Margin Vs Volume

Historically, MNCs have had high profit margins arising from monopolies in technology and finance, and political influence translating into protectionism. In the US, trade unions fought for a bigger share of the surpluses, and obtained the highest wages in the world. In effect, MNCs and the trade unions shared monopoly profits at consumer expense in developed countries.

Wal-Mart has redefined this model.

Far from seeking high margins, it has relentlessly cut prices and kept profit margins so low that competitors give up. Its profit margin is just 3% of sales. Prices at Wal-Mart can be half or less than at major department stores. So, unlike historical Numero Unos, Wal-Mart has risen by cutting instead of raising prices, by reducing instead of increasing profit margins, by catering to the masses rather than the well-heeled, and by using the cheapest rather than the most expensive workers. Harvard University estimates that Wal-Mart's lower prices benefit US consumers directly by $18 billion a year. Besides, Wal-Mart obliges rivals to cut prices.

Wal-Mart aims at scale economies of every sort. By buying massively, it pays least to suppliers. It has massive stores with acres of parking space to accommodate hordes who drive in. This strategy needs cheap land, so Wal-Mart stores are typically in urban peripheries, small towns and rural areas. Petrol is cheap in the US, so Americans happily drive an hour or more to a Wal-Mart store 30-40 miles away.

Conditions are totally different abroad, so Wal-Mart has often failed in other countries. The farther Wal-Mart goes from the US the worse is its performance. It shut down in Germany after losing hundreds of millions of dollars, and sold out in Korea too. It now accepts the need to adapt to local conditions, but adaptation erodes the power of its US model.

Land prices have skyrocketed in India, so a US-style superstore would have to be situated miles outside a big city. We simply cannot see well-heeled Indians driving for hours to a big store on the outskirts of Delhi or Mumbai. Unlike in the US, the poor and lower middle-class in India do not have cars or cheap petrol to facilitate long-distance shopping. So, small shopkeepers will easily compete. They typically evade sales tax. Many pay low rents because of rent control. They are located close to consumers, and provide home delivery at no extra cost. Some even provide credit. Even if Wal-Mart is cheaper, many consumers will opt for the convenience of local shopkeepers.