Wal-Mart and the Loss Leader Concepts' Impact on Distribution
Wal-Mart's use of loss-leader pricing strategies in their toy retailing operations is detrimental to the long-term viability of the toy industry and ironically, to Wal-Mart itself. This loss-leader approach to pricing toys below their cost to drive up traffic in their retail stores is flattening the elasticity curve of newly-introduced toys and causing manufacturers to second-source and often move their manufacturing off-shore, where quality and safety standards are not nearly as rigorous as in the United States. Loss-leading pricing strategies are meant to drive up retail foot traffic. Wal-Mart's purchasing economies of scale and focus on supply chain efficiencies, which are briefly described in this paper, all contribute to their ability to price toys below to wholesale price to other retailers. The flattening of pricing elasticities of new toy products greatly impacts the profitability of toy manufacturers themselves. Taking a loss-leader pricing approach to selling toys also forces other retailers either out of business altogether, or into significantly minimized operations. The intent of this paper is to show how Wal-Mart's use of loss-leader pricing on their toys significantly impacts the ability of manufacturers to produce high-quality, safe, and innovative toys for the...
Further, this loss-leader approach also starts to force an entire industry into premature consolidation as on the supply chain side, toy manufacturers push for lower prices on their raw materials and at times sacrifice quality. On the distribution and selling side, this also forces much consolidation of retail outlets.
Wal-Mart has a very analytically-oriented corporate culture, meaning they have key performance indicators for many of their advertising, marketing, sales and support activities. As a very analytics-driven culture, the company has created a steady stream of data from its stores to corporate headquarters in Bentonville, Arkansas. The integration of daily store operations including hourly sales data during the holiday season uploaded via satellite at the close of every day, and the quickness with which Wal-Mart's pricing managers can analyze the impact of pricing on volume is one of Wal-marts' major competitive advantages. In addition a department of pricing analysts and managers study the massive amounts of data and look for those product lines most successful in drawing people into the store, in addition to looking for products that have the highest level of pricing elasticity in them, in addition to support of up-sell and cross-sell strategies. During the 1990s Wal-Mart began to test the pricing elasticity curves of
