2/27/2008

Wal-Mart makes Gains in Troubled Economy

Wal-Mart is posting steady gains while other retailers are struggling as the economy cools off. Wal-Mart is in a favorable position compared to other trendier competitors due to the inelasitic nature of the goods they sell. People always need staple goods to survive whether in a recession or not. As household budgets tighten, buyers that may have once shopped at Target and now opting for Wal-Mart due to their comittment to low prices.

13 comments:

Emma said...

Not only are Wal-Mart’s goods inelastic, but they are normal and sometimes even inferior. This means that when customers start to face harder financial times, they buy cheaper products, which Wal-Mart provides. Customers also buy more of these normal products. Wal-Mart has always been known for their low prices, so as the economy declines, more people are looking to buy inexpensive goods and Wal-Mart is the best place in town for them to find what they are looking for. Wal-Mart has large amounts of money and support so they are able to keep their prices low. This increases the demand for their low-priced products and Wal-Mart is ready to be the best supplier.

Jacques said...

I was recently reading an article in the Economist about Wal-Mart's somewhat ideal positioning during an economic slowdown. It points out that Wal-Mart has seen a surge in sales of more than 8% over last year and that its greatest strength lies specifically in grocery sales, which is relatively inelastic.

It also mentions Home Depot's hard times at the moment--something to be expected considering a Tufte lecture from a couple of weeks ago.

Aidan said...

This surge for Wal-Mart shows that as the media keeps talking about a recession and trying to put fear in the eyes of consumers, it will only create a bigger smile for Wal-Mart. Wal-Mart is smiling because they hold the dominant market position as the low cost leader. You may even say that they are receiving free advertising.

Dr. Tufte said...

Rearden: If Wal-Mart's goods tended to have inelastic demand, their low-price strategy wouldn't work.

I can offer 2 other bits of speculation about why Wal-Mart is doing better now than over the last couple of years:
1) Emma is right: they sell inferior products which have done better as the economy has declined.
2) Their strategies to improve their business of 2005-6 are now showing signs of success.

Gavin said...

Wal-Mart is not in a better position than other retailers regarding inelastic products. Low-priced elastic products are bringing consumers into the store. Success invites competition and it will be interesting to see if anyone can employ a better strategy to sway consumers.

Matthew said...

Dr. Tufte and Emma said that Wal-Mart has been doing well because they sell inferior goods. While that may be true with some of their products, there's something I don't understand: If Wal-Mart sells inferior goods that do well in recessions or tight economic times, how come Wal-Mart has been able to have such good success, collectively, regardless of the state of the economy? There are many factors for Wal-Mart's success, that I feel are greater than providing some inferior goods. Wal-Mart brings customers in for low-priced staple items and gets them to leave with some extra, higher-priced items. Wal-Mart is located in many rural areas that have leave little choice for people to shop anywhere else, besides the Internet. I have seen wealthy people, doctors, successful business owners, and company presidents shopping at Wal-Mart, not because they have to shop for inferior goods, but because they want to buy the things Wal-Mart carries.

carter said...

I agree that Wal-Mart does so well in a recession because of their commitment to low prices. I love Wal-Mart.

Trinity said...

Dr. Tufte is right and I've got a 3rd point to add to his list. Walmart has recently remodeled all of its stores to appeal to consumer demands for a nicer store. Walmart had an image of dingy and dirty stores in the minds of many consumers. It has worked hard to overcome this image and it is paying off.

P.S.- When referring to a company or organization it is grammatically correct to use "it" and "its" instead of "they" and "their."

William said...

Dr. Tufte,
I agree with both you and Emma. In Investments class we studied this exact principle. Of how when the economy is not doing well it is best to invest in companies that provide inferior goods. As the economy is unstable and people are not sure about their jobs/incomes they will be more likely to buy cheaper items. Wal-Mart is a perfect company for this. I beleive that with the present worries of entering a recession Wal-Mart will only continue to increase its sales.

Reagan said...

Dr. Tufte-Extra Credit

I was just reading on Forbes.com about criticism of Wal-Mart's CEO, H. Lee Scott Jr., and his performance since he became CEO over 7 years ago. They must have compiled most of their information before Wal-Mart published their SEC filings. They claim that under his leadership Wal-Mart has averaged -3.4% annualized total return. Wal-Mart must have been in bad shape before they implemented their strategies to improve their business in 2005-6. The results of the changed strategy and their current success will need to continue to offset the struggles they had leading up to these changes. This evidence should reinforce with managers that it is important to closely monitor their strategies, make changes when necessary, and during economic struggles they should focus more on inferior goods. This is probably a good example of a company that was proactive and not reactive. What if they hadn't revised their strategies before they did?

TheFindlay said...

Dr. Tufte
I would like to add a third reason for Wal*Mart’s continued growth, if I may. Wal*Mart is the great mother behemoth of business; they cannot and will not be stopped!!! I was going to put that sentence in all caps but I think you can hear the screaming without such emphasis. Sam is the man and his creature will do well regardless of externalities and for that matter, even internalities. Wal*Mart has most Joe Sixpack’s by the jugular, whether Joe will admit it or not, and there are no signs of letting go.

Dr. Tufte said...

Matthew is right - I did say that Wal-Mart sells inferior products. Let me correct to say that 1) no place sells a lot of inferior products because there just aren't that many, and 2) Wal-Mart does sell more than most.

I disagree with thefindlay's comment. One day, Wal-Mart will also be an also-ran, just like K-Mart, Sears, and Montgomery Ward.

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