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Wal-Mart: Competitive
Considerations in its
2003 Pricing Strategy
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Edgardo Donovan
Touro University International
MKT 501
Dr. Alf Walle
Module 5 – Case Analysis
Monday, June 20, 2005
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Wal-Mart: Competitive
Considerations in its 2003 Pricing
Strategy

Ex.1 – Always Low Prices (Walmart.com)

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“Wal-Mart, No. 1 seller of toys and the industry's price leader, is expected to cut
competitors some slack by not maintaining such cut-throat pricing as last year. Its
aggressive "loss leader" pricing on popular toys last year lured millions of
consumers from traditional toy stores. While it recouped some of the margins from
sales of other products in its massive selection, stalwarts Toys R Us, KB Toys and
FAO Schwarz were critically wounded. Now it believes it doesn't need to cut as
much.” (Foust)

During 2003 Wal-Mart enacted a pricing strategy for its burgeoning toy selection
that would lose money in many areas with the intent to increase its market-share at
the expense of long-time competitors such as Toys R Us, KB Toys and FAO
Schwartz. Whereas in the past Wal-Mart could not have afforded such a costly
strategy and would have adopted pricing sensitive to industry brand name and
generic brand levels it now disposes of the resources it can use to dramatically
increase market share in some of their traditionally weak departments while taking on
short-term losses. This is possible in part due to their strength in so many different
product areas which have enhanced their ability to derive economies of scale and
leverage significant capital reserves.

In the past Wal-Mart tended to estimate their ability to fulfill the elastic market
demand for toys by adopting a pricing strategy sensitive to competitive generic brand
and brand leaders in order to strike a balance between increasing market-share while
remaining profitable. The ability of being able to forecast a viable strategy along
these lines was especially important during the early phases of the company’s history
since erring too much in favor of market share or profitability would have either
jeopardized the profitability required to do business in the short term or the future
customer base needed for long-term market success.

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The discipline of determining product pricing is deeply integrated with a myriad


of fields that are commonly associated with the development of a viable short-to-long
term business plan. Trend forecasting is heavily relied upon in the early planning
stages as a way of understanding consumer culture so that a company has the best
chance of attempting to satisfy consumer tastes rather than trying to adapt the latter to
their business strategy thus avoiding instances of organizational marketing/ product
myopia. Once a viable demand is assessed, usually through a combination of focus
groups and historical customer adoption rates of similar products or services, an
extensive analysis of industry barriers to entry is performed. Barriers to entry could
be high labor costs in a particular manufacturing country, overwhelming market
share from competing forces, cannibalization risks, etc. If the risks or barriers to
entry are deemed to be surmountable a further study of the competitive arena may be
conducted in order to prepare for scenarios in which competition would try to stifle
the success of the venture in an attempt to protect their own market share. Usually
once the risks analyzed above are agreed to be acceptable a company will usually
mobilize towards creating an operational plan that would coordinate an integrated
approach from a product positioning, supply chain management, and advertising
perspective.

The cornerstone of any business strategy revolves around pricing which can be a
good indicator of whether an organization is attempting to mount a low-pricing early
adopter approach designed to sell to a small but trend-setting customer base, a
guerilla pricing approach designed to pick off customers currently not the focus of
larger competitors, a flanking approach designed to price a product designed top win
away large chunks of second-tier customers from a larger competitor, or a full frontal
assault designed to compete both in price and quality usually at some economic loss
so as to win away large portions of an industry leaders customer base. (Trout/Reis)

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Ex.2 – Market Leader (CartoonStock.com)

"Very rarely do we actually know the shape of a demand curve. Price wars
between competitors often break out when firms have very different views of
the shape of that curve. If I believe the demand curve for my product is
inelastic, I would be reluctant to cut price because I don't believe the
additional volume sold will cover the additional costs of producing that extra
volume. But a competitor who thinks the demand curve for the product is
elastic cuts its price, then you might have no alternative but to match that
price cut. Both firms will then learn the shape of the demand curve over the
extent of the price cut but it could be an expensive lesson. All things
considered, I still agree with one of my instructors that price remains "a
mystery wrapped in an enigma" or "one heck of a problem in simpler
language." (Shapiro)

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People are more often subjective beings who all see the inter-relations within the
various components of a business strategy according to their own world view and
often through the prism of the corporate culture they work in. In the same manner
that it is impossible to predict a demand curve for a particular product or service there
is no industry wide methodology that companies use to make pricing considerations
within the larger context of their overall business plan.

Ex. 3 – Industry Consolidation (CartoonStock.com)

“Wal-Mart is expected to have 22 percent of the retail toy market this year,
versus 16 percent for Toys ''R'' Us and 10 percent for Target, according to
Harris Nesbitt, an investment bank." (Brown)

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However, regardless of strategic methodology by virtue of the pricing and overall
financial strategy implemented by Wal-Mart during 2002-2003 an argument can be
made that they are utilizing a full-frontal-assault-marketing/pricing approach
designed to severely weaken the leading competitors in the retail toy sector
(Trout/Reis). Similarly to historical industry leaders in their respective industries
like IBM, General Motors, JC Penney, Sears, Standard Oil, Boeing, and Microsoft to
name a few Wal-Mart is engaged in a struggle where they are sacrificing short-term
profitability in an attempt to consolidate the retail toy industry under its domain.
Practically all of the above cited companies went through similar growth cycles and
were sometimes accused of uncompetitive business practices and predatory pricing
which at the very least would indicate a reputation linked to an aggressive growth
strategy.

Some of the seemingly more cynical business strategists of our time such as
Andy Grove, Bill Gates, and Ray Kroc have sometimes likened business to warfare
and believe that one of the most effective ways to appropriate a bigger piece of the
micro-economic business demand curve is to financially destroy your competitors so
as to force demand to be fulfilled through the surviving companies
(Trout/Reis/Grove/Gates).

Whether one believes that Wal-Mart is guided by such a hyper-competitive


philosophy or not it is important to understand what market and strategic conditions
are necessary to conduct such an aggressive strategy. Similarly to Microsoft in the
late 1980s and Standard Oil in the late 1800s, Wal-Mart has extensive capital
reserves and the ability to keep on producing them over the long-term due to its
overwhelming profitable market-share in a variety of markets that enables it to
aggressively price targeted synergistic product lines.

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Ex. 5 – European Expansion (CartoonStock.com)

“So Wayne, N.J.-based Toys R Us, the second-biggest toy seller, can only
hope for easing price rivalry. It took a drubbing last year from Wal-Mart and
rival discounter Target (whose heavy toy promotions to carve out a place in
the business helped push Wal-Mart's pricing strategy). Toys R Us recently
announced that it may leave the toy business if its prospects don't improve. On
the heels of shuttering its Kids R Us stores and educational toy chain
Imaginarium, the chain now is using sharp discounts to thin excess inventory.
And it has already begun its holiday appeal with newspaper inserts
advertising new items, discounts and gift cards.” (Grant)

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During 2003 Wal-Mart enacted a pricing strategy for its burgeoning toy selection
that would lose money in many areas with the intent to increase its market-share at
the expense of long-time competitors such as Toys R Us, KB Toys and FAO
Schwartz. Whereas in the past Wal-Mart could not have afforded such a costly
strategy and would have adopted pricing sensitive to industry brand name and
generic brand levels it now disposes of the resources it can use to dramatically
increase market share in some of their traditionally weak departments while taking on
short-term losses. This is possible in part due to their strength in so many different
product areas which have enhanced their ability to derive economies of scale and
leverage significant capital reserves.

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BIBLIOGRAPHY

Works Cited

Grant, Lorrie. Wal-Mart doesn't plan to toy much with prices ; Last year's cuts hurt other
retailers and left giant thinking it slashed too much. USA Today, 2004.

Shapiro, Stan. Pricing. Touro University International, 2003.

Brown, Eryn. Imagining Toyland Without One of Its Giants. New York Times, 2004.

Ries, Al – Trout, Jack. Marketing Warfare. Bantam Books, 1978

Grove, Andy. Only the Paranoid Survive. Simon and Schuster, 1995

Gates, Bill. Business at the Speed ot Thought. Warner Books, 1999

Walmart.com. Always Low Prices Walmart.com, 2005

CartoonStock.com. Market Leader. CartoonStock.com, 2005

CartoonStock.com. Industry Consolidation. CartoonStock.com, 2005

CartoonStock.com. European Expansion CartoonStock.com, 2005

II. Works Consulted

Brown, Eryn. Imagining Toyland Without One of Its Giants. New York Times, 2004.

Grant, Lorrie. Wal-Mart doesn't plan to toy much with prices ; Last year's cuts hurt other
retailers and left giant thinking it slashed too much. USA Today, 2004.

Foust, Dean. Things Go Better With...Juice; Coke's new CEO will have to move quickly to
catch up in noncarbonated drinks. Business Week, 2004.

Brady, Diane. A Thousand And One Noshes; How Pepsi deftly adapts products to changing
consumer tastes. Business Week, 2004.

Anderson, Douglas – Bailey, Bruce. Product Management. Madaille College, 1998

Gates, Bill - Donovan, Eddie. Launch of Business at the Speed of Thought. Microsoft.com,
1999.

CartoonStock.com. Too Microsoft? CartoonStock.com, 2005

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CartoonStock.com. Product Needed. CartoonStock.com, 2005

CartoonStock.com. Product Wanted. CartoonStock.com, 2005

CartoonStock.com. Product Ideas? CartoonStock.com, 2005

Bianco, Anthony - Lowry, Tom - Berner, Robert - Arndt, Michael. The Vanishing Mass
Market. Business Week, 2004.

Allen, Gemmy. Introduction to Marketing. Mountain View College, 2005

Gladwell, Malcolm. The Science of the Sleeper: How the Information Age could blow away
the blockbuster. The New Yorker, 1999

Grove, Andy. Only the Paranoid Survive. Simon and Schuster, 1995

Gates, Bill. Business at the Speed ot Thought. Warner Books, 1999

Ries, Al – Trout, Jack. Marketing Warfare. Bantam Books, 1978

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