Walmart’s Quest for World Domination

16 Apr, 2006 | by

I, like many students of business, have great admiration for Walmart’s tremendous success through its innovative supply chain management structure, relentless pursuit of always having the lowest prices, etc, etc.

This does not mean I admire their complete and total disregard of their own blue collar employees. i.e. Paltry medical benefits and just a shear disinterest in workers in general. I’ll just leave it at that.

Recently, Walmart has begun to cannibalize sales of their own existing stores in various locations. Essentially stores are opening up in close proximately to older stores. Now, you would think Walmart would recognize and avoid such a maneuver given past experience of other retail giants. i.e. Home Depot, Target, etc.

Their business model is a simple one…World Domination. Walmart has recently entered the walk-in clinic market and are now testing the waters for their very own, in-store, retail banking service…Scary.

Now, Walmart is evening cannibalizing their own sales because they’ve already saturated just about every precious piece of real estate in the United States. Walmart is focusing less on individual store profitability and looking at total aggregate sales for regional locations. In other words, if two Walmart stores open in close proximity, each raking in, let’s say, $100 million per year, they would rather introduce another store and accept the individual decline of sales per store as long as the aggregate total surpasses the $200 million originally brought in by the two stores. To elaborate a little more, if each of the 3 stores pulls in $80 a piece, then the grand total would be a successful $240 million in their eyes. Wow, that just seems really greedy to me. Forget profitability. Let’s go get the volume and bury anyone that gets in our way. Talk about a great defense mechanism of staving off potential entrants to the market.

According to Walmart, cannibalization only saps 1% sales point of same store sales nationally. Interesting isn’t it? I mean, what happens if or when Walmart starts to flounder in the future? I know it’s a big if, but hear me out…It seems like a fairly large gamble to focus soley on economies of scale and not even consider profitability…

Wall Street, as do I, feel Walmart should slow their expansion effort (due to the decrease in ROI per store opening) and focus more on entering new markets and perhaps renovating older stores. Seems logical doesn’t it? But does it really seem logical in the Walmart way of thinking? Probably not…I mean, Walmart sees this as a near term hit that will ultimately yield long term results by decreasing overpopulation of individual Walmart stores, which should theoretically increase consumers appetite to buy more crap.

Sigh…Walmart is undoubtedly here to stay for many years to come, but this approach may really come back to haunt Walmart down the road. If I’ve learned anything from the past, it’s that profitability is king. When future struggles rear their ugly head and that lucrative expansion well runs dry, shareholders will demand action. The question then will be, will this Titanic be nimble enough to dodge that enormous iceberg before it’s too late?

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