Wal-Mart’s Price Leadership Helps Company Navigate Tough Economy
Wal-Mart’s (NYSE:WMT) business model thrives on its ‘Every Day Low Prices’ strategy. With a volatile and sluggish economic growth, customers have become more focused on product pricing in order to save money. Wal-Mart has been focused on managing its costs and has successfully passed on cost savings to its customers. This strategy has helped Wal-Mart to solidify and strengthen its presence as the largest retailer in the world with more than $445 billion in revenues.
We maintain a $71 price estimate for Wal-Mart’s stock, implying about 10% premium to the current market price.
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Scale of operations and buying power
The factors that enable Wal-Mart to follow ‘Every Day Low Prices’ strategy are briefly discussed below:
- Wal-Mart uses its enormous size and buying power to put pressure on its suppliers to sell goods at low prices. In return, suppliers have an incentive to sell a large volume of goods. The company then passes these savings to its customers.
- Wal-Mart enjoys a significant influence on its supplier companies since they depend on Wal-Mart for a significant part of their sales. Wal-Mart, for example has successfully influenced companies like General Mills to reduce costs by implementing redesigns of its products and packaging.
The retail industry has become fiercely competitive with the growing significance of online retail. Competitors like Target (NYSE:TGT) are employing strategies to strengthen their relationship with customers. Discount programs like 5% Rewards, REDcard Free Shipping and Pharmacy Rewards programs are proving very effective in driving incremental sales for Target.
It has become really crucial for retailers to establish a connect with customers. Customers perceive Wal-Mart as the largest discount retailer that offers products at the best available prices. We believe further strengthening this image could play a key role in building a loyal customer base for Wal-Mart.
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