Walmart : analyzed

I last left of with...............

Let’s get back to our Sony AM/FM/CD Radio now.

‘Critical Mass’ must be reached before a Wal-Mart and a Sony agree to engage in business. Some of the components of that critical mass are:

....to continue.

Sony management has determined that they wish to sell their product to Wal-Mart.

Wal-Mart management has determined that they wish to buy and re-sell Sony product to the general public.

It is very important to understand that one could write an essay simply about all of the components that go into the decision-making regarding the above two statements. For sake of brevity here, I will not attempt to expand and list all of the key decision making points involved in this decision, other than to say that both Sony & Wal-Mart management are savvy, veteran businesspeople, and are fully aware of the risk/reward equation for both of them. There are no country bumpkins here, folks.

Let’s get down to business........

The deal is cut: Wal-Mart writes the Purchase Order. It is for 200,000 on the Sony Model 1 sku (stock kept unit). A price and delivery schedule is specified. Along with this is a set of ‘performance’ criteria that Sony must abide by, or else they will suffer ‘penalties’.

Sony makes the decision to accept the Purchase Order, along with its’ set of conditions, and the deal is sealed.

The product is shipped in accordance with the details of the P.O. It is put on the shelves at Wal-Mart. The price that it is sold for is the lowest price that it has ever been sold for, and it is clearly a ‘good deal’ to the customer. Wal-Mart sells all of the units in the time period that they had projected.

Who are the winners and/or losers in this transaction?

Sony – Winner: They sold 200,000 Model 1’s at the agreed upon price. We must assume that they are happy with the profit from this sale, or else they would not have entered into the original agreement.

Wal-Mart – Winner – They bought the Model 1’s at an agreed upon price, and sold them at a price that they determined. We must assume that since they determined the selling price, that it met their profit requirements.

Consumers – Winner – They purchased the Model 1 for a price lower than it had ever sold for. Call it what you will, I choose to call it a ‘value purchase’. A value purchase occurs when one can buy a product with a confirmed performance record for a lower price. In plain language, a truly ‘good deal’....not to be confused with so many other purported good deals that do not stand the scrutiny of investigation.

In summary: Round One of the Sony/Wal-Mart marriage is a win-win for all involved.

Let’s keep going.

Round Two: The next Purchase Order.

Sony and Wal-Mart management exchange mutual kudos’ and well-done’s to each other, and agree that they’ve gotten off to a great start. “Let’s expand our relationship” is the mutually agreed-upon sentiment.

Wal-Mart says something to the effect of.... “We had great success with the Model 1, and we’ll certainly want some more. We also think that we can be successful with your Model 2, but the price to us is more that we believe it is worth. We are prepared to buy 200,000 Model 2’s at $X price, and, by the way, we were so successful with the Model One that we are prepared to purchase 400,000 of them this time around. But of course, we must pay xx% less than our last purchase of them because we need to be able to justify both models on our sales floor.”

Sony says..... “Let us get back to you”. They caucus back at the office. Hmmmmm......

For us to be able to meet Wal-Marts volume requirements, we’re going to have to add an additional production line on the Model 1.

They are also fully aware of the effects of their first sale of Model 1’s to Wal-Mart vs. their sales of Model 1’s to other merchants. The sales numbers are in, and they sold X% less Model 1’s through all their other chains of distribution since Wal-Mart has had the product.

They crunch their numbers, and deduce that this will be only marginally profitable for them, but given all of the metrics that drive such decisions (keeping the production lines going, increasing their market share of products in that price range, etc.) they determine that it is worth it for them to reduce their overall margin on these products.

They pull the trigger and accept the P.O. Let it be noted that no one put a gun to their head......They made a business decision based upon a risk/reward ratio that they deemed acceptable.

The shipments of Model 1’s & 2’s begins to Wal-Mart. The total quantity is not shipped in one shot. There are scheduled shipments, as of course, this makes solid business sense. Let us remember that the standard ‘performance penalties’ present in all Wal-Mart P.O.’s are in effect.

The Model 2 is a success almost immediately. Model 1 sales are good, but not as strong as the first round, and with each successive shipment, the rate of sale slowly declines, and Model 1’s begin to back up.

Wal-Mart notifies Sony of the Model 1 ‘problem’. They offer Sony two alternatives: Wal-Mart will reduce/cancel outstanding orders on the Model 1 to reflect the current rate of sale, or Sony must lower the price on the Model 1 to allow Wal-Mart to do the same in an attempt to restore sales velocity to where it becomes acceptable to Wal-Mart.

Sony is now faced with a difficult decision, as we must remember that while all this is going on, Sony is not selling products in a vacuum. Although Wal-Mart is now one of their largest customers, the impact of lowering the Model 1 price to where Wal-Mart wants to sell it will mean that Wal-Mart will now be offering the Model 1 for sale at a retail price that is less than any other retailer can buy it for. It does not take a rocket scientist to understand the impact that this price adjustment will have on the rest of Sony’s distribution channel in regards to Model 1 sales.

Sony has already made the investment in parts procurement and increased production capacity to meet the original Wal-Mart purchase order.

Sony management goes back to crunching numbers, and the result is that they must accede to Wal-Marts demand.

They do so; Wal-Mart is successful in raising the rate of sale back to a level that is acceptable to them.

In the meantime, sales of the Model 1 through the rest of Sony’s distribution channel plummet downward.

Wal-Mart has now ‘captured’ the Sony Model 1 as essentially a branded ‘house model’ on which no other retailer can compete.

Let’s assess the winners/losers again after these latest developments.

Sony – Loser – They are no longer in control of the sales or marketing of their Model 1. They are locked into what has turned out to be a money-losing proposition with Wal-Mart on the Model 1. They are tied to it until they fulfill the agreement for total Model 1units with Wal-Mart, for which they have procured all the parts to manufacture.

Wal-Mart – Winner – They have maintained their operation profit margin on the Model 1, while simultaneously leveraging their buying power to the point that no other retailer can profitably compete with them on the Model 1.

Their product introduction of the Model 2 has gone well, and there is no reason why they cannot now leverage the Model 2 the same way that they did the Model 1.

Consumers – Winner – If anything, even a bigger winner than the first time around. They now can purchase the better Model 2 for a great price. They can now buy the Model 1 at an even better price than it was introduced at.

What’s next?

It’s approaching time for Sony to change its’ model assortment, as consumers always look for newer and better. How will this be dealt with by Sony, Wal-Mart and the rest of Sony’s distribution channel?

Stay tuned to part 3 of........Alice in BigBoxLand.