Walmart: Who let the dogs out?

Well, it seems the LA Times has gone and done a 3-part series on those folks with the Smiley Face and the 55-gallon drums of peanut butter. They're going deeper into the beast and offering up some very nice detail on what a five cent cheaper pair of sweat socks costs or gains you exactly, in the aggregate. Worth checking out: Part 1, Yesterday. Part 2, Today. Here.

[ed: my bad. someone pointed out to me you have to register for the LAT link. hey it's a good paper and it is free. apologies. thanks to makeet]

So, the question is if you can get a gallon of milk in Las Vegas for:

$1.95 - Walmart
$3.04 - Albertsons
$3.25 - Vons

(Put the smaller grocers and bodegas who may sell you one at, ohh, maybe $3.50.)

And, a brand-identical, 9-item grocery bag (milk, cereal, Coke, bread, lettuce, carrots, hotdogs, coffee, shampoo) that the LA Times filled from the above Walmart, Albertsons and Vons, rounded out respectively, to:

$17.70 - Walmart
$23.74 - Albertsons
$25.41 - Vons

So the question is: Do the other smaller, less price-efficient players deserve to live?

All depends on your metric doesn't it? The current divisive management/labor impasse in California over health benefits is due in part to the competitive squeeze and resulting operating cost pressures from Walmart's heavy entry into grocery. Guess who's losing the most revenue? Albertons and Vons. That's 100,000 or so employees being told they can't have more subsidized health benefits like those you and I may enjoy from our companies. Lucky us, huh?

Now, do you work in: Auto parts, Hardware, Dry Cleaning, Flowers, Baking, Toys and Games, Business Supplies, Optometry, Musical Instruments, Furniture? Do you work? Yes? Well, chances are changes are a-comin'.

That $1.10-$1.29 price differential on a gallon of milk, is so large as to be unclosable. And that's the point: unassailable price advantage. That's the stuff which has often been the fuel of market capture. Early to market innovation, new category creation make up the other primary choices.

And, between Price, Product Improvement, or Pure Innovation, two of those approaches expand options and diversify markets. One doesn't. Improvement or innovation create new choices and often completely new customers or industries and, therefore, markets. But Price Contraction, as a source of competitive advantage is a lose/lose long term strategy viewed one way and a win/lose strategy posed another way. And if lose is in any of those definitions of "competitive advantage" you've broken the rules of real Sustainable competitive advantage: Everybody must win.

Win/lose short-medium term

Win/Lose means your muscle allows you to look at the floor with regard to price - $0.00. That's in the abstract, but it just so happens your "real" floor is several basements down relative to your competitors. The Win/Lose part of this is that the more you wheedle down operating costs to mind pennies, those cuts fall to operational areas like training people or, rather, committed, competent people. In all but rare cases, salary is perhaps our largest non-rotating, non-returning operational cost. The cost of goods is returned by sales, your cost of salary, goes out the door. Good, interested, competitive people cost money. They know it and they go elsewhere if you don't have money to pay them. The paradox is, those "good" people have money you need them to spend, but if you expect them to suffer through your underpaid, under-knowledged employees' disinterest in order to transact with your business, well, you know the answer to that one.

Lose/Lose long term

For the long term, Lose/Lose part of the proposition, by pruning away or acquiring your way to virtual retail dominance, you essentially destroy large parts of your local employment and diverse retail base and it's income generating capacity. you will have met your goal of creating an insurmountable barrier to entry to all but the most novel of upstarts. Banks will not loan to smaller players where you operate due to the operational squash-power your company has over start-ups. But still, given your operating cost focus, more competent (and therefore, costly) knowledge has been driven out of your market and been replaced by you, a low price, low product expertise player. Again, competence generates nmore cashflow and disposable income. Income you need. The Lose/Lose part of this conundrum is, to get where you've gotten, you are no longer considered a positive economic force, nor a good neighbor: your markets are captive and possibly resentful of the lack of choice you've dictated; your local tax-base has lost it's diversity and thus its stability. Customers will bolt the first chance they get, the Chamber of Ex-Commerce resents you, and politicians will not like the quandary your business model has put the community in as angry voters ask them how they "let things get this way." You'll be big. And probably alone.

Fun. The price model means you have to gobble up more strategic geography and ever-increasing tactical business channels. And there's always a wall, so to speak. For Walmart, for 10 years of exponential growth, things have been peachy. Stock analysts have been wooed and wowed, customers have saved money, and politicians have welcomed them with relatively unflinching open arms. And just as everyone thought the internet bubble had reversed the laws of economic gravity, Walmart enjoyed a honeymoon of shortsightedness all around.

But notice: Contraction is the key word in so much of whats being said about them, positive or negative. America is an expansionist culture and a divergent, not a convergent economy. New product, not lower prices as it's first imperative. If the price of doing business means that brands and their companies and their employees must bend to the cultural and operational imperatives of Walmart, where does that leave a nation that invented James Dean or Apple or Coke?

In my opinion,

Sam's America!®

is a non-starter. Walmarts "great unravelling" has begun.