Wal-Mart Cuts Out the Middleman Again
By George Anderson
Nobody cuts out costs — or the middleman — like Wal-Mart. In a move reminiscent of what it has done in so many areas before, the world’s largest retailer has sidestepped the regional utility companies in Texas to buy its electricity directly on the wholesale energy market.
A report on the Forbes.com Web site says Wal-Mart spends approximately $100 million a year for the electricity it needs to operate its 295 stores in the state where Kinky Friedman would be governor.
Although Wal-Mart is not sharing how much it has saved by going around the utilities, the director of the project, James Stanway, has said, “It’s significant enough that we’ve created a subsidiary company (with a 30-person staff). We have no intention of canceling the test.”
Wal-Mart is looking into expanding its energy-buying concept into other states where it operates including Arkansas, California and Louisiana. According to the Forbes‘ report, Wal-Mart spends approximately $1.1 billion a year for the electricity it needs to run its 5,100 stores worldwide.
The retailer says it has no plans to get into reselling the energy itself.
Moderator’s Comment: What do you think of Wal-Mart’s latest attempt to reduce costs? Will more retail companies follow Wal-Mart’s lead by purchasing
electricity directly on the wholesale energy market? –
George Anderson – Moderator
Pre-Enron, we had the chance to work with what was then the largest energy consolidator and reseller in Texas. The assignment was teaching their new “key account representatives” (old energy traders) key account management skills. Their new job was to sell bundled energy management programs to accounts like Wal-Mart.
Two lessons learned. First, there is a ton of margin to be gained if an account truly knows how to buy energy directly. Second, there is a reason most of the folks we were training were third and fourth generation Texas horse traders and oil men. This is not a world for the faint of heart and it makes Texas Hold ’em look like a kid’s game.
Wal-Mart may indeed do it well. Dedicating a 30 person subsidiary to it certainly sounds like the right kind of commitment. Maintaining their commitment to stay out of the reselling business is even better.
When you have the resources and size of Wal-Mart, almost anything is possible in areas like this. Most companies are not large enough or possess the imagination, time, energy or money required to tackle something like this. As they continue to grow and expand into so many areas, it will become even harder to effectively compete with them. Wal-Mart’s appetite for ravenous expansion will keep putting them increasingly under the national microscope until more politicians and governments decide they have to take action against them. It is amazing that W-M has been able to fly under the radar as long as they have. It will be interesting to see how much longer they can do that.
On a purely economic level – what the hey. Will it hurt lots of small rural utility companies and their employees? Of course, but that’s not Wal-Mart’s problem, now is it? Wal-Mart isn’t in business to help communities grow and prosper, it’s in business to help itself grow and prosper. Come on, this is business.
What this does is give us an interesting philosophical exercise. Who else doesn’t Wal-Mart need? Why does it bother with clothing manufacturers, or food producers or appliance makers? To hell with them all!
Will Wal-Mart start selling energy? In spite of denials the answer is, absolutely. The idea is already out in the Universe.
I can’t think of a single reason for Wal-Mart not to do so.
No surprises here; this is classic Wal-Mart. However, with this move, they’re playing with fire. Utility companies are joined at the hip with state governments and the last thing Wal-Mart needs to do is get another entity with strong lobbying strength upset at them. How long until they start to take undeveloped parcels of land located in unincorporated areas and turn them into their own towns? Just think of the potential. Locate a couple of residents on the parcel (WM employees). They elect themselves to every position and they set their own tax structure, etc.
This sounds like good, sensible, planning from Wal Mart’s perspective with no particular downside. I do not believe that they have no intention of re-selling. But I don’t think there are many other retailers in a position to emulate the idea.
Moves like this are right out of Henry Ford’s playbook of long ago. It was called then taking control of all possible means of production. In Wal-Mart’s case, it’s called taking control of all possible forms and means of controlling their business and expanding a market for themselves.
Will others follow? They really haven’t so far. Wal-Mart really has an open playing field to do pretty much anything the imagination comes up with and is legal.
It’s not about anything else. It’s all about Wal-Mart.
Wal-Mart has ample precedent for this move. It established a private satellite network for all internal communications ca. 1984 – cutting out dozens of small local telephone companies and AT&T. The move was unheard of in retailing at the time – even radical. Today, the spawn of that network carries its in-store video, data, training materials and voice. I’m certain it has saved the company many millions of dollars over the past two decades.
The decision to buy power on the open market is not dissimilar. Clearly electricity adds up to a significant cost item for the firm. When economic analysis indicates that self-management of a utility service offers an economic advantage, the firm should go for it. In Wal-Mart’s case, I’d buy the argument that this is actually a simplification of its business, as opposed to continuing to deal with dozens of individual utilities around the country.
Reselling power seems to go with the territory – no different than hedging currencies. The goal is to drive down the net cost of doing business.