Sunday, May 06, 2007

How is Wal-Mart like booze?

Provocative title, isn't it? It's a cheap journalistic trick to lure in readers, but I'm not proud.

But there really is a point to it -- it hit me as I was reading this article in Forbes. It doesn't tell us anything most of us didn't know (or at least suspect). But it puts some hard numbers to the fact that, just like alcohol, a little bit of Wal-Mart is okay, even good for you, but you gotta know when to stop.

Forbes studied 300+ manufacturers, correlating their profit margins to the amount of their total business Wal-Mart represented, and comparing the margins to those of competitors. The bottom line? The more you sell to Wal-Mart, the lower your margins.
  • Wal-Mart <10%, margin = 39.1%
  • Wal-Mart = 10-20%, Gross margin = 36.2%
  • Wal-Mart >20%, Gross margin = 35.4%
The trend is most pronounced in the apparel & accessories category, where average gross margin drops from 48.7% for companies generating less than 10% of its sales through Wal-Mart, to 28.7% for those selling 20% or more. Food & beverage also shows a big disparity, where the same breakdown shows average gross margins dropping from 39% to 22%.

In all, only 25 of 333 companies managed to beat its sector gross margin average while generating at least 10% of their revenue through Wal-Mart. Only seven that sold over 20% there did it.
The question not addressed, of course, is whether the additional volume makes up for the decreased margins. But certainly those tightened margins (and the vulnerability of being so dependent on one customer) is scary to investors, as to managers:
"I wouldn't not own a company just for that reason, but if I could choose between two companies that were basically equivalent, I'd choose the one that sells less through Wal-Mart," Todd says.

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