The Most Powerful Person on the Planet

Wal-Mart (NYSE:WMT) is arguably the most powerful company on the planet. As the world's largest retailer, Wal-Mart is one of the few stores that can request lower pricing terms from its big suppliers with a reasonable chance that those terms will be met.

Above all else, Wal-Mart is dedicated to selling products at the lowest price it possibly can, while still turning a profit. The King of Rollbacks is a discount retailer, after all, and its claim to fame is the tag line, "Always low prices."

The power behind the throne
With that background, it's pretty evident that Wal-Mart's CEO, Mike Duke, is a pretty powerful man. But even he cowers in fear of a far more powerful force -- a person so powerful that she influences every decision Duke makes.

That person? The average Wal-Mart shopper. Yes, the average Wal-Mart shopper may well be the most powerful person on the planet.

Wal-Mart doesn't demand low prices from its suppliers simply because it wants to maximize its own profits -- the company's own net margins are around a paltry 3.3%. Wal-Mart pushes its suppliers for low prices in order to attract shoppers to its stores.

When all is said and done, for the most part, people shop at Wal-Mart to get the stuff they need at the cheapest possible price. If Wal-Mart loses that pricing edge, its business model is sunk. As a result, Duke and the rest of the Wal-Mart team work tirelessly to keep costs and prices down throughout their supply chain -- all to appease that average Wal-Mart shopper.

The secret of Wal-Mart's success
The way Wal-Mart is able to keep prices down without bankrupting its suppliers is no major secret, but it is a key source of the company's enduring competitive advantage: efficient logistics. The fuller a truck, and the fewer "touches" between a factory and a store, the cheaper it is to have a product available for consumers. And thanks to both Wal-Mart's "big box" layout and its rapid product velocity, it does that sort of thing better than just about anyone.

It takes one heck of an investment to achieve that seemingly straightforward savings. When a company orders full truckloads of product, it'd better be sure that stuff will actually sell, or else it'll be stuck with some pretty expensive inventory. In addition, the company needs to have the space to put all that stuff, otherwise it runs the risk of watching its inventory either rot or walk away.

Neither the space nor the intelligent ordering and replenishment systems come cheap, but Wal-Mart invested early and heavily in its efficient logistics systems, and continues to do so today. That keeps Wal-Mart's end-to-end costs and prices down and lets it serve that all-important shopper. It's an advantage of its scale that none of Wal-Mart's competitors can match.

When you see how Wal-Mart stacks up vs. its competition, it becomes apparent why nobody can touch its efficient logistics systems:

Trailing 12-month data from Capital IQ, a division of Standard & Poor's. *As of August 2009.

Grocery and general-merchandise retailing is a pretty low margin business to begin with, and Wal-Mart is at the head of the pack in terms of both revenue and margins. That gives it a tremendous moat against its competition thanks to its unmatched ability to invest in money-saving logistics improvements.

Profit from that power
The quest to more cost-effectively serve its customers is what led Wal-Mart to make the investments that gave it its perch atop the retail food chain. The edge those investments give it over its competitors is what makes it a worthwhile long-term investment. At Motley Fool Inside Value, we understand the drivers that enable companies like Wal-Mart to become such strong, long-lasting market leaders.

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At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company mentioned in this article, but his wife owned shares of Kroger. Costco and Wal-Mart are Inside Value picks. Costco and Whole Foods are Motley Fool Stock Advisor recommendations. The Fool owns shares of Costco and has a disclosure policy.