Key Elements of Walmarts Cost Advantage

Detailed Analysis of Wal-Mart's cost advantage

Wal-Mart's cost advantage over its direct competitors can be graphically demonstrated as follows.

Figure 1

Figure 1 shows us that Wal-Mart enjoys a comparative cost advantage of approximately 4.2% of sales, which can be further explained as follows:

• Advertising Expenses are comparatively lower than its competitors (0.3% of sales). This is due to below strategies followed by Wal-Mart, which in turn leads to lower effort and expenses in relation to advertising :

o Few promotions: Wal-Mart could afford to have fewer promotions as it offered "everyday low prices".

o Limited amount of major circulars (13 vs. 50 -100 offered by competitors) being printed and distributed

o Local Managers were given ability to tailor merchandise to suit locality, both in terms of what items to stock and also in terms of prices. This would mean the ability to specifically target advertising at store level rather than at regional or national level if needed, resulting reduced advertising costs.

• Rental expenses are comparatively lower than its competitors (0.3 % of sales). This is mainly attributed to:

o A significant proportion of Wal-Mart's stores are in smaller towns where rental prices are likely to be significantly lower than in larger cities

o Wal-Mart's ability to generate sales of $300/sq ft, which appears to be significantly greater than its competitors (e.g. Kmart generates sales of only $147/sq ft).

o Wal-Mart's use of store space for inventory compared to its competitors is much lower (10% square footage vs. industry average of 25%). This would equate to more comparative space available on the shop floor to generate further sales.

• Inbound logistics costs are comparatively lower than its competitors (1.1 % of sales). This is driven by the strategic placement of distribution centres in relation to stores (hub and spoke distribution network), which allows use of the delivery fleet more efficiently (single truck being able to serve a number of stores) and use of cross docking techniques via improved coordination with suppliers to meet store requirements.

• Other Expenses are comparatively lower than its competitors (4.5 % of sales). This would reflect indirect/overhead expenses that cannot be attributed to any of the expense categories detailed above.

o A significant proportion of these costs are likely to be staff costs. A significant cost advantage over competitors on staff costs is likely to exist as there are numerous examples which demonstrate that Wal-Mart associates are highly motivated with their roles and responsibilities