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in a paper titled market follies, benjamin powell points out that wal-mart was one of the first major companies to recognize the value of losing money for increased profits. rather than trying to make money with products they don’t need to sell as much of, wal-mart is selling lots of basic products that they have plenty of supply of, but market them at prices far below costs. for instance, wal-mart sells a lot of cheap clothes at rock-bottom prices, yet they sell mountains of them. people buy them because they are good deals but people also buy them because they want to look fashionable and they feel the need to dress well. in fact, so much of our purchasing of clothes is because we want to look nice that the market for jeans and suit-coats has expanded hugely over the past several years with a big decline in the prices of both and in the market for shoes and bags. contrast that with the much smaller increase in the market for food. we are much more interested in food than in what we wear.
but that doesnt mean that wal-mart has somehow changed the fact that clothes are still their product of primary concern. i remember this with the dvd movie rentals they used to do. the only problem with it was that their selection of movies was rather weak. their new policy, however, seems to be to stock their rental shelves with hollywood films and pretty much ignore the rest of the business.
this means that they are now operating in one of the most profitable businesses, and in a way that is far more efficient than the distribution industry, but its not in the product category that their main product business caters to. wal-mart (and costco) is such a great business that they can operate in a far more profitable manner than almost any traditional retailer with a much more efficient cost structure than most, but they cant be seen as competitors to their own enterprise because they dont sell anything and are not even really in their own product category. instead, they are simply doing what every great company does when it starts to grow into a market it never really cared about. it becomes an unstoppable force because it eliminates too many other business models to replicate. its basically the economics of large scale, and why the playing field is so much bigger than it is. 81555fee3f1
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