In my last article, I talked about my experience with the inception of what we know today as Wal-Mart Super Centers and how so many retailers of fresh produce seem to have a misconception regarding the margins Wal-Mart is probably achieving in their produce operation. I say probably because although I don't have any inside knowledge or information, I do have some insight into the EDLP pricing format and how it can work.
As I mentioned in Wal-Mart: Part One, I was involved in the pricing and purchasing development process for the First Hyper Mart in Garland Texas, I also mentioned that at the time we did not have the array of tools available today to develop a sound EDLP pricing format based on thorough information analysis. In as much, hitting a target of generating a 21% gross margin, which was our goal with the first Hyper Mart, meant targeting those retail margins on a daily basis vs. analyzing and understanding annual average margins
So what, you might say, well this is a very important point when one evaluates today's Wal Mart EDLP prices vs. HI-LO operators retail margin targets.
To prove this point, let's compare the annual average bill out margin and associated retail of the Apple Category of your average HI-LO supermarket operator and compare the resulting average retail to Wal Mart's EDLP price.
Rather than make assumptions, I will rely on an acutal EDLP initiative I was involved in while running the produce division for a regional Southeast Supermarket Chain.
Let's make this as simple as possible. In evaluating our EDLP pricing formula, we looked at our total cases of apples moved on an annual basis and the retails and costs associated with that movement. What we found was that our average annual retail for the apple category was $1.06 per lb and our annual bill out was 40%. Now our weekly target for the category was to achieve a 48% gross meaning our average weekly non ad retail was $1.29, but when you threw in all the $.89, $.99, $1.09, and $1.19 ads, we actually managed a 40% gross and a $1.06 lb average retail!
What was amazing was that at the time, Wal-Mart had an average retail on apples of $1.12 per pound. This was truly and epiphany. Wal-Mart was actually selling apples at a higher retail than we were on an annualized basis, and in all likely hood generating a much healthier gross margin! We found this not only to be true in the apple category, but in all categories in our produce operation. Think about that for just a moment and then the next time you start wondering how Wal-Mart sells produce so much cheaper than your operation; think again. Question is what are you going to do about it.
Wednesday, May 30, 2007
Tuesday, May 22, 2007
Breaking Down The Wal Mart Mystery: Part One
I've been fortunate in my career to have had the opportunity to work in various parts of our great country for retailers operating a wide variety of formats. I cut my retail teeth working for Tom Thumb Page in Dallas Texas. Looking back, I see that from the perspective of management style, that company was well ahead of it's time with regard developing people, but that is not what I really want to talk about today. I do want to talk about Wal Mart and how retailers should open their eyes and learn how to compete with the Mega Super Center that is Wal Mart.
In the Mid to Late 1980's the parent company of Tom Thumb; Cullum Companies entered into an agreement with Wal Mart Stores to open a Hyper Market in Garland Texas. As far as I know, this was the first "Super Center" opened by Wal Mart.
Our mission was to develop the operating procedures, and merchandising/buying/pricing philosophies for the the food side of the store while Wal Mart developed the general merchandise side. At the time I was just leaving responsibilities as the head produce buyer for Tom Thumb and entering into the merchandising side of the business. My responsibility with the new Hyper Mart was in working with Bud Godwin; the VP of produce for Thumb at the time to develop the buying and pricing model.
I remember very clearly that we landed on an EVERY DAY LOW PRICE retail structure along with unexpected in store specials as our go to market strategy. Our goal was to maintain a 21% gross margin and operate on a 7% wage cost. At the time this represented a margin that was about nine points lower than the average Thumb produce department margin and a wage cost that was about three points lower. While most of the produce for Hyper Mart came through the Thumb D.C. the produce manager had the purview to buy from the local Dallas Farmers Market.
That first Hyper Mart opened with a boom and after the initial opening the produce department settled down to $125,000 per week. Not too bad for 1987 dollars, and considering the fact we went about developing those retails without the advantage of Excel or any other type of computer program, I know today that our EDLP structure was way too low. I'll prove that later on.
We eventually opened a second location in Arlington Texas before Wal Mart bought Cullum Companies share of that joint venture and we went our separate ways. What a mistake by Cullum Companies!
There must have been some type of non-compete in that agreement because I left Tom Thumb in 1993 and we did not have many Super Centers open in our marketing area during those years. I left Dallas for Boston, where Wal Mart Super Centers still do not roam only to find myself in Birmingham Alabama in 1995 working for a chain under full Super Center Siege.
What struck me as I got out into the many Wal Mart Super Centers in central Alabama was that the initial lay out we developed back in Dallas had not changed! The departments still looked just like the Hyper Mart department back in Garland Texas. Frankly, I was shocked.
From a pricing standpoint, they were much cheaper than we were on our everyday retails, and because of my previous experience with Hyper Mart, I was under the false notion that they were still working on a twenty to twenty five percent gross margin and that their sheer volume drove their margin dollars. Boy, just like most every other retailer that competes with Wal Mart, I could not have been more wrong.
Come Back Later and I will tell you why, or contact me at Alliance Fresh Produce Solutions:205-277-6609.
In the Mid to Late 1980's the parent company of Tom Thumb; Cullum Companies entered into an agreement with Wal Mart Stores to open a Hyper Market in Garland Texas. As far as I know, this was the first "Super Center" opened by Wal Mart.
Our mission was to develop the operating procedures, and merchandising/buying/pricing philosophies for the the food side of the store while Wal Mart developed the general merchandise side. At the time I was just leaving responsibilities as the head produce buyer for Tom Thumb and entering into the merchandising side of the business. My responsibility with the new Hyper Mart was in working with Bud Godwin; the VP of produce for Thumb at the time to develop the buying and pricing model.
I remember very clearly that we landed on an EVERY DAY LOW PRICE retail structure along with unexpected in store specials as our go to market strategy. Our goal was to maintain a 21% gross margin and operate on a 7% wage cost. At the time this represented a margin that was about nine points lower than the average Thumb produce department margin and a wage cost that was about three points lower. While most of the produce for Hyper Mart came through the Thumb D.C. the produce manager had the purview to buy from the local Dallas Farmers Market.
That first Hyper Mart opened with a boom and after the initial opening the produce department settled down to $125,000 per week. Not too bad for 1987 dollars, and considering the fact we went about developing those retails without the advantage of Excel or any other type of computer program, I know today that our EDLP structure was way too low. I'll prove that later on.
We eventually opened a second location in Arlington Texas before Wal Mart bought Cullum Companies share of that joint venture and we went our separate ways. What a mistake by Cullum Companies!
There must have been some type of non-compete in that agreement because I left Tom Thumb in 1993 and we did not have many Super Centers open in our marketing area during those years. I left Dallas for Boston, where Wal Mart Super Centers still do not roam only to find myself in Birmingham Alabama in 1995 working for a chain under full Super Center Siege.
What struck me as I got out into the many Wal Mart Super Centers in central Alabama was that the initial lay out we developed back in Dallas had not changed! The departments still looked just like the Hyper Mart department back in Garland Texas. Frankly, I was shocked.
From a pricing standpoint, they were much cheaper than we were on our everyday retails, and because of my previous experience with Hyper Mart, I was under the false notion that they were still working on a twenty to twenty five percent gross margin and that their sheer volume drove their margin dollars. Boy, just like most every other retailer that competes with Wal Mart, I could not have been more wrong.
Come Back Later and I will tell you why, or contact me at Alliance Fresh Produce Solutions:205-277-6609.
Subscribe to:
Posts (Atom)