Tuesday, November 24, 2009

How low can they go?

Here's a statement to reckon with:

"Our company is based on low prices. Even in books, we kept going until we were the low-priced leader. And with will do that in every category if we need to."

Raul Vazquez, president and chief executive of Walmart.com. (This mornings Bulletin.)




Talk about laying down the gauntlet.

I should remind myself of this statement every time I complain about comics being such a small industry. Yes, comics are a small industry and as such only provides about 60% of the revenues I need, but it is the base of my business. All the other 7 or 8 product lines are 'sidelines' and provide the other 40%. It would be difficult to make it on only sidelines. As it turns out, it's fortunate comics are also relatively difficult to sell, taking up space and energy and organization for very little return. To a very small audience. So far, the big boys haven't quite figured out a way to do it. So far.

Yet, I think that may be the future of a store like mine. Assembling together enough unique product that Walmart can't quite take it all. Hard work, that.

"...we kept going...until we were the low-priced leader...in every category..."

Does anyone think through the logic of such a statement? Where do those cost-cutting savings come from? Material? Labor? Transportation?

Because it has to come from somewhere. Either the cost cutting comes from the suppliers, or their own operations, or from the material in the product itself.

I had a 'customer' in yesterday, who occasionally buys the supplies for sports cards he can't get anywhere else, but never....never, ever...actually buys anything worthwhile from me. (Supplies are a courtesy, not a profit center.) He was complaining about the card sleeves he had bought from Walmart.

"They're rejects," he said. "Really low quantity."

"Well, you know," I ventured, into dangerous territory. "You're not quite getting the deals you think you are on anything else, either." I proceeded to inform him of the "Home Team Advantage" program that Topps has for hobby stores, guaranteeing a higher rate of autographs, etc. etc. etc.

I lost him right away. He had the example of crappy sleeves right in front of him, but wasn't ready to extrapolate from that. It still hadn't quite entered his thinking that maybe, just maybe, he was getting lower quality on everything else he was buying from Walmart.

Next book I'm going to read is CHEAP, THE HIGH COST OF DISCOUNTS. Even though I suspect it may be disheartening reading.

I believe the publishing industry, which is already in trouble, is being forced into very dangerous territory.

What's the most likely result of Stephen King's latest book being sold for $9.00 at Amazon, Walmart and Target?

That these stores become an even bigger slice of the publishing pie.

And what are they likely to do with that clout?

Well, we already know what Walmart is going to do. They've told us. They'll drive the prices of books down. And down. Until they are the "low-priced leader."

And the publishing industry will have to agree. Because it's more than possible that Borders won't survive this; or any number of independent bookstores; and I wouldn't think Barnes and Nobles is going to do so well, either.

I won't be buying wholesale copies of Under the Dome for 24.00 from my distributer, which extended to every other independent retailer can't be helping them much. And so on, up and down the line.

How many best-sellers can I ignore before I become irrelevant? So do I buy and lose money? Do I buy, and explain to my customers that they have to pay 4 times as much from me, but, gee, I'm such a nice guy?

It all seems so self-destructive to me. To our culture. To our economy.

But, hey. What do I know?


RDC said...

The key to competing with WalMart and for that matter every other big box retailer is the nature of their strength. Everything they stock/sell is focused on quick inventory turns. They will not sell it if they cannot sell it very quickly (I expect Walmart might even be down to a 7 day average target by this time, I know a few years ago when I had some meetings with them they were looking at less than 15).

The reason why they can charge what they do it because of the number of inventory turns that get (Someone making 10% margin that gets 50 inventory turns still makes more then someone else that has a 40% margin and gets 1 turn). That is the driver of their business. That is the driver of every big box stores business model.

That is also why they can take a loss on some tiems as long as it brings in volume that keeps the inventory turns on the other items going.

RDC said...

Retail has always been a dynamic model. A number of store keepers raised the same concerns you do now. They raised them in the early 1900 hundreds when Sears came out with the concept of a mail order catalog.

The cycle we are seeing is not unique. Nor is it the woe is us, seeds of destruction that you map it out to be. Business has always been based upon competition. The elements of that competition has not changed in 100 years. The big three being price, service level, and quality.

Just because a business area has gone realtively unscathed for a period of time does not mean that it always well. This is also not the first time that there have been forays into the book area. Ask the small book store owners how they like Borders and Barnes and Noble or for that matter Amazon. Now you have the high turns portion of the business being focused on by Walmart (and Target and others). I am only surprised that it has taken them this long. Considering that out of the thousands of books published each year the a large amount of sales is in a relatively few bestsellers.

As far as publishers are concerned, the majority are somewhat antiquated dinosaurs as far as management and approach. As with the dinosaurs many will be extinct 10 years from now. Consolidation will be a major activity in the publishing side. Survivors will be nimble and will develop new business models. THe good news is that unlik comics there will be topic expert publishers and it will not consolidate down to one or two mega publishers. The authors and their name recognition are still key and one of the keys to success will be a publishers ability to keep authors loyal.

Duncan McGeary said...

I seem to be going in the opposite direction.

Lower turns.

Higher margins.

The key word is 'unique,' I think. Unique product, unique location, unique person behind the counter.

I've created a Christmas Tree display of my Settlers of Catan, because I have about 20 in stock.

Seems weird to me, because I usually only have ONE or maybe TWO of even the best-selling items.

Fortunately, the policy of having one or two of as many different types of product as I can cram into my store is also the same policy that allows me to buy product that's on sale.

The 'on sale' product is usually a little to the left or the right of the mainstream stuff, and since I'm not hurrying to sell it, and because I'm probably the only guy within 200 miles that has it in stock, I can sell just enough of these unique items per day to get by.

I simply have to shrug my shoulders when everyone buys Stephen King's Under the Dome from Walmart, and hope that someone is looking for...say...an early Vonnegut.

So, weirdly enough, I actually avoid having too many best-sellers (well, maybe have one in stock cause I ain't crazy) and invest in medium or even low sellers THAT NO ONE ELSE HAS.

I just kept responding to circumstances, and found myself in this situation.

Duncan McGeary said...

That's like saying there have always been empires, and then there's Rome.

There have always been retail giants, and then there's Walmart.

Walmart has a whole nother level of ambition. They want to be the Leader in Everything.

I don't think they can do it. The more homongenized they get -- the more successful they get -- the more the hunger will grow for unique, for the special.

The more they drive down prices, the weaker their suppliers get. This model will only work if they can always be the cheapest.

What happens in transportation prices go up? Shipping and Trucking and fuel costs? Chinese labor costs?

How much can they cut expenses in their stores before it becomes too much?

Eventually, they get to the point where they're trying to Name That Tune with one note. Impossible.

In time.

In the long run.

RDC said...

They are to retail today, what Sears was to it in their day. 20-30 years from now their will probably be someone else with a different model that will replace them.

Jeff said...

It's funny to hear you guys talk about Walmart so much. Here in Corvallis-Albany there is no Walmart -- it's at least a 30 minute drive to get to one in Lebanon. Walmart-type shopping gets done at Bimart. Sounds like I'm not missing much.

tim said...

"Does anyone think through the logic of such a statement? Where do those cost-cutting savings come from? Material? Labor? Transportation?"

Sure, all those things. But a lot of it from the logistics revolution of the last 30 years. Basically, using computers to manage inventory and transportation. I know several people who have worked on those algorithms. It means less waste. less fuel burning, which is good.

It's all a mixed blessing, but you sure can't argue with how it's worked for them as a company (and Amazon, Target, Home Depot, etc).

And it was inevitable. There was logistics competition between a lot of companies, and the crappy ones mostly died off. Someone was bound to win.

Duncan McGeary said...

Yes, you can keep cost-cutting by halves to infinity, right, Tim?

I wish there was a way to find marketshare statistics for Sears at it's height and Walmart today.

tim said...

"Yes, you can keep cost-cutting by halves to infinity, right, Tim?"

They don't have to keep cutting by halves, they just need to apply productivity improvements as soon as they are available. They don't have to outrun themselves, just others.

They could very well fall, but they have the best talent for now and are better prepared than their competitors.

At any singlejunction, they have the upper hand. Yes, they'll eventually blow it--everyone does. Especially companies that aren't trying as hard as Wal-Mart.

Duncan McGeary said...

In my experience, I've learned to be skeptical of big store 'efficiencies'. That isn't what I've observed on a micro scale, and my instincts tell me it isn't true on the macro scale.

Someone had to become the biggest, maybe at the beginnings with a charismatic leader and or a better mousetrap, but eventually they just get so big they can stomp everyone into the ground.

tim said...

Well, I think you see what you want to see.

The logistics revolution changed retail.

Trucks used to run around with nothing in them. The routes are now optimized.

They even use GPS to plot routes to make fewer left turns (which saves fuel).

Warehouses used to be a mess. Inventory used to be a mess. The supply chain used to be a mess. Huge ordering mistakes were common. Products were sent to regions where they were not needed or wanted by the local populace. It was ridiculous.

The real problem isn't Wal-Mart at all. It's the shallowness and acquisitiveness of the populace. We want to buy crap--that's what's wrong. I'll blame TV over Wal-Mart ever day.

Duncan McGeary said...

"Well, I think you see what you want to see."

Well, you know, back at you.

I know it LOOKS impressive, but I'll stand by my assertion that most of their savings come through bully tactics and that they aren't as efficient as everyone thinks.