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Wednesday, May 26, 2010

The Wal-Mart Conundrum

Wal-Mart is the world’s largest retailer. Current projections are that they have over 2.1 million employees globally. Their original claim to fame remains very much intact—“everyday low pricing.” The company grew rapidly from its beginnings in 1962 where Sam Walton and his brother made sure that their markup was always less than their competitors. In the early days, they would drive all night in a rented truck to Tennessee and pick up a load of shirts. The next day they would display them prominently in their store(s) and after a week or two put them back in the storeroom for another try several weeks later. They stubbornly refused to be undersold on almost any item.

The company grew like crazy as Sam developed a unique strategy. They would invade a Nielsen DMA (media market) and build stores in smaller towns not near the major city. Slowly, they would circle the metropolitan area and then move in closer and closer to the center city but rarely would move in to highly congested and competitive areas with high real estate prices for a number of years.

Our advertising and media industries did not give then much attention as they were never significant advertisers. They relied on “everyday low pricing” to carry the day and eventually had a monopoly loyalty in some rural areas. Even today, their advertising to sales ratio is probably one fourth of that of a competitor such as Target.

Sam was not simply a great merchant. Internally, he and his team developed systems that were light years ahead of the rest of the industry. They computerized before others and had tighter inventory control than anyone. Eventually, manufacturers wound up managing Wal-Mart’s inventory for them. If Wal-Mart sold 5,000 lawn mowers on an April Tuesday, the manufacturer had to re-order and get mowers to appropriate Wal-Mart warehouses very quickly.

As they grew larger, they really put the squeeze on suppliers. The big package goods companies such as P&G, Colgate-Palmolive, Nestle, Kraft, and Kellogg among others historically strong armed retail stores regarding pricing, promotion, co-op advertising, and shelf space. Wal-Mart turned that around, often set pricing (lower than the manufacturer wanted), set minimum sales thresholds, and even made sure packaging fits their needs. Wal-Mart claims part of their green initiative is forcing companies to use less plastic in their packaging. Is it? Or does it give them more shelf space? The manufacturers soon sang and continue to dance to Wal-Mart’s tune as 25% of their volume may have come from the Bentonville wizards.

Eventually, the company branched out into groceries and did well there and soon added drugstores. They continue to try to get into banking for the underclass. Soon they had another concept—Sam’s Club, a membership club in competition with Costco and BJ’s among others.

They also keep playing the green card and are constantly adding solar panels to most new and existing stores as well as energy saving lighting. Is this all self serving? One would think so but they are probably the largest private user of solar energy in the world.

Globally, they have invaded Europe, South America and have vibrant growth in China. It appears other cultures enjoy saving money, too.

Wal-Mart is widely credited with fighting inflation, particularly in the U.S. There has been little evidence of price gouging and they buy in such volume that consumers benefit. And, in rural areas where they have put most serious competitors out of business, they are careful not to raise prices to avoid antitrust action from the Federal Trade Commission. Loyola University, Chicago found that Wal-Mart low prices saved the average working family $2,500 per year and creates 210,000 new jobs.

Is Wal-Mart really cheaper? Going back to my young days as a budding economist, I put together a representative market basket of goods (my basket may be different from yours!). In the grocery aisle, I went to Whole Foods (often called Whole Paycheck), a large local grocer, and a national chain. For OTC drugs and personal care products, I went to CVS and Walgreen’s. Without exception, I ignored sale items and found Wal-Mart 16% less expensive than all competitors for my basket of goods. Was the shopping experience pleasant? Nope. But, the savings were very real.

There are several large issues out there:

1) Professor Ken Stone, an economist at Iowa State University has written extensively on Wal-Mart. He says small towns lose their character a few years after a Wal-Mart opens. Shop owners have to adapt if they want to thrive with a Wal-Mart nearby. After several years, approximately half of local retailers shut down. The shop owners that they effectively shut down were often pillars of the community and without them, charities suffered as well as some good jobs. Wal-Mart is not famous for paying well (I grew up in a Norman Rockwell style New England village with small business owners the glue that held all the local institutions together. They were soft touches for school fundraisers and they served on school boards, town council, church committees and encouraged their employees to be part of the volunteer fire department). The shrinking pool of local leadership has also caused there to be more lower paying jobs as the closed businesses often paid better than Wal-Mart does.
2) The libertarian leaning Ludwig von Mises Institute argues the opposite stating that Wal-Mart has a positive effect on new business development. They see local retail closings as merely part of the process of “creative destruction” that takes place in a free market economy when innovation sweeps away the old and inefficient. Wal-Mart, to them is simply a living embodiment of the concept of Consumer Sovereignty where the consumer is king. The consumers feel Wal-Mart has listened to their needs via low prices so they continue to grow.
3) Labor unions often harp that Wal-Mart in the U.S. is hostile. Employees are unionized in other countries but not at home. Also, employee turnover is 70% per year implying that pay and benefits are weak.
4) Some say that Wal-Mart has worked hard and successfully on ethnic balance but claim that there is evidence of discrimination against women and gays in terms of promotion. Finally, their health coverage is considered problematic in many states. Claims have been made but are as yet unproven that they keep hours low for many employees so they do not have to provide healthcare.


The more you dig into Wal-Mart it is easy to see why views on the company are so polarized. Some commentators attack Wal-Mart as all that is evil in big business. Others say that the company is a lightning rod for criticism due to jealousy. They are a free market success story, the largest employer in the U.S. retail and people begrudge them their success.

Over the last couple of years I have lectured on Wal-Mart and used them as a case study. A few weeks ago, I outlined many of the ideas presented in this post to a group of young adults. The discussion that ensued was long and lively. Only one person admitted they liked Wal-Mart. Most said they hated the appearance of the stores, as well as the surly or invisible service but they came back again and again because the prices were excellent.

A few days letter I received a long message from someone who stayed quiet during the Wal-Mart discussion. She said her Mom was single and struggling. Wal-Mart put food on the table and truly lived up to their theme line—“Save money, live better.” To those of us who live comfortable lives, the point is well made. If Loyola is correct with the $2500 annual savings, blue collar families almost HAVE to go to Wal-Mart. Friends have told me they will not go there and admit it is for purely political reasons. They can afford to do that but a great many Americans cannot.

So what do you think?

Is it more important to lower costs for all or is it better to be a better corporate citizen in each market that the company enters? As a society are we better or worse off due to Wal-Mart’s growth and increasing dominance?

Is Wal-Mart simply a case of Consumer Sovereignty from a Consumer Behavior standpoint or is there something more sinister afoot?

To me, it remains various shades of gray and I will continue to monitor it and study it carefully.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Friday, May 21, 2010

Build Brand Awareness Through Social Media

Today, we have a guest contributor. Chris Maienshein is a very recent graduate of Stevenson University. This past semester he engaged in an independent study with me on emerging media. Here is his take on Social Media. It is interesting and important to get the vision of a bright 22 year old.



For years television has been the number one tool to advertise products and services to a mass audience. The landscape of advertising has begun to unravel recently due in part to the excitement of social media outlets. The only problem with these brand new outlets is the question not too many people seem to be able to answer. How do you properly use sites like Facebook, Twitter, and YouTube to reach your target audience? Many people believe that these websites will replace the need to advertise on television and could end up being the most effective way to broadcast their product. I still believe T.V. will remain the number one advertising mechanism but realize the importance of mastering the social media landscape. The fact is that Facebook has over 250 million users and continues to grow. There are 44 million users on Twitter, 72.5% of whom joined in the first five months of 2009. YouTube has 75 billion video streams reaching an audience of 375 million people. These statistics cannot be ignored by any company looking to expand their products across a broad range of people. Therefore, the time is now to learn how to market your company’s product or service effectively through social media. I believe in order to do this correctly one must realize that social media should not be looked at as advertising. Rather, it is a place to build brand awareness. Many companies are failing to understand this concept and are attempting similar strategies they would use on other advertising media. Do not approach Facebook and Twitter as a place to sell more of your product. Rather use these sites to engage your target audience. Allow them to discuss your product and give you positive or negative feedback. Social media does not automatically create sales. They can only accelerate the learning curve for the target market. Several key tips companies could use in order to master the art of social media are: Constantly updating your Facebook, Twitter accounts, and blogs are a must. In order to understand your target audience you must be heavily involved in the culture. Read other companies blogs and Facebook pages in order to determine the best route your company can take. A mistake to avoid would be hiring people to leave nice comments on your social media websites. This is not a constructive use of social media. You want the customers to feel free to say whatever is on their mind. These websites are a great place to receive constructive criticism and gives the company a chance to redeem themselves with the customer. Social media is a place to be real. Do not act like a hired marketing consultant attempting to push a sale through your readers. Show personality and enthusiasm for the product. That will allow people to gain a level of trust, ultimately creating a loyal fan base. As mentioned earlier, keeping up with each site is a necessity. That means it is going to be a lot of hard work for you. The easiest way to add new material to your blogs or Facebook pages would be offering tips or advice for the clients. For instance, if you are a financial advisor looking to reach new cliental through a blog you should consider starting a blog with your financial tips of the week. Remember you are not advertising the fact that you are a financial advisor, only creating brand awareness. Eventually you will have a large enough fan base that they will start reaching out to you for further advice. That is when you can offer them your services as a professional advisor. When writing a blog, running a Facebook page, and “Tweeting” on your Twitter account make sure you respond to all inquires. Answer their questions and be thankful for their input. Their input adds a whole lot more value to your web content and will strengthen your social media expertise. Lastly, do not get involved in just Facebook or just Twitter. Get involved in every social media website you can, the more the better. You should have links from one site to your others so that people can become even more engaged with your content. For example, using the financial advisor scenario, at the end of each of your blogs leave a link to your Twitter account, your Facebook page, and any YouTube videos that relate to your financial work. This would then allow the reader to recognize, through your Facebook page, that you are a financial advisor with valid knowledge. Your links do not have to stop at just your personal pages also. You can lead your readers to other appropriate web content that you feel would increase your audiences’ knowledge of the subject. Again, doing so gains you more credibility as a legitimate source and will leave the reader wanting more. Remember to maintain a strong reputation as a reliable source and as a respectful communicator that does not insult the opinions of others. Do not try to be someone you are not. Show your true personality through your content. Always be truthful in your statements. If you do not know the answer to a question simply reply that you will get back to them after you have researched the answer. Lastly, if you decide to use social media as a tool to build brand awareness stay timely. Participate fully with constant updates of your material and quick feedback to your readers. Getting involved in social media can grow your brand, and reinforce the connection between you and your customers. The time you invest into your social media outlets will ultimately make you aware of what people want out of your business.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Monday, May 17, 2010

The Future of International SKU's

A few weeks ago, I posted a story on vanishing SKU’s (Stock Keeping Units). To my surprise, it generated more mail than any other Media Realism piece to date. Some enjoyed, some agreed, many were amused by it and one reader said that I had definitely become a socialist! The mail also included requests from readers on three continents who asked me to expand on it and discuss what is happening internationally and what may the future may look like in their neck of the woods.

So here is my take. It may be different from what you see or hear elsewhere.

About 20 years ago, American multi-nationals began to realize that countries with emerging middle classes were becoming a happy hunting ground for well established brands. Colgate-Palmolive was way ahead of the pack. As early as 1972, some 52% of their sales were outside of the U.S. Other U.S. brands got religion and began to make their move abroad for several reasons:

1) Many brands were in mature mode in the U.S. and margins were paper thin. Beverages would be a good example. So, to keep growing they had to follow growth trends regardless of the passport of the new markets.
2) Foreign countries had some native brands but many were not national in scope. They did not have expertise in mass production, distribution, or branding.
3) Importantly, few had much advertising expertise as there were few media outlets available and not nearly as much TV as the U.S.
4) There was a halo effect. American pop culture traveled well whether it was blue jeans, Budweiser, Marlboro, Coke and Pepsi, McDonald’s, music and Hollywood films. So, when American products showed up, the new generation of consumers in emerging markets gobbled them up.

Since then, a few things have happened. Locals who did not have the expertise slowly began to get it. Some did knock offs of American products and succeeded as well. Countries such as India, Brazil, Korea, even Turkey now have indigenous brands that are thriving and fiercely competitive to US brands or Switzerland’s Nestle or the Anglo-Dutch conglomerate, Unilever.

So, for the next several years we may see brand and resulting SKU expansion around the world. But, then the big boys will pounce as they have done in the states for the last few decades. How will they do it? Do this exercise and you will come away convinced. I took a careful, actually boring look at the balance sheets of beverage and snack food king PepsiCo, the world’s largest food processor Nestle, and insurance giant and conglomerate Berkshire Hathaway. These companies are growing with almost armored car safety. If the present trend continues in about three years, they will be able to secure long term debt at a price far more reasonable than the US government will. This gives them access to capital that is easy and cheap relative to 99% of emerging market competitors.

These giants and others like them will buy up strong local brands across the globe at a pace far faster than the past and the cycle that we have seen in the US will only repeat itself.

Is this a good thing? Probably not as fewer SKU’s means less competition and less consumer choice. But the economies of scale that the multi-nationals provide may keep prices down for a while. Capitalism is relentless and unforgiving. The strong will get stronger and office workers in Manila will soon shave with Gillette, have Nescafe at breakfast along with a Kellogg’s cereal, brush with Colgate, and knock back a Pepsi at lunch and a Bud or two after work.

Also, if the dollar dives in a few years as our massive deficits finally catch up with us, earnings of the big multi-nationals may zing as big sales in stronger Asian currencies are repatriated back home.

Another big beneficiary will be the large advertising holding companies that have global responsibility for key brands. Right now, these accounts have the growth potential similar to many US brands in the early 1950’s.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com