Wal-Mart: Part Two

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.