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?

 

Does Groupon Threaten Walmart?
  • I don’t really think Groupon threatens WalMart, in part because I don’t think Groupon is really sustainable. Especially their revenue mode – from Wikipedia:

    Groupon makes money by keeping approximately half the money the customer pays for the coupon.For example, an $80 massage could be purchased by the consumer for $40 and then Groupon and the retailer would split the $40. That is, the retailer gives a massage valued at $80 and gets approximately $20 from Groupon for it.

    http://en.wikipedia.org/wiki/Groupon#Business_model

    That’s just insane.

    It’s why the cupcake shop in your example nearly went out of business – their revenue was 50% of Groupon’s cut, or 75% off. Of course, maybe the cupcake prices should have been higher, too.

    It’s also why Groupon’s biggest customers – well, providers – are restaurants or locations with HIGH overhead and LOW marginal costs. A lot of the cost of a restaurant is the real estate, staff, etc – the food is a pretty small part, so the marginal cost of having another table is really, really low. And since we have a tipping culture, the extra work for the wait staff (at least) is mostly paid for.

    But it also means that Groupon is YAI (Yet Another Intermediary) between the consumer and the manufacturer of the product; or, they’re WalMart +1.

    WalMart’s rise to power, IIRC, was only partly volume discounts. Other companies have always done that. No, WalMart’s real strength is its massive investment in operations – namely, in its supply chain. WalMart has a VERY lean, VERY well managed supply chain that significantly lowers the cost of delivering a product from origin to a customer. That goes for in-store as well – they arrange as much as possible to lower cost of delivery to the customer, given a baseline quality level.

    They also aggressively negotiate volume pricing, especially with smaller companies where sales to WalMart might make up 50%-60% of total revenue, but I don’t think that’s one of their “core competencies.” It’s one of their advantages (to scale) that allow them to remain at the top of the pile, of course.

    In other words: I don’t think WalMarts growth can be explained by post facto advantages to scale, and I don’t think Groupon works as a competitor (at all) because their revenue model is almost entirely limited to locations with low marginal costs.

  • Andrew

    Well put Mr. Griffiths.