[Authored by Zac Cooke, MBA Candidate] In a little over 40 years Wal-Mart has grown to become one of the largest corporations in the world, with annual revenues topping $350 billion. They have achieved this position as retail market leader by delivering products at a low price to all consumers. They are able to deliver these lower prices to consumers while maintaining a position as the 67th most profitable company in the U.S. in 2006, and they've done this by selling up to 40% of their offering as private label goods. These privately branded items, many of which are made in foreign countries, offer Wal-Mart an opportunity for higher profit margins.
Over time this strategy has led to huge growth, but now, as Wal-Mart continues to expand globally, their domestic pricing strategy is not leading to uniform success in all of their foreign markets. Recently, Wal-Mart completely pulled out of Germany and South Korea. Their strategy of offering low priced items led consumers in both countries to perceive the products offered by Wal-Mart as being of low quality. This has proved disastrous in countries like Germany where quality is valued heavily in the buying decision. Wal-Mart is also seeing problems in Japan with their Seiyu retail outlets. Last year, Seiyu posted losses of $195 billion. This is even after attempting to drive higher Japanese sales through the use of higher end goods.
Seiyu began to alter their product mix and offer higher end goods in 2006, but sales continued to fall short of expectations, and profits are suffering even more due to the slimmer profit margins on many of these higher end goods. Although Wal-Mart is struggling in some foreign markets, they do continue to make headway in China and are quickly becoming one of the strongest retail presences in urban areas of the country.
Back in the U.S., Wal-Mart is also dealing with new issues, and their competition is gaining market share. Target is one competitor who is gaining on Wal-Mart through a strategy of higher prices on a product mix that appeals more to a hip and more design-conscious consumer. This shift in product perception is also becoming evident in America. In the end, it just goes to illustrate once again that a low price strategy does not always work, and continuing to monitor the market's perceptions remains the key to an effective pricing strategy.
Zac Cooke, MBA Candidate