There are several critical factors that have lead to Wal-Mart's impressive success through the years. To unveil (at least partly) the secret of its success, we must examine Wal-Mart's cost advantage relative to a more typical discount retailer. To do this we will study table A derived blow.
Exhibit A: Wal-Mart vs. Industry Economics of Discounting Comparison in 1984 (% of net sales)
Line ItemsWAL-MARTIndustry Average
License fees and Other income.811.1
Cost of Goods Sold73.8071.9
Firstly, as indicated in Exhibit A, the licensing fees and other income is slightly lower than that of the industry average. This is primarily due to the fact that Wal-Mart increasingly ran over two-thirds of their specialty (shoes, pharmaceuticals, and jewelry) departments themselves. As indicated in the case, this figure continued to drop in subsequent years.
Secondarily, in examining the cost of goods sold (COGS) for Wal-Mart we see that, quite unexpectedly, their COGS is actually higher by nearly 2% than that of the industry average.
This seemingly large difference can be explained by Wal-Mart's overall strategy of volume pricing vs. margin pricing.
Third, we see that the payroll expense incurred by Wal-Mart is nearly 1% point less than that of the industry average. This can be explained by the fact that Wal-Mart enjoys high labor productivity that is a result of technical investment made at each store location. Wal-Mart's high revenue also reduces payroll expense as a percentage of revenue.
Additionally, advertising expense is considerably lower than that of the industry average. We know that in 1979 $3.7 million were spent on television advertising and this figure represented 29% of Wal-Mart's total advertising expense. From this we can calculate that the total actual advertising expense for 1979 was...