Economy analysis of Wal-Mart Stores, Inc

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Economy analysis of Wal-Mart Stores, Inc

 

1.        Background of company

Wal-Mart has been one of the America’s most successful businesses. Wal-Mart Stores, Inc is a chain of department stores that sells a wide selection of goods at reduced prices. The first Wal-Mart stores was set up in Rogers, Arkansas, and it was co-founded by Sam Walton and his brother James “Bud” Walton in 1962 (Lesley, Hansen & Zukowski-Faust 2003, p. 176).

 

2.        Objectives

 

2.1    Corporate vision

Saving people money to help them live better was the goal that Sam Walton envisioned when he opened the doors to the first Wal-Mart more than 40 years ago (Walmartstores.com 2011). This simple and long lasting corporate vision without too many changes over the past few decades has well built the foundations of the business directions and competitive strategies of the company and also the core values and corporate cultures that support the management decisions.

2.2    Business objective: maximization of sale revenue (market share)

As known to us, profit maximization is the ultimate objective of any for-profit organizations, but it would not always equal to the application of the formula related to marginal cost and marginal revenue. According to Susan V. Crosson and Belverd E. Needles (2011, p. 472), one key indicator of profit potential is an increasing share of the market and maintaining or gaining market share is closely related to the pricing strategies. This is exactly what happens in the Wal-Mart’s case. The company is targeting at obtaining a bigger market share in the global retail industry and utilizes the control market share to increase its bargaining power over the suppliers, producers and even over the customers. Therefore, maximization of sale revenue or market share will be the direct business objective underlying the business strategies.

2.3    Business objective: maximization of the shareholder wealth



The shareholder wealth maximization goal states that the management should seek to maximize the present value of the expected future returns to the owners, the shareholders of the firm. These returns can take the form of periodic dividend payment or proceeds from the sale of the common stock (Moyer, McGuigan & Kretlow 2009, p. 5). While the business future is hard to predict, we would evaluate the shareholder wealth in two different indicators: the share price trend and the historical dividend paid.

2.4    Business objective: maximization of the share price

Chart 1 3 years share price trend

Source: digitallook.com 2011

 

The share price represent the price that the shareholders could get when they trade out the stock in the stock market which could be more important than the dividend received by the shareholders, in particular to the long term stock holders. As seen from the chart above, in a long term’s perspective, it is believed that the company’s overall stability and business model make it one of the faster companies to take part in a recovery after the global financial crisis (Brighthub.com 2009). On average, from the beginning of 2009 to the late 2011, the stock price is in an increasing which is good news to the investors. The earning for the investors is positive if they brought the stock in the beginning of the said term.

Chart 2
 Delivery of earning per share since 2001
Source: dividendgrowthinvestor.com 2011

 

The company has managed to deliver an increase in EPS of 12.20% per year since 2001. Analysts expect Wal-Mart to earn $4.44 per share in 2011 and $4.88 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. Wal-Mart has one of the largest and most consistent stock buyback programs in the US. Also analysts estimate that Wal-Mart (WMT) will be able to achieve a 10% annual growth in EPS for the next 5 years (Dividendgrowthinvestor.com 2011).

 

2.5    Business objective: maximization of the dividend paid

Table 1
 Five year financial summary of Wal-Mart
Source: walmartstores.com 2010

 

The historical dividend paid to the shareholders could be a even exciting piece of news to the investors, from the 0.6 dollar paid in 2006 to 1.09 in 2010, in the five year period, the year on year growth rate of dividend paid if 38.02% which is much higher than the earning per share growth. This indicates that to the individual investors, the business growth of the company could be more benefiting to them because the more profits are distributed and repaid back to investors.

 

3.        Product of the company and retail industrial overview

 

Similar to Target and K-mart, Wal-Mart offers a wide selection of merchandise at discount prices. It operates discount stores as well as supercentres. On the first of March 1988, the first Wal-Mart Supercenter opened in Washington, Missouri, U.S.A. With fresh food, groceries and discount-general merchandise all under one roof, Wal-Mart Supercenter is the ultimate in one-stop shopping – not only saves customers time and money but also offers a unique shopping experience. This new concept has been enthusiastically accepted by the customers ever since. Till today, Wal-Mart has about 1,000 Supercenters around the world. Also the company operates SAM’S CLUB, the division of Wal-Mart Stores, Inc, named by the retail giant Mr. Sam Walton, founder of Wal-Mart, is a warehouse shopping club with membership system. Beginning in 1983, SAM’S CLUB has developed to over 500 chain clubs across the world (Wal-martchina.com 2011). In term of product types, the stores sell almost everything that a discount store sells including the meat and poultry, baked goods, dairy products, frozen foods and garden produce (Wit & Meyer 2010, p. 910).

 

The Wal-Mart Stores is operating in the highly competitive retail industry in both the United States and the countries that the company serves internationally. Wal-Mart faces strong sales competition from other discount, department, drug, variety and specialty stores, warehouse clubs, and supermarkets, many of which are national, regional or international chains, as well as internet-based retailers and catalog businesses. It compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees (whom we call “associates”) (Financial report 2010). The companies together with other retail companies are affected by a number of factors such as labor cost, foreign exchange rate, consumer behaviors, substitute products and services and technological innovations.

 

4.        Market structure and competitiveness of the retail industry

 

4.1    Market structure of the retail industry

 

The retail industry is a sector of the economy that is comprised of individuals and companies engaged in the selling of finished products to end user consumers (Farfan 2011). Though the global retail industry is highly competitive, it is dominated by the large scale retailers. According to the earlier survey in 2008, the global top 10 retain their leadership roles Retail sales became a bit more concentrated in the hands of the world’s 10 largest retailers in fiscal 2008. With combined sales approaching $1.2 trillion, the Top 10 garnered 30.2 percent of total Top 250 sales, up from 29.6 percent than that in 2007. Below we will look into the competitiveness of the retail industry by applying the Michael Porter’s Five Forces Analysis.

 


Table 2 The economic concentration of top 10 retailer in 2008

Source: stores.org 2010

 

 

4.2    Competitiveness of the retail industry

Figure 1
 Michael Porter’s Five Forces Analysis
Source: adapted from Porter (1980)

In the book Competitive Strategy, Michael E. Porter give us a tool that help us to understand the different competitive forces that bear down in an industry, Michael Porter’s Five Forces Analysis as one of the oldest tools in industrial analysis is still hugely powerful if used correctly according to Peter Cheverton (2004, p. 80). As illustrated in the figure above, the five force involved in an industry that will shape the competitiveness the industry are: the threat of new entrants, bargaining power of suppliers, threat of substitute products or service, bargaining power of buyers and the competitive rivalry. These five forces in the global retail industry will be analyzed in the following:

 

4.2.1            The threat of new entrants

The threat of new entrants is the extent to which new competitors can easily enter into a market or market segment (Griffin 2011, p. 81). The threat from the new entrants is low in the case of Wal-Mart Stores because of the market place that it has achieved and low cost strategy which create barriers to the new entrants . According to Christian Kneer (2005, p. 4), Wal-Mart does not have to worry about the threat of new entrants because they can utilize the economies of scale which spread the costs of production over the number of produced units. As a result the cost of product per unit declines as the volume increases. Hence Wal-Mart has sufficient capacity to produce more in order to lower the cost. Also technology plays an important role in helping Wal-Mart Stores to keep away the potential competitors. For example,
Wal-Mart has been trying to keep better track of its inventory by adding smart tags, or RFID (radio frequency identification) tags, to individual items in its stores in the recent years (Dailyfinance.com 2010). The application of the advance technology will require the inputs of large sum of money, labor and will hopefully increase the operating efficiencies of all the stores. Such high investment, low cost based pricing strategy and economy of scale will keep off the majority of the potential competitors from entering the industry as the threat to the Wal-Mart Stores.

4.2.2            The bargaining power of suppliers

The bargaining power of the suppliers could be understood in this way: since the suppliers wish to charge the highest prices for their products a power struggle arises between organizations and their suppliers, the advantage accruing to the side which has more choices or less to lose if the relationship ends (Greenwood 2002, p. 128). Wal-Mart has a strong competitive bargaining power with its suppliers. As Wal-Mart has more than 100000 suppliers worldwide (Cdproject.net 2009) the large number of suppliers of Wal-Mart has given it with a strong power to select the suppliers that meet their requirements (quality products at lower price). For example, Wal-Mart’s push goes beyond its efforts to reduce its own emissions by designing more energy-efficient stores and pursuing alternative fuels for its fleet of trucks as it requres its suppliers to reduce 20 million metric tons of greenhouse gas emissions by the end of 2015 (Sfgate.com 2010).

4.2.3            The threat of substitute products or service

Similarly, as with potential competitors, substitute products are also a threat to the industry and its companies. With substitution, it means to a certain degree the products or services cover the same needs of the consumers (Faarup 2010, p. 112). The threat of substitute products of the large scale discount stores is not strong. As suggested by James B. Jefferys (1954) as early as in the 1950s, large scale retailing will continue to increase in importance and will take the lead in introducing and developing new techniques of distribution and new relationship with manufacturers. The nowadays development and the anticipated future trends of the retailing industry has proved the rightness of Jefferys (1954)’s prediction as large scale retailing stores have dominated the retailing industry to a large degree globally. But still one important substitute in the future of the large scale retailing will still add uncertainty to the future development of the industry which is the online retailing. For example, in 2009, B2C E-Commerce reached 3.7% of total retail sales in the US, up from 3.3% in 2008 (Tmcnet.com 2011). Similar rapid growth of the online retailing could also be found in other developed and developing economies such as China indicating that online tailing could be a strong substitute of the large scale retailing in the future.

4.2.4            The bargaining power of buyers

Based on Ciby Joseph (2006, p. 90), buyer come from an extremely broad range and the ultimate buyers extend from individuals to large corporate customers engaged in an assortment of business activities. The bargaining power of customers in the retailing industry is not strong but it does exist. On one hand, the buyers of Wal-Mart do not need to utilize their bargaining power because the discount stores have already lower the prices in term of “every day low price” to offer price advantages to the customers but if Wal-Mart increase the prices of the products there is no doubt that the consumers will turn to the competitors; on the other hand, because the buyers of Wal-Mart are most individual buyers and each buying of them is small which limits the bargaining power of them. Another kind of bargaining power of the buyers takes the form the increasing awareness of the environment protection which reduces the importance of price when making a buying decision. For example, consumers today are less willing to accept that a plastic bottle will take 1,000 years to decompose in a landfill.  By proactively redesigning its bottle to reduce material use and pledging to recycle 100% of bottles sold in the US, Coca-Cola is clearly taking action to stay ahead of consumer brand expectations – and by doing so, defending (or perhaps enhancing) its brand value (WordPress.com 2008). Similar things happen in the other products on Wal-Mart’s shelves.

 

4.2.5            The competitive rivalry

The competitive rivalry is the nature of the competitive relationship between the dominant firms in the industry (Griffin 2011, p. 81). The competitive rivalry in the global retailing industry is intense and it seems that Wal-Mart’s price leadership strategy has been threatened strongly from the major industrial competitors. In the US market, Last year, Wal-Mart Stores lost U.S. market share to its competitors for the first time in a decade, according to calculations by Credit Suisse. The world’s largest retailer had grown its share of the U.S. consumer market annually during the previous 10 years, from 9.3 percent in 2000 to 13.9 percent in 2009. But last year, that market share fell to 13.4 percent according to Credit Suisse.  The ongoing issues of elevated energy prices, competitors (i.e. e-commerce) challenging its price leadership, and rising sourcing costs will continue to represent significant challenges to Wal-Mart’s longer term prospects (Walmarthelp.com 2011). In the China sector, even though Wal-Mart has 333 outlets and $7.5 billion in revenue in China, the company estimates its market share has plummeted to 5.5% from 8% three years ago because it has not reacted fast enough to key trends. And it is believed that Wal-Mart made the mistake of leaning too heavily on the big box retailer format in China like in the U.S., rather than smaller, conveniently located retail outlets (Seekingalpha.com 2011). Therefore, we can conclude that the retail industry has a high competitive rivalry among the established players.

4.2.6            Evaluation of the industrial competitiveness

To sum up the five forces analysis, because of the low threat of entry, middle level of threat from the substitute products, low bargaining power from the supplier, medium bargaining power of the customers and high level of intensity of the rivalry among the existing players, we can see that though the company claims that the industry is high competitive, in the perspective of the Wal-Mart, the industry is still attractive but with some threats which it need to take up strategies to tackle.

 

5.        Analysis of the economy performance of the company for the past few years

 

5.1   
Revenue, Earnings, Cash Flow, and Margins

Chart 3 Revenue growth (in billion dollar)

Source: Financial report 2010

 

Chart 4 Earnings growth (in billion dollar)

Source: Financial report 2010

 


Chart 5 Cash flow growth (in billion dollar)

Source: Financial report 2010

Chart 6 Gross profit margin

Source: Financial report 2010

 

In term of the revenue growth, as indicated in the figure chart above, in the period between 2006 to 2010, the revenue of the company grew from 309 billion to 405 billion suggesting that there is a 7 percent year on year growth which is in accordance with the company’s global expansion business strategy. And in term of earning growth, a 6 percent growth is observed in the same period and cash flow increased by about 10 percent from 2006 to 2010 while the gross profit margin increased gradually from 23.1% in 2006 to 24.8% in the most recent financial year. In general, the financial performance of the Wal-Mart is healthy despite the global financial crisis.

 

6.        Comparison between the company and the industry


Table 3 The global retail sales

Source: EIU, August 2010

 

 2006200720082009
Global retail11,90013,20014,50013,900
Wal-Mart revenue309 (2.6%)345 (2.61%)374 (2.58%)401 (2.88%)

Table 4 Comparing the global retail sale growth and growth rate of Wal-Mart

 

In term of the growth rate which is one of the most important business objectives as mentioned in the beginning to Wal-Mart as a large retailing chain, the growth of the company business scale has enjoyed a faster growth rate than the global market growth though the increase is not significant. In a certain point, it reflects that the company has enjoyed a less effective “Wal-Mart” phenomenon which is legendary to the company suggesting that some changes are needed to tackle problems such as the rise of the online retailing.

 

 

 

7.        Strategies adopted

 

7.1    Product decision

As mentioned above, there is an increasing awareness of the environment protection which reduces the importance of price when making a buying decision of the consumers, and this trend has increased the bargaining power of the customers because they would choose another competitors if the products provided by Wal-Mart is less environmental friendly than the offering of the competitors.  Hence Wal-Mart has adopted a strategy of a sustainability program to deploy a selection, action, and assessment process in the supply chain to focus on the product categories such as in term of the embedded carbon to introduce more products that are more environmentally friendly.

 

7.2    Market development into the E-commerce

As mentioned above in the Porter’s five forces analysis, a strong potential substitute of the large scale retailing is the increasingly popular online retailing which incurs even lower cost in the product categories and enjoys a better customer preference due to the convenience, one strategic decision to tackle this threat by Wal-Mart is to develop its market into the online retailing market. For example, to become even more localized, Wal-Mart is joining hands with e-commerce players in China and abroad in investing in the country’s fast-growing online retail arena. Wal-Mart reached an agreement with the Shanghai municipal government to establish an e-commerce office in the city to oversee Wal-Mart’s online retail operations in China. The retailer and the Shanghai government agreed to work together to train e-commerce personnel and speed the development of online retailing in China. The announcement of the Shanghai office followed Wal-Mart’s recent announcement that it had purchased a minority stake in the Chinese online retailer Yihaodian (Wal-martchina.com 2011). To support the e-commerce market development Wal-Mart is setting up a research centre in India under its Wal-Mart Labs to develop technologies and solutions for its global e-commerce business. Wal-Mart Labs is a part of Wal-Mart’s Global e-Commerce Division, and is the company’s hub for creating technologies and businesses in social and mobile commerce for global shoppers. The move underscored Wal-Mart’s drive for technology innovation in powering the next generation of e-commerce (Mydigitalfc.com 2011).  

 

8.        Conclusions and recommendations

 

To conclude the above analysis, in the competitive global retail industry Wal-Mart with its large market share has been able to utilize a price leader strategy and continue its fast pace of global expansion. But it seems that the expansion mode should not be copied to all the market divisions around globe, and China has made a good example to Wal-Mart management. Hence the strongest recommendation to the company would be to adopt a localization strategy to adapt the company strategies to the local needs such as opening up smaller scale stores in China and other developing countries to maintain the growth momentum.

 

 

Reference

 

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