Slim margins can lead to fat profits
I've followed Wal-Mart for some time, but it wasn't until I read two particular books that I realized the enormous opportunity that awaits this retailing superpower. A while back, I reviewed Sam Walton: Made in America, which gave me a better understanding of how Wal-Mart uses discounting to thwart the competition. Sam Walton explains:
"Say I bought an item for 80 cents. I found that by pricing it at $1.00 I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater."
By employing a strategy of slim margins and high volumes, it has profited handsomely. The company is currently on track to top more than $300 billion in revenues and roughly $10 billion in net income by the end of this fiscal year. Other retailers such as Costco
Tailor-made to profit in emerging markets
I'm especially excited because Wal-Mart's business model is perfect for emerging markets. In an article on corporate social responsibility, I highlighted an essay written by C.K. Prahalad and Allen Hammond called "Serving the World's Poor, Profitably." I have since read Prahalad's international bestseller, The Fortune at the Bottom of the Pyramid.
In both, Prahalad argues that emerging markets require what most companies are not accustomed to providing: high-volume, low-margin products. He explains that consumers living in these markets are paying for the same types of goods and services that you and I consume, but their goods don't even approach the quality or the competitive pricing of ours. What he calls the "poverty penalty," (where the poor pay much more for goods than the rich do) is a result of several factors, including local monopolies, inadequate access, and poor distribution.
The University of Michigan Business School strategist argues that there are enormous profits to be made in these emerging markets for companies that can offer better pricing. Who's the best at providing high-volume, low-margin products? Who has the distribution know-how to make it possible? Wal-Mart, of course
A Wal-Mart world
Wal-Mart already operates in several emerging markets, including Brazil, China, Nicaragua, Mexico, and Honduras. Its latest international target is India. But its presence in all of these regions is nominal compared to its long-term potential, making it a perfect investment for long-term-minded shareholders looking at 2007 and beyond.
Do you think Wal-Mart will outperform the market in 2007? Head over to The Motley Fool's new CAPS investing database, where more than 20,000 investors have rated more than 3,400 stocks. CAPS is totally free, so click here and give it a try.
Go back to the beginning to see what other retail stocks are in the running for our CAPS contest.
Fool contributor Jeremy MacNealy has a CAPS rating of 98.83 and is ranked 235 out of 20,091 participants. He has no financial interest in any company mentioned. Costco is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.