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Wal-Mart Stores, Inc.
Walmart: A Victim of its Own Success?

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By swapusa
May 16, 2005

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Walmart's slogan, "Always Low Prices, Always," is finally catching up with them. With their stock trading only a few points above their 5-year lows, it makes one wonder about what is happening at Walmart. Their executives and the analyst community would like and do blame things like slow economic growth and rising oil for Walmart's woes. But, IMHO, that is just an excuse. Walmart's problems are deeper than that. It is not that obvious but Walmart is falling victim to its own success and its own low cost suppliers, namely the Chinese factories, are now helping undo the great power that is, or was, Walmart. Here is the way I see it:

For years Walmart has been able to put pressure on its suppliers and cut prices on a regular basis and pass along the cost savings to consumers. That is fine, but as long as price drop on an item means you can sell considerably more of that item to make more absolute dollars. As manufacturing costs in China have dropped translating into lower Walmart retail prices, items have become too cheap and there is only so much people can buy. How much room does one's closet or house have for stuff? If the price of a notebook drops in half, are you going to buy twice as much for your kids? The problem is that prices of Chinese made products have dropped so much that Walmart can no longer increase its existing store revenues as fast is it used to. Their stores are selling considerably more volume of products than before, but the increased volume is not enough to offset the falling prices due to the Chinese invasion of retail store shelves. Just look at the fast growing Dollar Store industry and you see what I mean.

But that's not the main problem, although it is a big factor. Years ago, when Walmart was growing fast and squeezing other small and large retailers out, doing business abroad and finding low cost suppliers in remote corners of the world was a tall order. It took gigantic investments in infrastructure and personnel and required face to face meetings with suppliers overseas. You actually had to travel all over the world to find the low cost factories and buy from them. Importing container and shipload of products was not something an everyday small businessman could do. It was reserved for the big boys with money and the know-how. But that's not the case today.

The incredible economic growth of China and the growth of the Internet in the same time has disrupted the balance of power that companies like Walmart once enjoyed. Chinese products that Walmart imported into the USA used to be made by only a handful of factories that only catered to large retailers and master importers. A few years ago, a small entrepreneur could not even dream of approaching the factories in China, Taiwan, Korea, and others to purchase products in small quantities. But the Chinese incredible growth has created thousands of small and large factories that make the same products. If an item has a market in the USA, hundreds of factories are set up to make it overnight. And all these factories are looking for buyers to sell their wares. They no longer have to just sell to large retailers and master importers. They can sell to smaller retailers and small time rookie importers at almost the same prices that they sell to the likes of Wal-Mart. Their only problem was to find these smaller importers. Internet to the rescue!!!

Small importers and savvy small distributors and even single store retailers can now use the power of the internet to find factories and suppliers in China who are willing to sell direct to them even if the order amount is under $1,000. Order a palette load and they sell it to you. I have even seen factories in China who are willing to sell a case of product, if you can afford the shipping costs. Numerous Asian supplier specific web sites have been set up in the past few years that allow thousands upon thousands of Chinese, Indian, and other Asian factories and suppliers to advertise their products to the world. Alibaba.com and GlobalSources.com are just 2 such sources of products and there are countless others. Finding factories in China has become as easy as looking something up on eBay or Google.

One might think that, due to their size, Walmart and other large retailers can still get products much cheaper than the small time importers. That was true a few years ago but it is no longer the case. So many factories copy and make the same products in China, that they end up selling them in small quantities at almost the same prices they sell to the likes of Wal-Mart. Large retailers still get better deals, but their own internal costs are so huge compared to the nimble small importers and retailers that the cost differentials are going away. For years Wal-Mart kept squeezing its suppliers and factories for every penny of profit and made them efficient. But there is only so much that you can squeeze out of them and now the same efficient suppliers and thousands of others who have learned from them are catering to everyone and anyone who is willing to give them a buck.

But the problem for large retailers is getting worse. As if the Internet and ease of travel to China was not enough for their factories to find buyers, they are now showing up in international trade shows and setting up booths in U.S. gift fairs and other trade exhibitions. I have been attending trade shows in the U.S. both as buyer and seller for well over 12 years. In the past year, I have noticed a sudden large surge in the number of booths set up by Chinese factories and trading companies. The last Toy Fair in New York was in February and the Chinese and Honk Kong based companies and factories had 3 isles dedicated to them. We exhibited at the BCA (Billiards show) in Las Vegas a month ago and the second largest exhibition space was a Chinese factory with a large white banner reading "We proudly say: We Made These in China." The poor American pool table factories were trying to sell their pool tables for upwards of $3000 to $4000 at wholesale, while the Chinese factory was asking $600 for similar items with no minimum order. And here is where it gets even more interesting: The Chinese factory has set up a huge warehouse in Los Angeles and the $600 price was FOB L.A.

And that's the next phase of problem for large retailers like Wal-Mart. Large numbers of Chinese factories are setting up warehouses inside U.S., ship their products to the mainland USA, and sell direct to small retailers at low profit margins. Believe me when I say this: When it comes to entrepreneurship, the Chinese entrepreneurs are second to none. With thousands upon thousands of factories in China making products for export, some smarter ones have figured out that it is to their advantage to set up warehouses in the USA so that they can sell in ever-smaller quantities to their U.S. customers. Believe it or not, the Chinese factories are now selling their products directly on eBay from within U.S. borders. We are an importer of products from China and I now see Chinese suppliers in the U.S. who are selling the same products I am importing, at or slightly above my direct container quantity cost with no minimums. How can the likes of Wal-Mart compete with that?

The way I see it, the Chinese invasion and the efficient marketplace that they are creating will continue and it will make it harder and harder for large retailers to make money. The trade barriers have fallen and direct importing is no longer the big boys exclusive game. Their profit margins are under attack by smaller more nimble entrepreneurs who can move quickly and get in and out of hot products in a flash. The only large retailers who will survive are the ones who protect their turf by offering branded products and continue getting a premium for the brand names. But Wal-Mart is definitely now known for brand name products. It sells cheap Chinese products that are now available to other retailers at similar costs.

Honestly, I can't say that I am unhappy with the way things are going. Behemoths like Walmart are not good for this country and it is time the small entrepreneur has its day in the sun once again!!!

Cheers,

Mehran,

SwapUSA


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