How Wal-Mart's TV prices crushed rivals

[Amelia]

How Wal-Mart's TV prices crushed rivals

Retailer's holiday promotions proved disastrous for electronics stores

By Pallavi Gogoi

April 23, 2007

Business Week

Last "Black Friday," for its annual post-Thanksgiving sales blitz, Wal-Mart Stores decided to slash the price of one of the hottest electronics items for the holidays—the 42-inch flat-panel TV—to $988. The world's largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing's "low-price leader." In turn, Wal-Mart's move caused a freefall in prices of flat-panel televisions at hundreds of retailers — to the glee of many people who were then able to afford their first big-screen plasma or liquid-crystal-display model.

Now, it is becoming apparent that Wal-Mart's calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.

The fallout is evident: After closing 70 stores in February, Circuit City Stores on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group, the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores is boarding up dozens of outlets, as well as selling 94 of its 211 stores. "The tube business and big-screen business just dropped off a cliff," says Stuart Rose, chief executive officer of Dayton-based Rex Stores. "We expected a dropoff, but nowhere near the decline that we had." Clearly, these retailers are taking such drastic measures because they don't see any respite in sight.

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[Dr. Shane]

If you can stand the heat, get out of the kitchen. That is capitalism in action. The consumer rules. Success is making one's product affordable to the masses.

On the flip side, I wonder if these cheap flat screens Wal-Mart was or is selling are just junk - as in low quality. If they are, consumers will become wise to that and look for better quality to replace the junk they bought last time.

I still take my radios, VCRs and other electronics in to the repair shop when they don't work right. Most everything in there is digital. The repair man told me these digital TVs are not nearly as reliable as the old analog TVs. They break down a lot and the repairs are expensive.

Wal-Mart is known to make deals with manufacturers to produce cheaper, inferior models to be sold at Wal-Mart only. I buy a lot of stuff at Wal-Mart but I am hesitant to buy electronics there - especially digital electronics. I did buy my DVD recorder there buy only after the repairman at the electronics shop told me which brands to buy (RCA or Phillips) because the parts are easily available when it needs to be repaired.

[Robert]

If you can stand the heat, get out of the kitchen. That is capitalism in action. The consumer rules. Success is making one's product affordable to the masses.

And that is why capitalism will fail because at its core it is based in "I-ism" and "greed".

Wal-Mart has built itself on the backs of the poor. It's owners claim Christianity, but their deeds deny it.

[bevin]

The poor can now afford a large flat-screen TV

The companies with their 50% or more profit on a TV are no longer able to gouge the consumers

And the consumers have voted with their credit cards

/Bevin

[Robert]

The poor can now afford a large flat-screen TV

[Dr. Shane]

A lot of poor people shop at Wal-Mart and have a higher standard of living because of it. Wal-Mart has a very slim profit margin but makes up for it in volume. Many of their competitors do not have the volume and thus need higher profit margins to stay in business.

[David Koot]

Again, what planet? Wally World went from about 10% profit (which is good) to over 60% once they learned and paid for the privilege of taking advantage of other countries.

When I lived in Oklahoma (right next to Wally World's main offices, there in AR) they used to advertise, 'made in USA.' I see that changed. Now, they do indeed seem to get their merchandise from or contract with these third world countries. They can offer stuff at lower prices because of sweat shop pricing.

Dave

[Gail]

I agree with Robert.

I wonder how many of Walmart's staff can afford to buy those big-screen TVs?

[bevin]

Quote:

makes up for it in volume

Right, or to be more precise, they make up for it in inventory-turn-rate

Basically it works like this.

If you have $100 at the start of a year, you can either

(a) buy something for $100, and sell it for $101, every day for the year - profit = $1/day * 365 days = $365

or

( buy something for $100 and sell it for $150, but now the there are a lot fewer buyers, so you can only sell one every two months - profit = $50*6 = $300

In the first case you sell 365, keeping a lot more workers employed and making a lot of consumers happy

In the second case you sell 6! Far fewer workers and far fewer consumers. So the small store that was using ( as their model complains about your price cutting and putting them out of business.

People who don't understand this get very confused.

This is how supermarkets can operate on really really small profit margins.

/Bevin

[Dr. Shane]

And these little mom and pop TV shops didn't pay their workers anymore than Wal-Mart pays its workers. Sure mom and pop made a good living but compared to the management at Wal-Mart they are in about the same boat.

[David Koot]

Athe management at Wal-Mart

Management? Are we talking floor help or management? I would think the management gets competitive pay.

[Dr. Shane]

I believe they get better benefits that the typical mom and pop operation was able to provide for its owners too.

[David Koot]

Except that if the resale price is $100., you also have to add in overhead. If a company were to sell product for only $1 more than they paid for it, they would go under very quickly. But speaking of profit margins, Robert mentioned that Wally World upped its profit margin to 60%. That is quite a mark-up. Can that be verified?

Dave

[Dr. Shane]

The only thing they are making 60% on is the bottle of soda one buys while waiting in the checkout stand. And they make closer to 80% on that. I do think they are getting their 40% on the books even though they are undercutting most book stores.

The faster things fly off the shelves, the lower mark up they can charge. It is kind of like the product has to pay rent for sitting on the self. The longer it sits, the higher its rent.

[David Koot]

Walmart also has the resources and the staying power to crush competitors by offering products at close to their cost, for a time. I seem to recall that Federal restraint of trade laws prohibit 'loss leaders' and unfair competition, but companies can certainly come close to that. For a highly competitive product line, shaving even a few dollars off the retail price can make or break smaller businesses.

Dave

[Dr. Shane]

It isn't so much to crush their competitors as it is to bring customers into the store. The may make next to nothing on a popular item that was advertised but the consumer will end up making other purchases in the store while they are there. Like the bottle of soda for $1.09 in the checkout line.

[bevin]

"Loss leaders" are standard fare in supermarkets.

Be careful quoting margins, because they are usually gross margins.

Gross margins : the immediate costs of (buy+handle-sell)/buy

This does not factor in the cost of the shop, the management, and many other overheads.

Walmart has much lower overhead/sale than a small mom-and-pop shop, and hence can pay for their overhead with a much smaller add-on to their immediate costs.

/Bevin

[Kountzer]

Meanwhile, some tv assembly line worker in china is making $.30 an hour..

DB

[Dr. Shane]

This is what is hard for some Americans to grasp. If that television plant closes down, that Chinese worker is not going to find another job that pays 30¢ (if that is the correct wage). Those factory jobs are actually stimulating the Chinese economy and raising the standard of living for the Chinese.

[Robert]

Those factory jobs are actually stimulating the Chinese economy and raising the standard of living for the Chinese.

These people are economics slaves and Americans workers, losers. The real winners are the corporations.

I'll laugh my head off if the Communist government in China takes over and sends all the Yankees home. It happened in Cuba. Why is the US dealing with a communist government anyway?

Answer: Greed & corruption

[bevin]

Sends all the Yankees home? They aren't there to send home - the industry is been managed, researched, and run by Chinese.

Did you watch China Rising when it was on TV recently?

/Bevin

[Kountzer]

That same factory worker is probably 14 years old and works 12 to 16 hours a day. Nothing correct about that.

[Kountzer]

I didn't know all this was going on til I read the article posted by Amelia. It all makes sense though cause Wal mart is always doing stuff like that. I saw where circuit city is laying off. They just built a really big store just a few miles down the road.

I was in wal mart a month or so ago, and I was astonished at how low the hdtv prices were. Perhaps we'll get one soon.

[bevin]

The TV program showed 18y/o women, grateful for the wages AND THE FREE ACCOMODATION AND FOOD provided by the factory.

The one they interviewed was sending half her income home to her parents, saving for med school, and still had some "mad money" left over for buying some personal shopping

/Bevin

[Dr. Shane]

It isn't hard to grasp. Years ago in the United States towns were divided by the railroad tracks. One side of the tracks was poor and the other side was wealthy. I grew up on the poor side of the tracks. When my older brother was born, we lived in a house with a dirt floor. Now both sides are wealthy compared on a global scale.

Now the "wrong side of the tracks" is the third world. The shifting of manufacturing jobs into the third world is a form or wealth distribution. The third world has young educated workers with a hard work ethic. The developing world has an aging population that is headed for a retirement fund crisis.

Many of these countries have highly educated workers. NCLB Act raised education standards in the US up to what the third world has been producing for years. My wife, in El Salvador, had to pass chemistry, physics, algebra and conversational English in order to graduate. I only had to take biology and basic math to graduate in Minnesota.