Tuesday, November 5, 2013

#page462 What will the company that replaces Walmart (and Amazon) look like?

If you were to ask anyone who the defining retailer is in the United States today, the answer would probably be Walmart. Some people love the place, and then there are a number of people like Cory Briggs (see my Empoprise-IE posts on Briggs) and Sprawl Busters who are fighting Walmart.

But - and this may surprise some people - Walmart will not last forever, and will eventually be replaced by some other company. Amazon is already threatening Walmart.

In the aforementioned Empoprise-IE blog, I recently addressed this at a local level. A new Walmart opened in Ontario, California at the end of last month; when will it close? It's quite possible that the Walmart that opened with great fanfare just a few days ago may be closed by 2023.

Perhaps it's impossible to speculate what the replacement to Walmart will look like, but I'd be willing to bet that the replacement will pay fanatical devotion to cost control.

Now I know what you're saying - how can any company contain costs more than Walmart? Walmart's non-union policies keep its wages low, its vast buying power exercises supplier control, and it long-standing technological innovation helps manage the Walmart empire efficiently.

However, it's a truth of business that if there's a company that excels at something, a company will pop up that can do it better.

Let's look at two parts of Walmart's financials.

First, take a look at the "Operating, selling, general and administrative expenses, as a percentage of net sales." For the five fiscal years up to January 31, 2012, this percentage was about 19% to 20%.

So all that a competing firm has to do is to get that percentage down to 18%. Or 15%. Or 10%. Or lower?

Now let's take a look at another line - inventories. On January 31, 2012, Walmart inventories were over $40 BILLION dollars.

That's a lot of inventory that's on hand, even with Walmart's vaunted controls. What if Walmart could get the same amount of sales with inventories of only $30 billion? Or $20 billion?

Or $0?

Hear me out. What if we had a company that could do the business that Walmart did, but with a lot less employees and with no inventory - AND could do it by maintaining brick-and-mortar stores where people could walk in and IMMEDIATELY purchase products, unlike Amazon where you might have to wait a day (or longer) to get your stuff?

And interestingly enough, Amazon itself may offer the solution to this problem.

When you buy things from Amazon, you're often not buying from Amazon. In the fine print, you often see that a particular item is not being sold by Amazon, but by some other company. As of March, these third party sellers accounted for 40% of the unit sales conducted through Amazon. Amazon charged fees to those third party sellers, thus getting a cut of their sales. Those fees covered things such as the use of Amazon's website, and the use of Amazon's warehouses.

What if Amazon - or some other company, perhaps a new company - carried this same concept to brick-and-mortar stores, but added more innovation (or more ruthlessness) to it?

This is, of course, nothing new. Every week, there are physical stores that are mere shells, in which independent sellers hawk their wares. These stores are more commonly known as swap meets. But what if you get rid of the cheap Vietnamese trinkets, and replaced those with high-end items, provided directly from the manufacturers? The manufacturers would be ecstatic because they'd have control over the selling of their stuff without depending upon distributors, retailers, and other middlemen - but there would be a price.

So, although I still have to raise a teeny tiny bit of capital to execute this, let me share the first draft of my sales pitch. This is for my future store, the Empoprisorium (Empoprises Emporium). And I'm sending the pitch to well-known electronic manufacturer Vizio.

William Wang
Irvine, California


Here's the deal.

Right now your products are the at mercy of Costco employees and Walmart employees that don't really care about your products, and who may be transferred to the dog food aisle next week. Perhaps you could start your own store, but why not place your products in a store where a lot of people go, and where you can have complete control - and I mean complete control - over how your products are sold?

Here's how it will work.

We provide the store, the cashiers, and the delivery docks. We'll provide you with one or more aisles of floor space to sell your stuff. If you rent space in the back, you'll pay a certain amount. If you rent space in the front, it will cost you a little more.

You provide the salespeople for your part of the store. Rather than depending upon a clueless store employee, you provide the people directly. You compensate them any way you want to; we don't care. You see, the Empoprisorium operating and SGA costs are kept below 5%, so we can't provide employees for anything but the cash registers. You provide the salespeople.

Oh, and you provide the products that you want to sell in the store, and you get them on the floor. None of this "send it to the distribution center and add it to inventory" stuff. Empoprisorium doesn't carry any inventory. And again, we can't provide employees for anything but the cash registers. And our cash register people won't unload your trucks. Get your salespeople to do it.

Within your little space, you have complete freedom to sell the stuff any way you want - well, except for a few little rules that we'll impose on how you sell things. If you're a franchise operation yourself, you'll recognize some of the things that you'll see in our 1,000 page guide that we provide to sellers.

Which reminds me - on about page 383 of the guide, you'll see that all sales that you conduct in our store have to pass through our cash registers. None of this booking sales on the floor that go some other way.
If we catch you making sales that don't go through our cash registers, we will kill you. Literally. See page 462.

Oh, and those sales that pass through our cash registers? We take 25% of the gross sales. That's in addition to the fees that we charge you for floor space. Oh, and a few other charges that are listed on pages 668 through 724 of the guide.

At this point, you're probably hemming and hawing and saying that Vizio would never do business like that, and that Walmart never does anything like that to Vizio. Well, If you don't like our terms, you can keep on selling through Walmart. And Costco. And as far as we're concerned, you can go ahead and sell through Kroger and A&P while you're at it. And you can watch your business go down the toilet while you're at it. (Whoops, that's supposed to go into the Moen letter; I don't think that Vizio makes toilets yet.)

You see, it really doesn't matter to us at the Empoprisorium. You know those Walmarts that are near and dear to your heart? Well, they're all going to close pretty soon - look at the Walmart that just opened in Ontario in 2013 and is about to close because of lack of business. The Montclair Costco and the Montclair Target and the Montclair Best Buy already closed after we opened our superstore in Upland.

So if you're counting on selling your stuff through those stores, forget it. You have to deal with us now.

By the way, Sony has already claimed the space right up front. If I were you, I'd claim the space right behind them right now, before that gets claimed by KitchenAid.

I await your reply.

John Bredehoft
CEO Empoprises d/b/a Empoprisorium
"No inventory. Few employees. Immense profits. Plus page 462."
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