Tough times are actually a good time for

Thomas Schoewe loves to say the phrase, "Tough times are actually a good time for Wal-Mart". This outlandish statement is infact coming. Consumers in the United States are riddled with rising food prices and huge cost of gas. This has made it difficult for most households to run their home and a number of them are living off credit. Consequently this year, Wal-Mart slashed grocery prices by as much as 30 percent to lure customers stung by high food costs. This brilliant strategy was promoted with enticing advertisements that read (and asked consumers) - "What will you do with your savings?"

In the last six months, Wal-Mart's stock price has risen $15 a share, or about 33 percent. During that time, Macy's shares dropped by 16 percent, Target's by 6 percent and JC Penney's by 5 percent. As their CFO says, "Wal-Mart customers value our price leadership more than ever, especially as they try to stretch their money even further".

Now, this is a brilliant "economic moat". A business that has the muscle to change potential problems into opportunities. Wal-Mart used it's efficiencies to actually display an advantage to it's customers .. this not only increases sales at stores but also builds loyalty. I am assuming that the stores donot make a loss on the sale of groceries, but are at a no profit-no loss situation. An average Wal-Mart customer doesnt earn his shopping dollars just on groceries. Groceries (i presume) are only 20% of all purchases (value) made by a customer at the stores. So, my 100 dollars at the shop will be split as 80 for other goods and 20 for groceries. I am further assuming that I would make a margin of 10% on groceries (on an average; since they are perishable, everyday commodities) and 15% on other goods. So spliting the spends on an 80:20 ratio, I find -
Case 1 : (80 * 15%) + (20 * 10%) = 14.0%
Case 2 : (80 * 15%) + (20 * 0%) = 12.0% (a small increase in sale is enough to off-set this reduction in profit margin which can be easily done by innovative pricing changes)

This also takes me back to my principles of micro-economics which reads - "In case of essential commodities like food, the demand curve is inelastic such that any increase in price will only induce just a small reduction in demand". This is true from an individual's point of view. However, from a firm's poin of view (Wal-Mart) ... this principle doesn't hold good. In this case, by virtue of lowering the price of food .. Wal-Mart has been able to post very high increase in traffic at their stores which has resulted in greater sales of other goods aswell. I'm wondering how soon will be see a similar campaign from an Indian retail firm (Subhiksha, Reliance, More, EasyDay, Food Bazaar) given the increasing food prices here.

On the subject of inelastic demand ...  I'll leave you with a thought :

In March 2002, Ireland enacted a nationwide tax of nine pence (15 cents) on the use of plastic grocery bags, to be collected by retailers. Predictably, in just five months the tax cut plastic bag use by 90 percent.

What is the Price Elasticity of Demand for Plastic Grocery Bags? 

PS: If you have an interest in economic policies then read more about this tax (here). Don't miss the comments section.

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