Enterprise
Retail sales here in Alleghany County average about $5.8 thousand per person a year. That is comparable with the nearby counties of Yadkin ($5.1K) and Stokes ($3.5K). Yet other nearby counties average much more. So, just what is it that makes the difference in Surry County ($12K), Wilkes ($7.6K) and Ashe ($8.0K) counties?
Wal-Mart. OK, Wal-Mart and Lowes.
Alleghany, Yadkin and Stokes have no Wal-Marts or Lowe's Home Improvement Centers. Surry, Wilkes and Ashe have four of each.
Next time you go to Wal-Mart, stop across the street from the front door and watch the steady stream of shoppers coming and going day and night. In a year those shoppers will spend an average of $105 million dollars in that one store. At Lowe's it is $30 million per store. That means, the eight Wal-Mart and Lowe's stores in Surry, Wilkes and Ashe counties will have something like $540 million dollars in retail sales. That's about 47% of all retail sales in those three counties. And, that's 130% of total retail sales in the three "have not" counties. Indeed, annual retail sales of $62 million here in Alleghany County comes to about 7 months of sales in a single Wal-Mart store!
Wal-Mart is a shining example of the tremendous possibilities of capitalism operating in a free market. Indeed, as Adam Smith postulated, competition in a free market tends to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. And, Wal-Mart is basically a service company (they produce nothing) in the business of reselling a wide variety of consumer goods at low prices. In so doing, last year Wal-Mart earned $12.7 billion, representing an 8.5% return on assets, for the capitalist who own the corporation.
Wal-Mart shoppers do truly benefit from low prices and here's how it is done.
The stockholders make a modest profit of only 3.4¢ on every dollar of goods sold. That 3.4¢ on total sales of $374 billion, of course, represents the $12.7 billion shareholders profit.
Like every successful business enterprise, Wal-Mart pays taxes to various governments amounting to 1.4¢ on every sales dollar. These, of course, are the taxes you will hear less successful business owners cry about as the cause of their difficulties. So why are Wal-Mart taxes so low? Well, these taxes are primarily bases on pretax profits, which are (3.4 + 1.4)¢ or 4.8¢ on each sales dollar. Their effective tax rate is then 1.4¢ on 4.8¢ or 34%. So it is that Wal-Mart's taxes on sales (1.5%) is low because their pretax profit margins (4.8%) are low.
A more significant reason Wal-Mart prices are low is that they are a very efficient reseller. Specifically, their operating, selling, general and administrative costs come to only 18.7¢ on each sales dollar. With that 18.7¢ they buy, warehouse, distribute, merchandize,and sell the goods, advertise in the media, and provide management top-to-bottom for the business. That even includes the Wal-Mart greeter! By way of comparison, Target spent 22.3¢ to do the same things. That 4.3¢ difference, equivalent to 80% of Wal-Mart's entire pretax profit, they pass along directly to Wal-Mart shoppers.
How Wal-Mart is able to sell at low prices has a great deal to do with how they buy and price their goods. First we look at pricing.
For them, the cost of goods sold accounts for 76.5¢ of every sales dollar. The difference is selling price (100¢) and cost of good (76.5¢) is their gross margin (23.5¢). It covers the operating, selling, general, and administrative cost as well as taxes and corporate profits. By way of comparison, the average variety store marks up their prices to achieve a 39% gross margin. The gross margin for Target was 31.9% last year. In short, Wal-Mart marks up their prices by 15% less than their competitors.
Finally, we come to Wal-Mart's greatest advantage, namely buying. Simply put, they buy in huge volumes and get favorable purchase prices as a result. No competitor even comes close. Their message to their vendors is simple: We sell to our customers in huge volumes at low prices and if you want our business you will sell to us in huge volumes at low prices. Needless to say, their buyers are very good at what they do. But that's another story.
And that's how Wal-Mart has succeeded with its strategy of selling to customers at low prices by buying low, operating efficiently while taking a modest profit. But that's not what the investors like. Nope. It's that 8.5% return on assets they like. And, how do they succeed there? Asset management.
Retail sales is basically a cash and carry business and that keeps accounts receivable very low. Their distribution system is a model of efficiency and allows them to turn inventories 8.1 times a year. (By comparison, Target can only turn inventories 6.2 times a year and the average general merchandizer can only manage about 4 turns a year.) Further, they keep a relative small amount of cash on hand. As a results, their total current assets are remarkable low for their volume of sales.
The majority of Wal-Mart's assets are real estate, buildings and fixtures. These are primarily the stores and warehouses in which the enterprise operates. They are being depreciated as cash flow right into the operating costs. And, last but not least, Wal-Mart has little goodwill sitting there doing nothing on their balance sheet.
And, there you have it. The largest and one of the most successful enterprises in the history of capitalism and the free market earns 8.5% on assets with a 3.4% net profit on sales of goods to consumers at low prices. Sam's boys in Bentonville, Arkansas have done themselves proud.
Wal-Mart. OK, Wal-Mart and Lowes.
Alleghany, Yadkin and Stokes have no Wal-Marts or Lowe's Home Improvement Centers. Surry, Wilkes and Ashe have four of each.
Next time you go to Wal-Mart, stop across the street from the front door and watch the steady stream of shoppers coming and going day and night. In a year those shoppers will spend an average of $105 million dollars in that one store. At Lowe's it is $30 million per store. That means, the eight Wal-Mart and Lowe's stores in Surry, Wilkes and Ashe counties will have something like $540 million dollars in retail sales. That's about 47% of all retail sales in those three counties. And, that's 130% of total retail sales in the three "have not" counties. Indeed, annual retail sales of $62 million here in Alleghany County comes to about 7 months of sales in a single Wal-Mart store!
Wal-Mart is a shining example of the tremendous possibilities of capitalism operating in a free market. Indeed, as Adam Smith postulated, competition in a free market tends to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. And, Wal-Mart is basically a service company (they produce nothing) in the business of reselling a wide variety of consumer goods at low prices. In so doing, last year Wal-Mart earned $12.7 billion, representing an 8.5% return on assets, for the capitalist who own the corporation.
Wal-Mart shoppers do truly benefit from low prices and here's how it is done.
The stockholders make a modest profit of only 3.4¢ on every dollar of goods sold. That 3.4¢ on total sales of $374 billion, of course, represents the $12.7 billion shareholders profit.
Like every successful business enterprise, Wal-Mart pays taxes to various governments amounting to 1.4¢ on every sales dollar. These, of course, are the taxes you will hear less successful business owners cry about as the cause of their difficulties. So why are Wal-Mart taxes so low? Well, these taxes are primarily bases on pretax profits, which are (3.4 + 1.4)¢ or 4.8¢ on each sales dollar. Their effective tax rate is then 1.4¢ on 4.8¢ or 34%. So it is that Wal-Mart's taxes on sales (1.5%) is low because their pretax profit margins (4.8%) are low.
A more significant reason Wal-Mart prices are low is that they are a very efficient reseller. Specifically, their operating, selling, general and administrative costs come to only 18.7¢ on each sales dollar. With that 18.7¢ they buy, warehouse, distribute, merchandize,and sell the goods, advertise in the media, and provide management top-to-bottom for the business. That even includes the Wal-Mart greeter! By way of comparison, Target spent 22.3¢ to do the same things. That 4.3¢ difference, equivalent to 80% of Wal-Mart's entire pretax profit, they pass along directly to Wal-Mart shoppers.
How Wal-Mart is able to sell at low prices has a great deal to do with how they buy and price their goods. First we look at pricing.
For them, the cost of goods sold accounts for 76.5¢ of every sales dollar. The difference is selling price (100¢) and cost of good (76.5¢) is their gross margin (23.5¢). It covers the operating, selling, general, and administrative cost as well as taxes and corporate profits. By way of comparison, the average variety store marks up their prices to achieve a 39% gross margin. The gross margin for Target was 31.9% last year. In short, Wal-Mart marks up their prices by 15% less than their competitors.
Finally, we come to Wal-Mart's greatest advantage, namely buying. Simply put, they buy in huge volumes and get favorable purchase prices as a result. No competitor even comes close. Their message to their vendors is simple: We sell to our customers in huge volumes at low prices and if you want our business you will sell to us in huge volumes at low prices. Needless to say, their buyers are very good at what they do. But that's another story.
And that's how Wal-Mart has succeeded with its strategy of selling to customers at low prices by buying low, operating efficiently while taking a modest profit. But that's not what the investors like. Nope. It's that 8.5% return on assets they like. And, how do they succeed there? Asset management.
Retail sales is basically a cash and carry business and that keeps accounts receivable very low. Their distribution system is a model of efficiency and allows them to turn inventories 8.1 times a year. (By comparison, Target can only turn inventories 6.2 times a year and the average general merchandizer can only manage about 4 turns a year.) Further, they keep a relative small amount of cash on hand. As a results, their total current assets are remarkable low for their volume of sales.
The majority of Wal-Mart's assets are real estate, buildings and fixtures. These are primarily the stores and warehouses in which the enterprise operates. They are being depreciated as cash flow right into the operating costs. And, last but not least, Wal-Mart has little goodwill sitting there doing nothing on their balance sheet.
And, there you have it. The largest and one of the most successful enterprises in the history of capitalism and the free market earns 8.5% on assets with a 3.4% net profit on sales of goods to consumers at low prices. Sam's boys in Bentonville, Arkansas have done themselves proud.
Comments
Post a Comment