Strategically, Wal-Mart positioned itself to cater to population that lived in small towns having no other discount stores nearby with everyday low prices and greater variety of goods. 33% of its stores operated in metropolitan areas with few competitors enabling Wal-Mart to command 10-20% of total retail sales compared to non-metropolitan areas with 12% gross margins. By lowering expenses in key areas (advertising, COGS, SG&A expenses) and with competitive pricing, Wal-Mart was able to drive up sales and reap superior profits compared to other competitors in the market. The remainder of this paper analyzes in detail the various components of Wal-Mart’s cost structure which formed the core to its high profitability.

Cost structure (1984) of Wal-Mart with respect to industry average is as below:
Discounting Industry Economics Wal-Mart Economics in 1984 ($ in millions)
Net Sales 100.0% $ 6,401 100.0% *Exhibit 1
License fees and other income 1.1% $ 52 0.8% *Exhibit 1
Cost of goods sold 71.9% $ 4,722 73.8% *Exhibit 1
Payroll expense 11.2% $ 645 10.1% *10.1% in 1985 - p.7
Advertising expense 2.3% $ 70.4 1.1% *$16.3 million in 1985 - p.6
Rental expense 2.2% $ 120 1.9% *1.8% + 0.1% in 1980's - p. 4
Miscellaneous expense 7.6% $ 346 5.4% *Calculated from difference
Operating income 5.9% $ 550 8.6% *Exhibit 1 - Earnings before interest and taxes - $271 + $231 + $48
Net income 2.7% $ 271 4.2% *Exhibit 1

Analysis:
There were many factors that led to Wal-Mart’s higher profitability and low cost overhead in 1984. Based on the cost structure outlined above some of the key points are:
i. Superior distribution/transportation network - Wal-Mart employed only 20% of inbound merchandise directly from vendors and distributed the rest from its 400+ truck distribution channel using a