--- In [EMAIL PROTECTED], "K. Feete" <[EMAIL PROTECTED]> wrote: >because they're only selling so many of that product; but WalMart is >so >big they can make a profit by selling the products at a lower >percentage >profit. So if a small store needs to sell something at a 5->cent profit to >stay afloat because they only sell a thousand or so, >WalMart can sell the >same product at a 1-cent profit and make the >same amount of profit by >selling five thousand of them- undercutting >the competition at the same >time, because everyone goes to WalMart >since they sell things more >cheaply. In much the same way the large >farms can get away with wasting >more money and more resources per pound of milk than a small farm can >because they're selling so >many more pounds. This makes no sense to me. Lets consider 1000 small stores and 1 super store. The small stores have a lower cost per unit sale than the larger store. The smaller stores sell 1000 units apiece, with a cost of $100 per unit, and the large store sells 10,000,000 units with a cost of $105 per unit. The small store sells each unit for $120, generating $20,000 profit, while the large store sells each for $110, generating $10,000,000 profit. Each stores cost includes all the costs: salaries for everyone (even the owner), loan costs (for building, etc.) So, you might argue that the large store is more profitable, and would be able to drive the small stores out of business. But, they can�t go below $110 per unit without losing money. At that rate, the small stores still make $10,000 profit apiece. That�s less than the larger store�s profit, but the initial investment had to be less also. Since the costs of the larger store are more, it is very unlikely that their fixed costs are significantly less. So, as an investor, I would much rather buy ownership in 10 small stores than a 1% stake in the large store. What I think is missing from this example is the different ways these two types of stores did their books. In many/most small stores, the owner doesn�t take a salary. His salary is the profit. So, the owner/manager pays himself salary and benefits comparable to what a department manager gets at the super store, and fined out his $20,000 profit is now a $30,000 loss. Wal-Mart has been profitable and watched competing small and big stores go bankrupt (including some big NE chains) because they�ve cut costs. I know, from uncles who owned a small town hardware store and from generally available data, that the larger stores get a price break. I remember my uncles bemoaning the fact that the larger stores could sell for retail just pennies above my uncles� wholesale costs. This price break has two foundations. First, its cheaper for a company to fill one 100,000 unit order than 10000 10 unit orders. Wal-Mart can buy for its whole fleet. Second, an order of that size gives bargining power. They can say, �Gee, we don�t want to go elsewhere, but�� My uncles� order gets lost in the noise. Further, Wal-Mart made a brilliant investment in a computer controlled inventory control and pricing system. They are able to watch sales by the hour, and adjust prices to match flow. This resulted in a tremendous decrease in their inventory costs. As an aside, a local merchant �Mattress Mac� has made hundreds of millions off his one furniture store. He found a way to move inventory about 3-4x faster than the large chains. That cut his costs, and allowed him to be the low price vendor. His store is now huge, he is a wonderful manager (I�ve watched him work and he typically does every job in the store, and he treats his employees well), and he has made a mint. Now, every small or medium sized store owner cannot do this. He was very fortunate, as well as good. What I am pointing out is that a small store can compete if it can find a way to lower costs below the big guys. I submit that most small stores can�t compete because their costs per unit goods are much higher. Dan'm Traeki Ring of Crystallized Knowledge. Known for calculating, but not known for shutting up _________________________________________________________________ Get your FREE download of MSN Explorer at http://explorer.msn.com
