Walmarts executives some of whom have personal vendettas against Aldi due to a bad frozen pizza that they once shared - decided that Aldi poses a competitive threat to Walmart. List the advantages and disadvantages of Walmart lowering the prices of the products that Aldi also offers, which are groceries (price war!). Estimate the impact on Walmarts revenues if it decides to match the prices of Aldi in the United States for a single year:

o Use the 2013 revenue figures for your estimates

o Assume that Walmart will lower prices of its groceries to match those of Aldi in all of its stores

o Assume Aldis revenues are 100% generated from groceries o Assume that if Walmart matches the prices of Aldi, it will recoup 20% of the Aldis revenues for the single year. Note: the case highlights repeatedly that Aldi is primarily a grocer, so it predominantly sells different variations of groceries.

Exhibit 7 Common Size Cost Structure Estimate of a typical Wal-Mart and Aldi shopping basket in 2012 (in % of sales) Wal-Mart Aldi Sales 100.0 100.0 71.5 80.0 2.5 2.5 1.0 0.5 0.5 0.1 0.5 1.8 Purchase Prices Inbound Logistics Shrinkage Advertising Rental Info Systems Payroll Depreciation and Amortization Other SG&A Operating Income 1.0 1.0 12.0 6.0 1.5 1.1 2.0 2.0 7.5 5.0 30.0 N/A / Invested Capital (common-sized as % of sales) Exhibit 7 Common Size Cost Structure Estimate of a typical Wal-Mart and Aldi shopping basket in 2012 (in % of sales) Wal-Mart Aldi Sales 100.0 100.0 71.5 80.0 2.5 2.5 1.0 0.5 0.5 0.1 0.5 1.8 Purchase Prices Inbound Logistics Shrinkage Advertising Rental Info Systems Payroll Depreciation and Amortization Other SG&A Operating Income 1.0 1.0 12.0 6.0 1.5 1.1 2.0 2.0 7.5 5.0 30.0 N/A / Invested Capital (common-sized as % of sales) Exhibit 7 Common Size Cost Structure Estimate of a typical Wal-Mart and Aldi shopping basket in 2012 (in % of sales) Wal-Mart Aldi Sales 100.0 100.0 71.5 80.0 2.5 2.5 1.0 0.5 0.5 0.1 0.5 1.8 Purchase Prices Inbound Logistics Shrinkage Advertising Rental Info Systems Payroll Depreciation and Amortization Other SG&A Operating Income 1.0 1.0 12.0 6.0 1.5 1.1 2.0 2.0 7.5 5.0 30.0 N/A / Invested Capital (common-sized as % of sales) Exhibit 7 Common Size Cost Structure Estimate of a typical Wal-Mart and Aldi shopping basket in 2012 (in % of sales) Wal-Mart Aldi Sales 100.0 100.0 71.5 80.0 2.5 2.5 1.0 0.5 0.5 0.1 0.5 1.8 Purchase Prices Inbound Logistics Shrinkage Advertising Rental Info Systems Payroll Depreciation and Amortization Other SG&A Operating Income 1.0 1.0 12.0 6.0 1.5 1.1 2.0 2.0 7.5 5.0 30.0 N/A / Invested Capital (common-sized as % of sales)