Wal-Mart is more than just a success story.
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It is the largest grocery retailer in the United States, making up about 20% of the grocery sales market last year. As a business, it is ranked number one in revenue when compared with other public corporations. There are so many more accolades to list but it is safe to stop here and just say that this company is not going anywhere in the near future.
The most intriguing aspect of Wal-Mart is that it specializes in non-glamorous products. The company is in the distribution business and is, if not the best, one of the best at it. You can find almost anything in Wal-Mart and at an affordable price. Their business model focuses on buying in bulk at a discount and selling products at a much cheaper price than its competitors.
Okay so we know Wal-Mart is in distribution, we know they are absolutely dominating the market right now, and yet they do this by selling products at the lowest prices possible. What is about the distribution market that makes a company like Wal-Mart continue to improve its revenue every year since the 1960s?
Distribution is not limited to one market
This is probably the best part of being in the distribution business and Wal-Mart's discount business model only makes this better. Big warehouse grocery stores like Wal-Mart, Costco, Hannaford, etc, all have the ability to expand their product inventory because of this simple reason: they distribute everything.
You can find products ranging from perishable items like eggs, milk, meat and poultry, to bigger warranty items like tires, television sets, dishwashers and bed frames. Because Wal-Mart is not limited to one market they have the ability to sell whatever consumers want. Imagine being in the VHS cassette tape market just two decades ago.
You were making a lot of money in the early eighties to early nineties. But right now if you were still in the VHS business you would be bankrupt and out of business. Compact Discs and DVDs have revolutionized that industry and cassette tapes couldn't be any more obsolete. Wal-Mart's strength lies in its ability to sell whatever is hot on the market. If consumers like Mp3 players then Wal-Mart will start to distribute Mp3s.
Distribution helps you leverage what is hot in your favor because you are not in manufacturing so have the leeway to move in and out of the supply chain wherever it is convenient from a profit standpoint.
Disintermediation: Middle-men can be eliminated
In every supply chain there are multiple intermediaries that aid in getting the product or service from the manufacturer to the consumer. The only challenge here from a business standpoint is that as a result the amount of profit potential possible to the eventual retailer is small compared to what they otherwise would get to keep if they owned the whole distribution chain.
With the advent of the internet a lot more of the intermediaries that used to be deemed irreplaceable in the supply chain can now be replaced and their profit shifted elsewhere. Wal-Mart's business model eliminates the wholesalers and jobbers and lets them access the manufacturers more directly. This is why they are able to offer a wide range of products at very cheap prices.
If the products were allowed to pass through the hands of the other intermediaries then the price would have to go up because Wal-Mart would have to incur the cost of paying the jobbers and wholesalers. So distribution gives you the ability to access certain links in the supply chain based on your company's competitive advantage and eventually eliminate some of them so you can keep more of the profit.
Internet makes the world an even bigger oyster
The internet has without a doubt revolutionized the way we do business today. There is no question about that. The distribution industry is no different and Wal-Mart like other companies is leveraging the ability the internet has to reach a worldwide audience.
For a long time Wal-Mart was the middle-man for most large-scale manufacturers. But ever since the internet came along the internet essentially replaced big warehouse distributers like Wal-Mart and took the place of middle-man in the distribution world. More and more companies are not just lining up to get a website, but also are looking to develop a larger customer base online.
The three biggest expenses for almost every company are advertising, employees, and overhead. What the internet has enable distribution companies to do is cut down costs tremendously in all those three areas. Not good news for people looking to work for these companies, but very good news to the owners.
Most effective advertising online is through word of mouth and referrals. So making the transition from conventional stores to online shopping for Wal-Mart has been a piece of cake. More and more people are getting used to shopping online and it is fast-becoming the more prevalent way to shop now. There are projections that by the year 2010, 30% of all revenue generated through distribution will be captured via the internet.
You can expect that these distribution companies are enjoying the costs that the internet is helping reduce and the profit potential it brings.
Be rest assured that distribution is not going anywhere. There is a lot of profit to be made in any part of the supply chain but perhaps the most lucrative today would be in the actual contact with consumers.
The future belongs today to the company that can get products to consumers faster and without the help of additional intermediaries along the way. Wal-Mart is doing this and doesn't look like they are slowing down. They aren't concerned with innovation because they let the consumers dictate what their inventory looks like. They access manufacturers directly and as such keep more of the profit when the final sale is made.
For those of us thinking about getting into the distribution business, hopefully this stimulated some ideas. The further down you are in the supply chain the better. Manufacturing is probably not the smartest industry to get into, but the service industry is continuing to produce more opportunities for budding entrepreneurs.