because betting that his policies will drive equities higher bas been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today’ s “clarity” will have dissolved, leaving only great uncertainty and probably significant losses.

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– isthe riskiest environment of all.


Study on Economies of Scale

I went to a fancy french restaurant called “Deja Vu.” The headwaiter said, “Don’t I know you?” — Steven Wright

Economies of Scale

Below is a 27-page PDF on economies of scale. Yes, the document is repetitive, but you often have to read or hear something three times before the lesson sinks in. Economies of scale is one concept of competitive advantage that you must understand in order to improve your business understanding. Learn it.


We will tackle the Coors case study in a day or so.

Keep plodding along.

Study Break; Course on Money and Credit, J. Rogers on Rating Agencies

Experience is something you don’t get until just after you need it.–Steven Wright

Study Break

Let’s take a study break and return to the Coors case study this weekend.  You have a strong foundation of strategic logic to study the case. You learned from Wal-Mart that management did not expand from Arkansas into California or the Northeast back in 1985, but expanded at its periphery (like an amoeba), where it could readily establish the customer captivity and economies of scale that made it dominant. And it defended its base.  What did Coors do?

Mises Academy Course on Money and Credit

I mentioned the course with links to the books and study guide here: http://wp.me/p1PgpH-ix

This article by Professor Murphy discusses the course in more detail. I hope some of you join me in taking this rigorous tour of money and credit. http://mises.org/daily/5878/Mises-on-Money-and-Banking

“Is This Course Going to Be Really Hard?”

Let’s be frank. Mises’s writing at times can be difficult, especially his earlier work when he was writing for other economists, rather than the lay public. The amateur fan of Austrian economics who flips through The Theory of Money & Credit might recoil, thinking it is too hard and that anything important from the book would have been distilled by Rothbard in Man, Economy, and State.

If I’ve just described your view, I suggest doing the first week’s reading (the first two chapters from Mises) with my study guide as a companion. You might be pleasantly surprised to discover that Mises’s prose, though a bit formal, is still accessible to the layperson. If — using my study guide for help — you can get through the first week’s readings, then I believe you have what it takes to get through the whole class. It’s true, we will get into material that is more complicated than what Mises lays out in the opening chapters, but then again that’s what you have me for, to explain it for you.

Now if you determine that you are capable of digesting the material, I would urge you to take the plunge and sign up for the course. Yes, Rothbard and others have explained the Austrian theory of the business cycle in other venues. However, by exploring the Misesian framework of money and banking, you will walk away with a much deeper understanding of his theory of economic fluctuations. For example, the typical objection that “we had business cycles before the Fed, so the Austrians are obviously wrong” will seem quite ludicrous after studying Mises’s classic work.

 Jim Rogers Savages the Credit Rating Agencies




Part 2: A Professor Provides a Different Perspective on WMT

I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.–Michael Jordan

What is a Moat?

Moats are structural characteristics of a business that are likely to persist for a number of years, and that would be very hard for a competitor to replicate.  Management is not a moat. The best poker player with a pair of deuces can’t beat a beginner with a straight flush.

Moats are not great products, strong market share, great execution and good management.

Part Two: A Professor discusses WMT Case Study

See Part 1: http://wp.me/p1PgpH-j0

Part Two: The Professor continues his talk on Wal-Mart’s success.

First used in grocery supermarkets, bar-code scanners at retail checkout stations are now ubiquitous. Mass merchandisers began to use them in the early 1980s. Most retailers saw the bar-code scanner as a way of eliminating the cost of constantly changing the price stickers on times. But Wal-Mart went further, developing its own satellite-based information systems. Then it used this data to manage its inbound logistics system and traded it with suppliers in return for discounts.

Susan, a human resources executive, suddenly perks up. Isolating one small policy has triggered a thought. I gave a talk the day before on “complementary” policies and she sees the connection. “By itself,” she says, “it doesn’t help that much. Kmart would have to move the data to distribution centers and suppliers. It would have to operate an integrated inbound logistics system.”

Good,” I say, and point out to everyone that Wal-Mart’s policies fit together—the bar codes, the integrated logistics, the frequent just-in-time deliveries, the large stores with low inventory—they are complements to one another, forming an integrated design. This whole design—structure, policies, and actions—is coherent. Each part of the design is shaped specialized to the others. The pieces are not interchangeable parts. Many competitors do not have much of a design, shaping each of their elements around some imagined “best practice” form. Others will have more coherence but will have aimed their designs at different purposes. In either case, such competitors will have difficulty in dealing with Wal-Mart. Copying elements of its strategy piecemeal, there will be little benefit. A competitor would have to adopt the whole design, not just a part of it.

The professor suggests that WMT incorporated the bar-code scanners into an integrated process that a competitor couldn’t copy at least in the short run. When a company invents a process advantage, competitors can eventually copy that. I see WMT using a technology to lower costs within the company’s regional economies of scale advantage. Even if Kmart could lower its costs with the same technology, it was still at a disadvantage in terms of cost structure versus WMT.

There is much more to be discussed: first-mover advantages, quantifying its cost advantage, the issue of competence and learning developed over time, the function of leadership, and whether this design can work in cities. We proceed.

With fifteen minutes to go, I let the discussion wind down. They have done a good job analyzing Wal-Mart’s business, and I say so. But, I tell them, there is one more thing. Something I barely understand but that seems important. It has to do with the “conventional wisdom”—the phrase from the case I put on the whiteboard at the beginning of the class: “A full-line discount store needs a population base of at least 100,000.”

I turn to Bill and say: “You started us out by arguing that Walton broke the conventional wisdom. But the conventional wisdom was based on the straightforward logic of fixed and variable cost. It takes a lot of customers to spread the overhead and keep costs and prices low. Exactly how did Walton break the iron logic of cost?”

I push ahead, putting Bill into a role: “I want you to imagine that you are a Wal-Mart store manager. It’s 1985 and you are unhappy with the whole company. You feel that they don’t understand your town. You complain to your dad, and he says, ‘Why don’t we just buy them out” We can run the store ourselves.’ Assuming Dad has the resources, what do you think of his proposal?”

Bill blinks, surprised at being put on the spot for a second time. He thinks a bit, then says, “No it is not a good idea. We couldn’t make a go of it alone. The Wal-Mart store needed to be part of the network.”

I turn back the whiteboard and stand right next to the boxed principle: “A full-line discount store needs a population base of at least 100,000.” I repeat his phrase, “The Wal-Mart store needs to be part of the network,” while drawing a circle around the word “store.” Then I wait.

With luck, someone will get it. As one student tries to articulate the discovery, others get it, and I sense a small avalanche of “Ahas,” like a pot of corn kernels suddenly popping. It isn’t the store; it is the network of 150 stores. And the data flows and the management flows and a distribution hub. The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn’t break the conventional wisdom; he broke the old definition of a store. If no one gets it right away, I drop hints until they do.

When you understand that Walton redefined the notion of “store,” your view of how Wal-Mart’s policies fit together undergoes a subtle shift. You begin to see the interdependencies among location decisions. Store locations express the economics of the network, not just the pull of demand. You also see the balance of power at Wal-Mart. The individual store has little negotiation power—its options are limited. Most crucially, the network, not the store, became Wal-Mart’s basic unit of management.

In making an integrated network into the operating unit of the company, instead of the individual store, Walton broke with an even deeper conventional wisdom of his era: the doctrine of decentralization that each kettle should sit on its own bottom. Kmart had long adhered to this doctrine, giving each store manager authority to choose product lines, pick vendors, and set prices. After all, we are told that decentralization is a good thing. But the oft-forgotten cost of decentralization is lost coordination across units. Stores that do not choose the same vendors or negotiate the same terms cannot benefit from an integrated network of data and transport. Stores that do not share detailed information about what works and what doesn’t can’t benefit from one another’s learning.

If your competitors also operate this kind of decentralized system, little may be lost. But once Walton’s insights made the decentralized structure a disadvantage, Kmart had a severe problem. A large organization may balk at adopting a new technique, but such change is manageable. But breaking with doctrine—with one’s basic philosophy—is rare absent a near-death experience.

The hidden power of Wal-Mart’s strategy came from a shift in perspective. Lacking that perspective, Kmart saw Wal-Mart like Goliath saw David—smaller and less experienced in the big leagues. But Wal-Mart’s advantages were not inherent in its history or size. They grew out of a subtle shift in how to think about discount retailing. Tradition saw discounting as tied to urban densities, whereas Sam Walton saw a way to build efficiency by embedding each store in a network of computing and logistics. Today we call this supply chain management, but in 1984 it was as an unexpected shift in viewpoint. And it had the impact of David’s slung stone.

Compare this discussion with Greenwald’s analysis of WMT in Ch. 5 of Competition Demystified. Do you agree with the professor that WMT has a network effect?

Hint: You are most likely to find the network effect in businesses based on sharing information (Amex), or connecting users together (Ebay, CME), rather than in businesses that deal in rival (physical goods). Of networks there will be few.

Cost advantages matter most in industries where price is a large portion of the customer’s purchase criteria.

A Typical View of Wal-Mart’s Advantages. Again!

If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time – a tremendous whack. –Winston Churchill
We will discuss Wal-Mart in the next few posts before moving on to the Coors case study.  Think of reviewing these cases as you develop more experience with analyzing competitive advantages. In fact, do not be afraid to read the cases again! Think of these guys: http://www.youtube.com/watch?v=T9AajQn7b18

Now give me fifty push ups! Does power corrupt?

A Typical View of Wal-Mart’s Advantages


The Limits of the Local by Steven Horwitz

Critics of the market often point to the increased globalization of production and consumption as one of the problems that economic freedom can generate. This criticism has a number of elements. One is that multinational firms like Wal-Mart or McDonald’s turn the United States, as well as the rest of the world, into one commercial culture, destroying the local stores that provided a distinct identity to small towns and cities across the globe.

Large chain stores and franchises do affect local businesses, especially in small towns, but note that it’s mostly a shift rather than destruction: Some businesses find ways to compete effectively by filling niches that the larger stores can’t fill, particularly with respect to distinctly local products, such as restaurant food.

However, larger chains have at least two big advantages worth discussing.

First and perhaps most obviously, their size normally gives them the ability to buy in larger quantities, keeping their costs and prices down. Wal-mart grew to the size it did through highly effective inventory management; it pressured suppliers to keep their input prices low and passed those low prices on to consumers.* Low prices are a big part of what lures people to shop there rather than at the smaller boutique stores. Chains like McDonald’s work in similar ways; a burger, fries, and drink there is usually no more expensive (especially if you count the lack of a tip) than the diner up the road.

Known Commodity

The second advantage is less commented on. The very similarity of chain stores and franchises nationwide, and even worldwide, is a big attraction to many customers because they are a known commodity. If you’re hungry in a strange town, you know that you can always go to a national fast-food chain and get a meal of nearly identical quality to what you’re used to at the chain’s restaurant at home — and for a good price. If you are sufficiently risk-averse, the consistency of a national brand is very valuable. In an economy where national chains were more difficult to operate, we would be far more at the mercy of the unknown.

And it’s not just about food. On a recent trip I forgot to pack dress socks. Thankfully, in a strange town 2,500 miles from home there was a Wal-Mart five minutes up the road. I happen to like Walmart’s in-house Faded Glory cotton dress socks, so I was able to buy several pairs of exactly the socks I like and usually wear (for less than $2 per pair). In a “local only” economy, not only would I have had to spend more time searching for a store that carried dress socks (and was open at 8:30 a.m.!), I would also have faced uncertainty over whether those socks would be the kind I like. And I probably would have paid considerably more. A highly local economy constantly puts strangers in a similar position to the traveler with car trouble who knows he is at the mercy of a mechanic he’ll never see again. Chain stores and franchises bring reputation and repeated dealing into the equation, removing uncertainty and reducing the seller’s power over the buyer.

Freedom of Choice

One final advantage of a global economy is that it still permits people to “buy local” if that’s what they prefer. I love living in a small town with a Wal-Mart ten minutes away and a farmer’s market during the summer and a top-notch restaurant that serves lots of local beef and produce. In a world where everything is local, those of us who want to “buy global” presumably would be prohibited from doing so — in the name of preserving the local character. Just as markets allow pockets of voluntary socialism, but socialism cannot abide capitalist acts between consenting adults, so a global economy has room for the local, while mandatory localism cannot meet the needs of those who prefer to buy global.

Whether it’s food or socks or pretty much anything else, the freedom of the marketplace allows for firms of varying size and composition to meet the equally varied wants of consumers.

*Has the writer accurately assessed the competitive advantages of Wal-Mart—the source of Wal-Mart’s cost advantage? Will going global help or hurt Wal-Mart’s profitability? How? (See 2003 Wal-Mart Case Study for help).  And if the writer is correct, then why do Sears, Kmart and other large retailers struggle? What does this article illustrate about most business writers or analysts? Lessons?

WMT 2003 and Coors Case Studies; Items of Interest

I got my driver’s license photo taken out of focus on purpose. Now when I get pulled over the cop looks at it (moving it nearer and farther, trying to see it clearly)…and says,” Here, you can go.” — Steven Wright

The Wal-Mart Stores in 2003 and the Adolph Coors in the Brewing Industry Case Studies are in the Value Vault.  If you just want me to email you the cases just write to aldridge56@aol.com with CASES in the Subject line–you will have them by tomorrow.

Other Items of Interest

Should we re-write the constitution every 20 years as Thomas Jefferson suggested? Check out: http://www.constitutioncafe.org/

How to strengthen willpower. http://artofmanliness.com/2012/01/15/how-to-strengthen-willpower/

Nassim Taleb’s New Book

Talk about Nassim Taleb’s new book, Antifragility, go here www.cafehayek.com and click on podcasts on left of blog.  Other interesting podcasts available.

Keynesian Economics is a Failure

Interesting lecture on classical economic theory: http://mises.org/resources/5278/Why-Your-Grandfathers-Economics-Was-Better-Than-Yours

  • A participant: “I really enjoyed this talk. Most of it is about Say’s Law and how Keynes was wrong. Keynes, in fact, got his idea from Thomas Malthus who was a contemporary of JB Say.”Here are some notes:Recessions are never due to demand deficiency.
    An economy can never produce more than its members are willing or able to buy.
    High levels of savings do not cause recessions.What causes recessions?
    – Structure of supply doesn’t fit the structure of demandGeneral Glut
    – Could you produce too much of everything? No.
    – Overproduction of particular goods can lead to a general downturnMen err in their production there is no deficiency in demand – David Ricardo

A Different Analysis of Wal-Mart Part 1

I bought a self-learning record to learn Spanish. I turned it on and went to sleep; the record got stuck. The next day I could only stutter in Spanish.                 — Steven Wright

A Different Professor’s Analysis of the Wal-Mart Case Study  (Part 1)

Try to jot down answers to the professor’s discussion. Part two of his lecture will be posted tomorrow.

A Professor Discusses Wal-Mart with his MBA class. The purpose of this analysis is to give you another approach of analyzing a case. Do you find Greenwald’s approach “better” or more thorough, precise and analytical or this professor’s approach? Can you answer his question at the end of this post?

The Professor: Much of my work with MBA students and companies involves helping them uncover the hidden power in situations. As part of this process often teach a case about Wal-Mart’s founding and rise, ending in 1986 with Sam Walton as the richest person in the US. In a subsequent session I will follow-upby discussing the modern Wal-Mart, pushing into urban areas, stretching out to Europe, and becoming the largest corporation on the planet in terms of revenue. But the older case portrays a simpler, leaner Wal-Mart—a youthful challenger rather than the behemoth it has become. Hard as it is to believe today, Wal-Mart was once David, not Goliath.

I write this on the Black-Board: CONVENTIONAL WISDOM: A Full-line discount store needs a population base of at least 100,000. The question for the group is simple: Why has Wal-Mart been so successful? To start, I call on Bill, who had some experience in sales during the earlier part of his career. He begins with the ritual invocation of founder Sam Walton’s leadership. Neither agreeing nor disagreeing, I write “Sam Walton” on the board and press him further. “What did Walton do that made a difference?”

Bill looks at my labeled box on the board and says, “Walton broke the conventional wisdom. He put big stores in small towns. Wal-Mart had everyday low prices. Wal-Mart ran a computerized warehousing and trucking system to manage the movement of stock into stores. It was non-union. It had low administrative expenses.” It takes about thirty minutes for six other participants to flesh out this list. They are willing to throw anything into the bin, and I don’t stop them. I prod for detail and context, asking, “How big were the stores?” “How small were the towns?” “How did the computerized logistics system work?” And “What did Wal-Mart do to keep its administrative expenses so low?”

As the responses flood in, three diagrams take shape on the white-board. A circle appears, representing a small town of ten thousand persons. A large box drawn in the circle represents a forty-five thousand square foot store. A second diagram of the logistical system emerges. A square box represents a regional distribution center. From the box, a line marks the path of a truck, swooping out to pass by some of the 150 stores served by the distribution center. On the return path, the line passes vendors, picking up pallets of goods. The line plunges back to the square, where an “X” denotes cross-docking to an outgoing truck. Lines of a different color depict the data flows, from the store to a central computer, and then out to vendors and the distribution center.

Finally, as we discuss the management system, I draw the path of the regional managers as they follow a weekly circuit: Fly out from Bentonville, Ark., on Monday, visit stores, pick up and distribute information, and return to Bentonville on Thursday for group meeting on Friday and Saturday. The last two diagrams are eerily similar—both revealing the hub structure of efficient distribution.

The discussion slows. We have gotten most of the facts out; I look around the room, trying to include them all, and say, “If the policies you have listed are the reasons for Wal-Mart’s success, and if this case was published—let’s see—in 1986, then why was the company able to run rampant over Kmart for the next decade? Wasn’t the formula obvious? Where was the competition?”

Silence….This question breaks the pleasant five-and take of reciting case facts. The case actually says almost nothing about competition, referring broadly to the discounting industry. But surely executives and MBA students would have thought about this in preparing for this discussion. Yet it is totally predictable that they will not. Because the case does not focus on competition, neither do they. I know it will turn out this way—it always does.

Half of what alert participants learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance. Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also at the same time, either blocked or failed competition. Sometimes competition is blocked because an innovator holds a patent or some other legal claim to a temporary monopoly. But there may also be a natural reason imitation is difficult or very costly. Wal-Mart’s advantage must stem from something that competitors cannot easily copy, or do not comply because of inertia and incompetence.

In the case of Wal-Mart, the principal competitive failure was Kmart. Originally named the S.S. Kresge Corporation, Kmart was once the leader in low-cost variety retailing It spent much of the 1970s and 1980s expanding internationally ignoring Wal-Mart’s innovations in logistics and its growing dominance of small—tow2n discount. It filed for bankruptcy in 2002. After some moments I ask a more pointed question: Both Wal-Mart and Kmart began to install bar-code scanners at cash registers in the early 1980s. Why did Wal-Mart seem to benefit from this more than Kmart?