Wal-Mart's Cost Leadership Strategy

On July 2, 1962, Samuel Moore Walton, a merchant with over 15 years of experience in retailing, set
up his first discount store in Rogers, a small town in the state of Arkansas, US. The store offered a wide
variety of branded merchandise at a competitive price.

During the initial years, Walton focused on establishing new stores in small towns, with an average
population of 5,000. These towns were largely neglected by leading retailers like Sears Roebuck &
Company, K-Mart and Woolco, which concentrated more on larger towns and big cities. In his efforts
to attract people from the rural areas to his stores, Walton introduced the concept of Every Day Low
Prices (EDLP).

EDLP promised Wal-Mart's customers a wide variety of high quality, branded and unbranded products
at the lowest possible price, offering better value for their money.

Wal-Mart's advertisement describing EDLP said, "Because you work hard for every dollar, you deserve
the lowest price we can offer every time you make a purchase. You deserve our Every Day Low Price.
It's not a sale; it's a great price you can count on every day to make your dollar go further at Wal-
Mart."

From the very beginning, Walton made efforts to procure products at the lowest prices possible from
manufacturers.

He always shared these savings with customers by charging them lower prices, thus giving them the
maximum value for their money.

Wal-Mart's products were usually priced 20% lower than those of its competitors. Walton's pricing
strategy led to increased loyalty from price-conscious rural customers. It helped the company to
generate more profits due to larger volumes. Explaining his pricing strategy, Walton said, "By cutting
your price, you can boost your sales to a point where you earn far more at the cheaper retail price
than you would have by selling the item at the higher price. In retailer language, you can lower your
markup but earn more because of the increased volume." EDLP was extremely attractive to rural
customers and emerged as the key contributor to Wal-Mart's growth over the years.

Offering products at EDLP, especially during its early years, when Wal-Mart was not an established
retail player, was quite difficult. The company aggressively followed a cost leadership strategy that
involved developing economies of scale and making consistent efforts to reduce costs.

The surplus generated was reinvested in building facilities of an efficient scale, purchasing modern
business-related equipment and employing the latest technology. The reinvestments made by the
company helped it to maintain its cost leadership position

From the start, Wal-Mart imposed a strict control on its overhead costs. The stores were set up in
large buildings, while ensuring that the rent paid was minimal. The company imposed an upper limit
for its rent payment at $1.00 per square foot during the late 1960s. Not much emphasis was laid on
the interiors of the stores. The company did not invest on standardized ordering programs and on
basic facilities to sort and replenish the stock.

In the early 1990s, Wal-Mart started focusing on its Supercenters and Sam's Clubs to fuel growth. Wal-
Mart expanded its operations into the Northeast and West of the US by placing a lot of emphasis on
the groceries business through its Supercenters. The modus operandi was to first establish discount
stores, after which the best performing stores were to be converted into Supercenters. By 1991, Wal-
Mart's mammoth retail network comprised of 1,355 discount stores, 120 Sam's Clubs and three
Supercenters being served by 16 distribution centers.

However, at this time, Wal-Mart had yet to enter as many as 23 states in the US. In the early 1990s, it
was estimated that the size of the groceries business in the US was three times that of the discount
store business. So, Wal-Mart decided to focus on Supercenters to propel its growth. Following
Walton's death in 1992, David Glass succeeded him as the CEO of WalMart. Glass viewed food retailing
as a key driver to increase revenue growth in the 1990s.

By the beginning of the new millennium, Wal-Mart was one of the world's largest companies, with
revenues of $165 billion in fiscal 2000. Wal-Mart's rapid growth continued in the initial years of the
new millennium.

While continuing its aggressive expansion in the food business, the company started launching
innovative programs to further penetrate the US markets. For instance, in 2001, Wal-Mart launched a
program, called 'Store of the community.' Under the program, WalMart began remodeling its discount
stores and Supercenters in the US to fulfill the needs of customers they served, in line with what the
customers wanted. Explaining the program, Tom Coughlin, President and CEO of Wal-Mart Stores
Division, said, "The one-size-fitsall concept simply doesn't work anymore in the retail industry.
Customers tell us what they want and it is our responsibility to meet those needs. Our store associates
live and work in each store's community and interact with over 100 million customers each week. Wal-
Mart has chalked out an aggressive expansion plan to accelerate its growth in the near future. At the
fiscal year ending 2007-08, Wal-Mart achieved a revenue target of $500 billion.

Questions

1. What problems do you think would have been faced by Wal-Mart initially to offer products at
cheapest prices?

2. After analysing the above case, do you think every company should aim at cost leadership?