It was very popular in the early 2000’s to talk poorly about Walmart. Between putting local “mom and pop” stores out of business and underpaying their female employees – Walmart had developed quite a bad reputation. However, amid this negative press, Walmart was actually doing quite well. They rose to become one of the top 20 biggest companies in the world and today they are the largest when measured by revenue.
It was during this time of bad press when I first learned the key to Walmart’s success. It was my Sophomore year of college and I was in Accounting I. My professor – a tall older man with distinguished white hair wrote in capital letters on the chalkboard: “VOLUME.” His scratchy voice belted across the classroom: “If you’re a company that manufactures shirts and you usually sell them for $50 a piece – Walmart would come to you and place an order for a million shirts – but demand a volume discount down to $25.” He explained, as a shirt manufacturer it’s hard not to take that deal. Even if the final price barely covers your costs – getting your product out to such a large population is very valuable.
Is this starting to sound familiar? Groupon (and all companies like it) uses the very same volume-based negotiation tactics that has made Walmart so successful. The only difference is that Walmart is a single entity and therefore must take on risk. If Walmart places an order for a million shirts and sells none, they’re left holding the bag. Alternatively, Groupon, who has capitalized on the same volume-based negotiation leverage, works in a very decentralized manner. The result is that Groupon can negotiate worry free, holding no liability if no one buys a deal.
This begs the question – will Groupon threaten Walmart’s retail dominance?
Also, how long will it take for Groupon to develop a negative reputation? It was barely a few months ago when I saw the first New York Times article criticizing Groupon’s tactics. The article was about a cupcake shop that nearly went out of business trying to meet the demand for their cupcake offer on Groupon. The shop had offered a dozen cupcakes for half price, which ended up being below their costs.
It will definitely be interesting to see what happens. For those who have been critical of Groupon’s 12 billion dollar valuation, just remember that Walmart’s market cap is 200 billion.
What are your thoughts?