How does this retail company generate HIGH returns despite keeping its prices LOW?

Tuesday: Return Driven Strategy FROM THE DESK OF MILES EVERSON: As a business leader, one of the frameworks I truly find effective in managing my team at MBO Partners is Return Driven Strategy (RDS). This pyramid-shaped framework has 11 tenets and 3 foundations that help businesses achieve wealth and value creation. You may know more about this framework when you read Professor Joel Litman and Dr. Mark L. Frigo’s book, “Driven.” Let’s talk about a business case study related to RDS’ Tenet Two—Fulfill Otherwise Unmet Customer Needs—in today’s article. Keep reading to know how this retail company is able to price its offerings more cheaply and still generate high returns. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

How does this retail company generate HIGH returns despite keeping its prices LOW? In a past “Return Driven Strategy” article, we discussed the factors that led to the downfall of toy retail company Toys R Us. There, we highlighted how the brand struggled to keep up with changing trends in consumer behavior and childhood play. As a result, the company experienced pricing pressure and in 2018, it filed for Chapter 11 bankruptcy due to years of declining returns and mounting debt. Today, we’ll talk about another business case study that’s relevant to Return Driven Strategy’s (RDS) tenet on fulfilling otherwise unmet customer needs. The difference is that, unlike Toys R Us, this company used the right business strategies and therefore achieved high returns. The name of this business? Walmart! Walmart is an American multinational retail corporation headquartered in Bentonville, Arkansas. Founded by businessman Sam Walton in 1962, the company operates a chain of hypermarkets, department stores, grocery stores, and Sam’s Club retail warehouses. As of today, Walmart has over 10,000 branches in 24 countries and is the world’s largest company by revenue. Why Walmart had—and still has—Pricing Power [Pricing Power: This refers to a company’s ability to raise prices without reducing demand in its products. Pricing power is generally determined by how unique or essential a product is in the eyes of customers, or the unique value it provides to customers relative to competitors.] In the book, “Driven,” authors Professor Joel Litman and Dr. Mark L. Frigo say Walmart has pricing power even when its offerings are cheaper than other businesses. How is that possible? According to them, Walmart’s low prices combined are still far higher than the costs of making those goods available to the public. Just to clarify: The “costs” we’re referring to here are not the costs of Walmart’s offerings. What we’re referring to are the costs of the assets necessary to sell those goods. These assets include warehouses, trucks, equipment, and others. What other factors enable Walmart to generate high returns despite keeping its prices low? Competition If Walmart doesn’t keep its prices low enough to compete with other companies and e-commerce giants, it could soon go the way of some once-ubiquitous retailers that saw their market share fade and collapse. Here’s an example of how the company competes with another industry giant… Amazon is one of the leading e-commerce giants nowadays. While it offers cheap pricing on some items, such as food offered through AmazonFresh, a 2018 analysis found that Walmart’s products are around 34% cheaper than Amazon’s. As a result, many consumers flock to Walmart to save some cash AND enjoy the same, high-quality items. Low Operational Costs Since its first opening in 1962, Walmart has followed the guidance and principles of Walton to keep its operational costs low. Until today, the company keeps its costs low by using a sophisticated and largely automated supply chain management system, keeping in-store design basic, and having business executives use budget travel options. Sheer Volume of Sales Walmart is known for selling more of just about everything and selling its products for less than other sellers. Because of that, the brand can still make more money even if the margins are smaller. Additionally, Walmart has huge bargaining power. It can demand lower wholesale prices, and these savings are passed on to customers. Direct Sourcing Walmart hardly ever transacts with brokers when making deals with suppliers. It works directly with the manufacturers that make the products it sells and the farms that cultivate food for its grocery sections. AThe company also sends its own trucks and drivers to pick up and deliver the goods it will sell. These are some of the factors that contribute to Walmart’s success in keeping its prices low yet still “sufficiently high” so as to generate returns more than double its cost of capital. In other words… Walmart has pricing power because it has the ability to price its goods far more cheaply and still generate above average returns! — According to Professor Litman and Dr. Frigo, one of the amazing things about Walmart’s business strategy is that its prices could even be cheaper, and the firm would still generate a handy profit. BUT! The company doesn’t have to price more cheaply than it already does because it has effectively built a reputation of low prices through the years, and customers are flocking to its stores in droves. In fact, Walmart’s statement on its website says: “Every Day Low Price (EDLP) is the cornerstone of our strategy, and our price focus has never been stronger.” … and one more thing! Walmart is not a cost-plus pricer. It sets prices based on customer needs and the value of goods to customers, not based on the costs to produce those goods. If the brand priced products according to their costs, these offerings would even be less expensive than they are now. The bottom line? Walmart doesn’t have to sell its products at the lowest prices. It only had to be cheaper than other retailers to fulfill its customers’ unmet needs. We hope you find today’s topic helpful and insightful! Keep in mind that pricing your offerings based on their value to customers is a good business strategy. As Professor Litman and Dr. Frigo said, this is a huge contributing factor to generating high cash flow returns. Stay tuned for more business case studies that are relevant to Return Driven Strategy! Hope you found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Tuesday’s Return Driven Strategy! What do you think is the reason why some people establish their own businesses? Learn more about the importance of addressing customer pain points in your copywriting in next week’s article!