General Question

guywithanaccountnow's avatar

How are big chains able to have lower prices than smaller businesses?

Asked by guywithanaccountnow (313points) April 12th, 2012

I’m not saying I can’t think of any possible answers, just that I want to make sure. Does anyone here know the answer beyond a shadow of a doubt?

Observing members: 0 Composing members: 0

13 Answers

Keep_on_running's avatar

They buy in bulk, massively large bulk.

john65pennington's avatar

Big stores buy products from the manufacturer on a big scale. By doing so, they can sale the bought product at a lesser price, compared to a smaller store.

marinelife's avatar

The overhead is a fixed cost: building, accounting services, etc. When you have a chain that fixed cost is spread over more stores making the profits per store increase.

In addition, since you need more inventory, you have more bargaining power to buy more units at a lower per unit costs.

SpatzieLover's avatar

Big box stores have 90 days or more to pay for their invoices. Due to their large volume orders, they set the rules to the distributors.

In the case of small businesses, they must pay in advance for their orders (in some cases it’s over 6mos in advance). They don’t get a volume discount.

I’ve run small businesses. Here’s an example for you:
I buy 20 cases of baseball cards direct from a company. I pay $400 per case 6 mos in advance.

A big box store orders 1 case for each store. They pay their invoice 90 days after delivery.
They also get a small percentage discount for the volume of their order.

We both receive our orders at the same time. I sell mine for a 20% profit. The big box store sells theirs for a 10% profit on the non-discount invoice price (they may have already gotten 5 to 8% or more of a discount off their initial order price).

The big box store sells out of their product within the first week. They put the money in the bank and get compounded interest on their money for the entire 90 days prior to the invoice due date.

Qingu's avatar

There isn’t just “one” answer.

In addition to buying in bulk, there are also some other “bulk” strategies that favor large companies. There are upfront costs associated with marketing, for example, that get spread out with a large national chain.

There are other costs that do not simply scale up 1:1 with having more stores, too. Adding more stores to your business does not necessarily require employing the same proportion of additional accountants, lawyers, or IT specialists that you had with fewer stores.

cazzie's avatar

Having the ability to own their building rather than pay rent to a commercial landlord is a big one. Also, when they are a national chain, they have a lot of control in purchasing from manufacturers. For example:

I worked for a few juice companies in New Zealand when I was doing accounting there. First of all, we had to convince them to carry our product so we could become, what is called in the trade, a listed supplier, which meant every one of their stores had us listed as a supplier and made shelf space for us. (refrigerator space in our case, which is even more competition for) When they wanted to run a special on our product, they contacted us, told us what the discount was going to be and we, in turn, had to supply them account credits to cover their discount. (notice, it was not a manufacture coupon deal thing. They didn’t exist there. The chain grocery stores told us which of their regions would be running the special. ) Some of the large grocery stores were completely centralised in Auckland and others had more regionalised centers. Their deliveries went to the stores and we had to sent the POD (proof of delivery) and invoice and statements to the corresponding center. Purchasing power gave them a good price. Good times….

SpatzieLover's avatar

Here’s an article about how company’s vy for eye-level store shelves

This is another way Big Box chains make ^oodles of money. You want to be in their store and you want to be seen? You buy a shelf or an end cap.

sorry I could’nt find an article that wasn’t old…there are whole documentaries based on this type of economics, though

Jaxk's avatar

Economies of scale come into play for everything, whether goods management or equipment. Most of the cost differential is however cost of goods. When buying in bulk both the store and the manufacturer benefit. The store gets a lower price by committing to a high volume and the manufacturer (or distributor) gets a guarentted revenue stream. The quantity discounts are quite significant and reduce the cost of goods by half (sometimes more).

Lightlyseared's avatar

Because they are so big they can buy direct from the manufacturer instead of through a middle man

zenvelo's avatar

It’s called “monopsony”. Walmart is most famous for it. Sales reps from every industry, from DVDs to aspirin to socks to TVs have to go to Benton, Arkansas, wait in an uncomfortable waiting room, and then face the Walmart buyer who demands lower prices. Since Walmart has its own ships between China and the West Coast, they have alternative products always in the wings; they’ll buy direct of you charge them too much.

Walmart has even put West coast ports (Seattle, Oakland, Long Beach) into competition with each other.

Bellatrix's avatar

Large chains will often be given very cheap rent in shopping centres because they are draw cards for customers and other retailers.

mrrich724's avatar

they buy in bulk and sell in volume.

It cost more money to store more items until those items are sold in obvious (need larger space), and less than obvious (higher insurance premiums) ways.

Smaller shops can’t hold as much, so won’t sell as much as the big guy. Thus, to pay their employees competitive wages and keep the lights on, they have to make up the difference by charging more.

This is a short answer and not complete . . . but one could go on…

jca's avatar

Sometimes, however, if you are looking for a certain specialty item, like kitchen cabinets, you may just get a better price from a smaller store. Smaller stores can be desperate to make a sale.

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