Walmart Fights in the court of Consumer Opinion

I have long sustained that business models based on the cheapest price are failed models. Walmart has long touted this model although it was not part of the original model. Walmart was created with a model based on offering local products at a reasonable price. Their differentiating factor was that they would eliminate the middleman and allow local producers and farmers to sell their products directly in the store without having to share their earnings with distributors and wholesalers. This model allowed the producer and Walmart to have greater margins. Somewhere along the path to becoming the largest retailer in the world, most likely when Wall Street became involved, Walmart modified its business model and went for low prices at any cost.

Walmart began expanding and decided that its business was to offer the lowest price. They forgot the premise of their success, quality products at a reasonable price by eliminating middleman and transportation costs. They embraced the traditional distribution and wholesale model and decided that the low price was their model. This was the beginning of the end of Walmart. As soon as Walmart started down this road they became the Kmart, Sears, and so many other low cost retailer who first grow and then die.

Since Walmart now had the same cost structure as other retailers they had to cut costs from other areas. They went in two directions. They massacred their employee compensation and started buying products produced in other parts of the world. The result was the complete abandonment of the original successful business model. Since quality and price at the point of production are relatively stable the only way to compensate for higher distribution and transportation costs was to reduce quality. Today, over 70% of products in Walmart come from Chinese producers. The shipping costs now account for almost 30% of the price of anything found on the shelves. Walmart sales are now stagnating. Since they no longer are quality products at a reasonable price they have no loyalty from their customers, just like what happened in Kmart with the blue light special.

Walmart realizes they have a problem. In the last year, under vicious attacks from employees and labor advocates, they began paying their employees better. In fact the typical employee, in any geographical area, makes 10% more money than a Target employee. They have eliminated their slogan about low prices at all costs. They have also begun an institutional advertising campaign to tell the US market how they are involved in giving their employees health insurance. These are not things a company does because they have had a prophetic vision. They have finally realized the fallacy of the low cost model. They have seen the light; there is always someone else who can find a way to sell your product at a lower price.

Walmart attempted to go after the high end market but failed. It is almost impossible for the crappy low price leader to sell into the quality conscious segment. They have no credibility. If Walmart wants to survive it needs to go back to the original model. Eliminate shipping costs, pay their employees a reasonable amount and sell a quality product at a reasonable price. This is the only model that will be successful. It should not be difficult for Walmart to do this; it is part of their DNA. They will have to go against the grain but their future depends on it. If they do not there will always be an Eddie Lambert out there looking to pick up retail locations.

Tags: Walmart Politics Recession Corporate America Economy Reaganomics