Microeconomic Analysis of Wal-Mart Stores, Inc.

Microeconomic Analysis of Wal-Mart Stores, Inc.

Wal-Mart is a worldwide retailer, operating in both brick-and-mortar and online markets. With more than 11,000 retail stores worldwide, more than 2 million employees, and an annual revenue of almost $500 billion, the company is the number one overall retailer in the world (Wal-Mart Stores, Inc., n.d.). The conglomerate is divided into three segments: Wal-Mart U.S., Wal-Mart International, and Sam’s Club. More than half of the chain’s revenue comes from grocery sales (Wahba, 2016). The remainder of the company’s revenue comes from apparel, electronics, home improvement, entertainment, and financial services.

In March of 2017, megaretailer Wal-Mart made the decision to upgrade the quality of beef being sold to customers (Boyle & Wilson, 2017). Fighting for shares of consumer business, Wal-Mart faces stiff competition from grocers such as Aldi and Amazon.com has become a competitor with the purchase of Whole Foods Markets Inc.in mid-2017. Wal-Mart’s biggest move comes in the form of unchanged prices to customers. The retail giant has garnered success as the go-to grocer for low prices. Unfortunately, the quality of goods, including grocery, has long been a target for Wal-Mart critics. The move to higher quality beef signals the company’s commitment to listening to consumers while maintaining competitive pricing, but is the decision to keep prices stable on par with beef’s price elasticity?

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Over the years, many studies have been conducted to find the price elasticity of certain items. Of those categories studied, meat was the most frequent (Andreyeva, Long, & Brownell, 2010). According to Lusk and Tonsor, the price elasticity of demand for meats like steak is more sensitive to price changes in chicken breast. This fact appears to depend on the income level of consumers (Lusk & Tonsor, 2016). When consumers’ incomes increase, the demand for steak appears to also increase. Lusk points out that “a 1% increase in the price of beef causes a less than 0.3% increase in pork and poultry. A 100% increase in the price of beef causes a less than 30% increase in quantity of pork and poultry demanded” (Lusk J. , 2015).

Lusk also ponders nonprice factors that impact the supply and demand of beef in the grocery market. Beef supply can be heavily affected by the cost of raising cattle. The price of feed, the cost of land upkeep, the weather, and disease all affect the supply and the demand of beef. The increasingly hotter and drier weather has forced producers to scale back herds to avoid massive losses in inventory and profits. This scaling back limits the supply of beef in the market. The drought weather also affects the production of feed, thus raising feed prices. Producers of beef had to raise prices to combat the loss of livestock. The mad cow disease outbreak of the early 2000s serves as a lesson in how supply and demand can be affected by animal health. The price of cattle purchasing fell dramatically due to the disease. Consumers began to purchase alternative sources of protein instead of beef (Hays, 2003). Another nonprice factor that impacts the demand for beef is the consumer lifestyle. Over the past few years, consumers have become more concerned with living healthier lifestyles and eating healthier foods. While this consumer behavior might influence the demand for beef, Lusk states that there is no definitive way to determine if this is the case (Lusk J. , 2015). Another nonprice determinant of demand for beef is the safety of the product. Consumers need to believe that the product being purchased is safe. When it comes to beef there are a few concerns. Some consumers worry about the production process. Are the cows treated humanely? Is slaughter done in such a way as to not cause unnecessary pain? Are the animals given any hormones or other medications that could change the quality of the meat or affect the health of the consumer? When outbreaks like the mad cow disease occur, consumers question the safety of the product and demand will shift.

The factors mentioned above can each impact the supply and demand equilibrium of the beef market. For example, the BLS reports the cost of uncooked beef steaks to be $7.525 per pound (Bureau of Labor Statistics, 2017). If this were the equilibrium price, there will be no surplus or shortage of beef steaks on the market. This is the price at which both quantity demanded and quantity supplied are the same. If producers of beef steaks want to sell product at more than consumers are willing to spend, a surplus will occur because consumers won’t purchase the item. If producers of beef steaks sell product at less than the equilibrium price, a shortage may occur due to increased demand. According to Scott Brown, the latest reports show a surplus of beef in the markets due to an expansion of cow herds over the past year (Brown, 2017). These reports show that no equilibrium exists in the current market. Over the past couple of years, the retail price of beef has increased, but so has the demand for beef. This is where Wal-Mart shines regarding the ability to meet consumer demands. The company worked with suppliers to negotiate prices that would allow the retailer to not only provide consumers with higher quality meat, but also provide that quality without increasing retail prices. So, while the price of beef rises for other retailers, Wal-Mart has made moves to keep prices stable while improving the quality of the meat.

Armed with the knowledge that both supply and demand are increasing, it may be a valuable idea for Wal-Mart to invest in marketing the new change. Marketing the change in quality and the stability in price could prove valuable to the retailer by increasing consumer traffic. Part of Wal-Mart’s success depends on the loyalty of its customers. An article published by Business Insider states that the average income of the Wal-Mart shopper is approximately $56,482 per year (Peterson, 2016). The middleclass consumer is Wal-Mart’s target. Marketing low prices plus high quality is a way to reach the consumer where they are.

In the world of meat retail, there are many factors that contribute to the production, transfer, and sale of beef. Because Wal-Mart is not a producer of beef, the sale of beef and the associated costs depend on multiple factors. Key inputs for Wal-Mart’s beef retail include land, labor and human capital, and physical capital. “Land encompasses the nonhuman gifts of nature” (Miller, 2016). For beef retail, the supply of beef cattle is key. Without enough cattle being raised for beef, grocers would not have enough product to offer consumers. The supply of beef cattle depends on the work of cattle ranchers and the weather. Labor includes the work of people like butchers, meatpackers, inventory control specialists, and cashiers. These are the people that provide labor so that Wal-Mart can ship, transport, stock, and sell meat. Human capital includes the training Wal-Mart provides to employees. This training includes programs provided to Wal-Mart’s suppliers which are “designed to influence continuous and sustainable improvement: (Wal-Mart Stores, Inc. , 2017). Wal-Mart employees are also offered continuing education opportunities, such as management training programs. Wal-Mart’s physical capital consists of brick-and-mortar stores, warehouses, refrigerated store cases used to house the beef, and transportation equipment. Wal-Mart’s fixed costs consist of payroll, utility payments, inventory, taxes, and rent. Variable costs consist of maintenance, supplies, cost of goods sold, and often payroll can be a variable cost. Wal-Mart is known for its management of labor costs, thus creating the possibility of payroll being a fixed cost OR a variable cost (Miller, 2016).

Like many natural commodities, there is a cycle, or season, when it comes to cattle. According to the USDA, the cattle cycle lasts about 10 to 12 years (Matthews, Jr., Hahn, Nelson, Duewer, & Gustafson, 1999). These cycles include years to expand cattle numbers, years to consolidate those numbers, and years of declining numbers. During these stages, the prices of cattle and beef can fluctuate, but the changes are “not perfectly correlated with cattle inventories” (Matthews, Jr., Hahn, Nelson, Duewer, & Gustafson, 1999).

The labor input for Wal-Mart is part of the retailer’s strategy to control costs. For example, Wal-Mart’s butchers sought to organize under a union, but instead of taking the chance that employees would demand more payment via union representation, Wal-Mart eliminated fresh meat counters and began carrying pre-packaged meats. This allowed Wal-Mart to control labor costs more effectively and efficiently (CBA.MARKETWATCH.COM, 2000). One can easily see Wal-Mart’s control of labor with a visit to a store during different times of the day and night. During the day, there tends to be more employees available for customer service. During the later hours and the overnight shifts, fewer employees are available. Wal-Mart can convert labor from a variable cost to a fixed cost by simply managing personnel. The human capital input for Wal-Mart is important because proper training and management of this input helps to provide a better shopping experience for consumers and it also translates to lower costs for the company. For example, as a former Wal-Mart cashier, I know that cashiers are expected to correctly scan items. This is a part of cashier performance reviews and the reason behind it is that correctly scanning items helps lower costs for the company. Correct scans provide better inventory control. The more correct scans performed by cashiers, the more items the cost of labor is spread across. Employees are provided pre-employment and continued employment training via tutorials and on-the-job training. Over the past decade, customer service has become a hot topic with shoppers. Not only do shoppers want low prices, but they want pleasant shopping experiences. Wal-Mart is not known for high marks in the customer service area, so to combat this, Wal-Mart created training academies to provide more customer service training to employees (Hyken, 2016). This training provides meat department workers with more knowledge to assist customers with questions about cut and meat quality. This knowledge was previously held by the meat cutters, but the company lost that wealth of knowledge when on-site meat cutting was eliminated. With the additional training, Wal-Mart effectively addresses any customer concerns regarding the pre-packaged meat that is sold.

Wal-Mart’s physical capital of brick-and-mortar stores and refrigerated cases changed as Wal-Mart expanded the pre-packaged meat section. The space previously used to house the on-sight meat cutting is now filled with refrigerated cases of pre-packaged meat. Wal-Mart’s decision to offer upgraded beef at the same cost as previously carried meat provides the company with savings on marketing. If all the steaks are the same quality, the store won’t have to spend time and resources on differentiated marketing and labeling for the meat products.

Based on the production inputs and costs, Wal-Mart’s management might be wise to invest in marketing strategies that reflect the switch to higher quality beef and the dedication to continuing the company’s low-price mantra. Because the company has placed its stores within in reach of most grocery consumers and consumers value saving time and money, marketing both benefits may increase customer traffic.

Wal-Mart has been accused of being a monopoly. The company does exhibit monopolistic characteristics. For example, there are a lot of competitors in the beef retail arena. Nationwide supermarket chains like Albertsons (Safeway, Vons), Kroger (Smith’s, Ralph’s) and regional supermarket chains like WinCo Foods are Wal-Mart’s direct competition (Walmart, 2017). The beef retail market exhibits the features of a monopolistic competition:

1. Large number of sellers in the highly competitive market
2. Differentiated products
3. Sales promotion and advertising
4. Easy entry of new firms in the long run (Miller, 2016).

Smaller companies like regional grocers suffer the most due to Wal-Mart’s sheer buying power. Few retailers can compete with the company’s ability to cut out the middle man and set prices lower than its competitors, thus the megaretailer can be aggressive in advertising and directly luring consumers from the competition. The monopolistic competitor spends resources to differentiate their product from the next. In the case of Wal-Mart, the decision to improve the quality of the beef sold is one way the company challenges competitors.

A closer look at the retail industry where Wal-Mart resides reveals that the company also has an oligopolistic structure. An oligopoly is an industry where there are few large sellers that are interdependent upon each other (Miller, 2016). Because of the size of retailers like Wal-Mart and the direct competition of nationwide chains such as Kroger, Safeway, and Publix, Wal-Mart also operates within an oligopoly. Wal-Mart and stores like it advertise to consumers that they can find the best prices and quality products in their stores. The number of sizeable competitors in the beef retail market on this scale are few. Wal-Mart’s sheer buying power places it far ahead of competitors because it the low pricing forces competitors to follow suit or risk losing business. Wal-Mart’s buying power and ability to negotiate prices with wholesalers help the company control pricing in such a way as to pass those savings on to the customer. Unfortunately, Wal-Mart is not classified as a supermarket by the North American Industry Classification System (Economic Research Service, 2017). This classification makes it difficult to determine Wal-Mart’s share of the beef retail industry.

Wal-Mart’s entry into any market creates a strain on their competition. Wal-Mart’s monopolistic abilities creates a harsh reality for those businesses which cannot afford to offer lower prices to customers. Wal-Mart has a well-known reputation for entering markets and eliminating competition by introducing high barriers for other competitors. If Wal-Mart were to change the company’s industry structure, the company might suffer financially because they wouldn’t be able to fully control the market.

References

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