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There are several critical factors that have lead to Wal-Marts impressive success through the years To unveil at least partly the secret of its success we must examine Wal-Marts cost advantage relative to a more typical discount retailer To do this we will study table A derived blow Exhibit A Wal-Mart vs Industry Economics of Discounting Comparison in 1984 of net sales Line ItemsWAL-MARTIndustry Average Net Sales100100 License fees and Other income8111 Cost of Goods Sold7380719 Payroll Expense1010112 Advertising Expense3523 Rental Expense19022 Miscellaneous Expense62376 Operating Income85059 Net income42027 Firstly as indicated in Exhibit A the licensing fees and other income is slightly lower than that of the industry average This is primarily due to the fact that Wal-Mart increasingly ran over two-thirds of their specialty shoes pharmaceuticals and jewelry departments themselves As indicated in the case this figure continued to drop in subsequent years Secondarily in examining the cost of goods sold COGS for Wal-Mart we see that quite unexpectedly their COGS is actually higher by nearly 2 than that of the industry average This seemingly large difference can be explained by Wal-Marts overall strategy of volume pricing vs margin pricing Third we see that the payroll expense incurred by Wal-Mart is nearly 1 point less than that of the industry average This can be explained by the fact that Wal-Mart enjoys high labor productivity that is a result of technical investment made at each store location Wal-Marts high revenue also reduces payroll expense as a percentage of revenue Additionally advertising expense is considerably lower than that of the industry average We know that in 1979 37 million were spent on television advertising and this figure represented 29 of Wal-Marts total advertising expense From this we can calculate that the total actual advertising expense for 1979 was 1275862 million 29X 37 If we assume that advertising expense grew due to higher advertising costs and more advertising conducted
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