Friday, December 25, 2009

How Wal-Mart Will Take Over the World: Simple Economics

It started with a simple idea at Sam’s Club. Construct a cheap warehouse, model it as a store, buy mayonnaise in five-gallon drums, and pass on bulk purchase savings to consumers. It worked like a charm in places where homes have adequate space to store pickles by the ton – the Heartland and rural America. (New York City? Not so much).

But then Sam realized something. If the companies were going to deliver the merchandise anyway, why not ask them to break it into smaller packages so they can be sold at a super-supermarkets called “Wal-mart?” Companies were so excited just to be on the shelves of such a growing enterprise, they all yelled, “Absolutely, Sam! We’ll break it up for you, and you help us do such a volume business, we’ll even give you the same rate we had when we were selling you toilet paper in the fifty packs!”

As every small store and artisan in hamlets throughout America closed their doors, one by one consumed by the behemoth, the industry giants of grocery –Kelloggs, Tyson, Jimmy Dean, Borden, and the like – didn’t think twice about all the little folk being gobbled.

Little did they know that the joke would ultimately be on them.

Even a decade and change ago, if you went into a Wal-mart, you noticed some “generic” products, mostly in the cereal aisle. Malt-O-Meal had a slew of cereals whose names and images came as close to trademark infringement as one could get. If you didn’t want to pay $4 for a 16-ounce box of Fruity Pebbles, you could pay $8 for 100 ounces of Dino Bites in a plastic bag.

There has always been a school of thought that a company could make roughly the same product as Kellogg but sell it for less because there’s no marketing overhead (no commercials with Tiger's wearing kerchiefs).

But about a year ago, I noticed something different. The “Great Value” brand, Walmart’s own, appeared in the cereal aisle. Quaker instant oatmeal was $3, but Great Value was only $2.10. Then Great Value appeared in the milk aisle for $1.89 per gallon, while Dean’s was $3.10. Then Great Value made graham crackers, which taste better than Keebler and cost $1.00 less per box. Every new trip reveals new Great Value. Now they have Great Value hamburger and turkey.

This is pure, unadulterated, diabolical genius by Walmart.

Think about this. How does cereal get made? Kellogg contracts with people for grains, then it either contracts with people to refine the grain into cereal or it uses employees to do it. Then it contracts with people to deliver the product, or it uses employees to deliver it to grocery stores. Under this model, the grocery store is selling nothing but space.

But what Walmart realized is that if we make our “space” the most valued on the planet, we can take it over. Walmart decided it would use its billions to contract directly with the people who make the grains and it would make its own food cheaper. Now you’re saying, “Yeah, but Chris, this is the Malt-o-Meal model, isn’t it? When was the last time you said Malt-o-Meal owned the world?”

True. But the difference is Walmart has the heft to make a “generic brand” legitimate just by putting its name on it. So I tell myself, well, seeing "Great Value" everywhere on the shelf helps build the brand, but Walmart might have to ultimately advertise. This week, I saw my first billboard for “Great Value.”

Word will spread, rest assured. And once people realize you can save $1.00 per gallon on milk (and damn near everything else) without being able to tell the difference, the “name brand” products will start getting demolished, and so will the name brand companies. In fact, the only place I haven’t seen the Walmart takeover yet is in the hygiene aisle. That might be the one safe haven for brand names. Nobody will live down using “Great Value” deodorant.

But the rest of the world will soon be owned by Walmart.

I'm not kidding.

So, on that uplifting note....Merry Christmas and Happy Holidays to all!



Anonymous said...

Actually, walmart does have a generic brand in the hygiene aisle, it's labeled under 'Equate.'

Akla said...

Kroger has been doing this for years, as have several other grocery stores. Kroger even has two generic store brands.

But people still buy the brand names for some reason. Loyalty, stupidity, status? Who knows.

I have not tried the walmart brand, but I usually do not buy my groceries at a clothing/electronics store.

Chris Worden said...

Akla: I shop at a lot of places, and Kroger does have its own brand, but it's nowhere near as prevalent as at Walmart. You go into a Walmart now, and it looks like a generic food virus is spreading because you see that Great Value label EVERYWHERE. That's part of the plan, of course. Imagine the subconscious brand cred a product like Coke would have if you saw it in EVERY SINGLE AISLE.

Andrea said...

"But people still buy the brand names for some reason. Loyalty, stupidity, status? Who knows."

Quality. I tried store/generic brands and found the quality to be awful. I'd rather spend more on quality brands and economize in other areas. These days, I spend even more on local items/organics and am perfectly happy with my choice.

If you chose the store brand, good for you....just don't call me stupid because I chose differently.

Oh and for the record, I don't shop at Wal-Mart. I wanted to, I like a good deal as much as the next person. After the third or fourth trip where I had to maneuver dirty aisles strewn with product that had been knocked from shelves, I gave up. That was over 10 years ago and I haven't been back since.

While the Wal-Martification of America continues, there will always be those of us that resist because we want a different type of life.