Walmart strategy- Every Day Low Pricing Model

We see a lot of supermarket chains around us. Big Bazaar, D-Mart, V-Mart are some names that have gone huge and later released their IPO. Supermarket chains have expanded from metro cities to now smaller towns. One thing that unequivocally attracts people to the Supermarkets stores is their low pricing.

They buy and sell in huge volumes and thus can generate economies of scale that normal Kirana Stores cannot. This piece talks about how Walmart’s famous revenue model works and has the retail sector been able to generate benefits for consumers through this model.

The Pricing

There are two kinds of pricing models broadly known in the retail business. One is the High-Low pricing model (also known as the H-Lo model). Supermarkets sell goods at a higher price, and then they call for a ‘Sale’. Customers get a promotional discount and they rush to the stores.

Another model is the Everyday Low Pricing (EDLP) model. Instead of selling some object for ₹100 in a normal season and ₹50 during ‘Sale’, a supermarket may choose to sell it at ₹80 throughout the year. Now, is this model profitable? Does it attract enough customers? We will dig a little deep.

The Customer Base

There are two kinds of customers. First are those who do prior research on their grocery. They know what they want to buy, where the price would be the least, other promotions and so on. These people take the most benefit of the ‘Sale’. These people stock when the prices are low. These are the people to whom even grocery shopping excites. 

Second, are those who do not take their groceries seriously. Except for a few things, they do not even plan what they should buy. They just reach out to the store and take the stuff. This crowd is the customer base of the EDLP supermarkets.  Everybody wants to pay less. However, they are ready to pay ₹80 for something that regularly fluctuates between ₹100 and ₹50 as long they have their peace of mind. The customer gets associated with the supermarket brand thinking they will not have to pay foolishly higher than the fair price. Therefore, they shop from a single chain with whom they have developed trust.

The Supermarket Profits

The High-Low pricing supermarkets make profits when goods are in demand and then sell them in the discount when demand falls flat. EDLP supermarkets are selling the same goods at lower prices throughout the year. How do they profit then? This is what Wal-Mart has taught the world. EDLP has proved to reduce fixed costs significantly. Less amount is spent on promotions or marketing. Instead, the focus is on the improving quality of service. Since these kinds of customers have a long-term association with the supermarket, a minimum cash inflow sustains irrespective of market factors. Besides, this association helps the stores to predict the demand and manage the inventory accordingly. The efforts are minimal and hence, they need minimum staffing for this purpose.

Also, they need not rethink the price repeatedly. Price changing is a cumbersome process. With every change in price, all the variables change. Each change has to be well quoted across the store. EDLP is devoid of such processes. Supermarkets like Wal-Mart are known to build over these advantages. They indeed sell at lower prices and hence their margin is lower. Yet, the volumes of sales have compensated the loss of margin.  

The Customer Advantage

The EDLP model has been famous amongst those who are not into shopping. They just want to buy things at a fair price. Hence, the customers develop a sense of trust with the brand. In India too, people have a clear choice when they go for buying. They know the set of products they would get and the estimated price they will have to pay. They need not screen every store, Monday to Saturday, to know when their product would be charged the least.

Since such customers shop less, they tend to buy most of their groceries at once. Hence, it reflects significantly in their bill. Their bills are mostly predictable. It can be easily understood that if High-Low pricing does not offer many variations, people would prefer to move to EDLP. So, do the customers benefit from the EDLP? Well, it is a trade-off. It would take more effort to reduce the bill if you are into buying stuff from ‘Sale’. On the other hand, you put less effort; you get an assured price that is somewhere in between the ‘High-Low’ price.

Walmart’s Foundation Story & Business Model

Walmart was founded by Sam Walton in Arkansas, USA, in 1962. Its headquarters are in Bentonville, Arkansas, USA.

It has been almost 64 years since its foundation. Walmart has now emerged as a leading American multinational retail corporation, operating a vast network of discount department stores & warehouse stores worldwide.

It has become a global retail giant with over 10,500 stores and a strong presence in e-commerce. Its retail network also includes grocery stores, hypermarkets, warehouse clubs, and neighbourhood markets.

The Journey of Walmart

In 1945, Sam Walton purchased a Ben Franklin store franchise from the Butler Brothers. With a consumer-first approach, he primarily focused on selling products at lower prices to drive higher sales volumes. The initial investment for purchasing a branch and the cost of leases were high. Despite all these challenges, he successfully undercut competitors by getting lower-cost suppliers, enabling him to offer competitive prices.

His strategy and efforts paid off. The sales saw amazing growth year after year with:

• 45% increase in the first year alone.
• Revenue jumped from $105,000 to $140,000 in the second year,
• $175,000 in the third year, and,
• eventually $250,000 by the end of the fifth year.

What started as a small store has now become a big retail giant!

A single discount store built on the simple idea of “more for less” evolved over the next five decades into the largest retailer in the world. With millions of customers serving daily, Walmart has almost become synonymous with affordability, convenience, and global reach today.

Let’s dive deep into understanding Walmart's business approach.

Walmart’s Business Model

Walmart has revolutionised how people shop. A large customer base has become a loyal segment for Walmart by offering a wide range of products at affordable prices.

1. Low-Pricing Model

Its business is built around its signature Every Day Low Pricing (EDLP) model strategy. This concept has helped the retail giant become a household name worldwide. In case you are not familiar with the EDLP term, let me elaborate.

The EDLP business approach is all about offering a constant yet affordable low price for a product throughout the year. It does not make its profits from relying on frequent sales or discounts in any season.

Let's dive deeper and know why this model has succeeded for Walmart.

By incorporating this EDLP model into its business, Walmart offers its products at stable, low prices all year round, eliminating the need to wait for sales to get a good deal. The goal is simple: to make shopping easy and affordable for customers.

For Walmart, this strategy has been successful so far for several reasons. Below are some of those:

• High-Volume Sales: By prioritising the sale of goods in large volumes at lower profit margins, the supermarket chain can keep prices down compared to its competitors.
• Efficient Supply Chain: Advanced logistical operations and inventory management systems help Walmart reduce costs and deliver products quickly and efficiently to customers.
• Strong Supplier Relationships: By negotiating favourable terms with the suppliers, Walmart can keep costs low.
• Technological Innovation: Walmart constantly invests in technology to improve efficiency and enhance the customer experience. Data analytics are used to predict demand and optimise inventory.

All these strategies resulted in Walmart’s success. People know they can rely on this retail brand for affordable daily prices without hunting for discounts. This has helped Walmart achieve a big name in the retail industry and grow its revenue and market share successively.

2. Differentiated Access

To expand its customer reach, Walmart offers exclusive services such as pharmacies & health clinics. It also invests in smaller-format stores and enhances its e-commerce spread.

3. Competitive Assortment

This simply means offering everything from local goods to global brands. And this is exactly what Walmart is providing, both in its physical stores and online.

4. Exceptional Experience

The heart of Walmart’s success lies in its commitment to customer satisfaction. Providing a positive shopping experience, with well-trained employees, competitive pricing, and a 100% money-back guarantee, reflects Sam Walton's original vision for the company.

The Indian Market

Indian market is much divided when we discuss EDLP as a profitable and customer attracting strategy. Big Bazaar advocates the ‘High-Low’ strategy. It has ‘Sabse Sasta Budhwaar’ (Cheapest Wednesdays) offers. It is India’s biggest supermarket chain. Big Bazaar is part of the ‘Future Retail’ owned by Future Group. Future Retail has shown a consistent rise in the past 5 years with current annual revenue nearing $3 billion. Similarly, DMart keeps coming up with promotional offers on different products at different times.

On the other hand, we have Reliance Retail. Reliance Retail is an umbrella of various Reliance brands including Reliance Fresh, Reliance Smart, Reliance Digital, Ajio, and recently acquired Hamleys. Reliance Retail since its foundation in 2006 has chosen to use the EDLP pricing model. In its 14th year, it is generating $10 billion in revenue every year.

Each retail company has chosen its way to price, and it seems like each works in a way or the other. It is even more surprising because the Indian market is known to be more price-sensitive, and the one that is stereotyped to get lured by the promotional offers or ‘Sale’.

Walmart's USP

Here are those USPs that have led Walmart to achieve an acclaimed worldwide position in the retail industry.

• Continuously stocking shelves with a wide variety of products offered at good prices throughout the year.
• Keeping its stores open longer than competitors, especially during peak shopping seasons like Christmas.
• Buying wholesale goods from the lowest-priced suppliers and passing those savings on to customers.
• Passing these savings to the costumes achieved by getting goods supplied at a lower price.

The Bottom Line

Is EDLP the best way to do business? No!

Not many retail chains have been able to switch to EDLP in the past. As pointed out above, EDLP is designed for a different customer base. Though this customer base is increasing, High-Low pricing is still very much in the game. There is a huge customer base that cherry-picks promotional offers and then tends to buy stuff. With much information now available online, this customer base is more informed. Moreover, the EDLP model needs to build a relationship with the customers over the years. The trust of pricing, the familiarity with products, and the approval for quality takes time to build.

Compared to the H-Lo Pricing model used by other retailers in the market, Walmart's EDLP business model earned success points in its cart. By offering consistent pricing, it has built a loyal customer base and reduced operational costs.

Besides, it requires time to build trust and establish a consistent number of customers considering the EDLP model. In markets like India, where consumers are still attracted to promotional offers, EDLP and high-low pricing strategies coexist. Both business models have their own advantages, targeting different consumer preferences and shopping habits.

On one side, EDLP stores have a loyal customer base. On the other side, it becomes tough for them to bring in new customers without offering any promotions. In fact, for markets like India, promotional offers have a proven record. Nonetheless, with people spending less time on grocery shopping, which is likely to reduce more in this busy world, the EDLP model stands tall. Wal-Mart and Reliance Retail have proved this. With time, we might see some other chains taking up this model. Until then, to each its own.