netrashetty
Netra Shetty
Wal-Mart Stores, Inc. (formerly branded as Wal-Mart, branded as Walmart since 2008) (NYSE: WMT) is an American public multinational corporation that runs a chain of large discount department stores and a chain of warehouse stores. In 2010 it was the world's largest public corporation by revenue, according to the Forbes Global 2000 for that year.[6] The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. Wal-Mart, headquartered in Bentonville, Arkansas, is the largest majority private employer[7] and the largest grocery retailer in the United States. In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business.[8] It also owns and operates the Sam's Club retail warehouses in North America.
Wal-Mart has 8,500 stores in 15 countries, with 55 different names.[9] The company operates under its own name in the United States, including the 50 states. It also operates under its own name in Puerto Rico. Wal-Mart operates in Mexico as Walmex, in the United Kingdom as Asda ("Asda Wal-Mart" in some branches), in Japan as Seiyu, and in India as Best Price. It has wholly owned operations in Argentina, Brazil, and Canada. Wal-Mart's investments outside North America have had mixed results: its operations in the United Kingdom, South America and China are highly successful, while it was forced to pull out of Germany and South Korea when ventures there were unsuccessful.
Wal-Mart Stores, Inc. (NYSE: WMT) is the world's largest retailer and grocery chain by sales. Wal-Mart is so large that its 2010 sales were almost 50% more than its 5 closest competitors combined, including Target (TGT) and Sears Holdings (SHLD).[1] Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers. Many suppliers give in to Wal-Mart's pressure because they depend on the discount retailer for a majority of their sales.
Conversely, however, Wal-Mart's reliance on Chinese-made imports makes the company vulnerable to a weakening dollar or strengthening of the Yuan. Wal-Mart purchases billions worth of merchandise directly from China every year with many of its other inventory from companies like Mattel (MAT) coming indirectly from China. In fact, if Wal-Mart were a country, its imports are so substantial that it would be China's sixth largest export country.[2] In the summer of 2010, the People's Bank of China announced that it would "enhance the renminbi exchange-rate flexibility" which would allow the value of the Yuan to rise.[3] A stronger Yuan means that Wal-Mart will have to pay more for its merchandise from China, an issue that threatens Wal-Mart's bottom line.
Contents
1 Company Overview
1.1 Business Segments[6][5][7]
1.1.1 Wal-Mart Stores (63.8% of Revenue)
1.1.2 Sam’s Club (11.5% of Revenue)
1.1.3 Wal-Mart International (24.7% of Revenue)
1.2 Reorganization of US Operations
1.3 Wal-Mart Acquires Online Movie Service VUDU
1.4 Wal-Mart To Invest In Green Dot
1.5 Wal-Mart Family Mobile Service
1.6 Wal-Mart Invests in China's 360buy.com
2 Business Growth
2.1 FY 2010 (ended January 31, 2010)[4]
2.2 Q1 2011 (ended April 30, 2010)[19]
2.3 Q2 2011 (ended July 31, 2010)[20]
2.4 Q3 2011 (ended October 31, 2010)[21]
3 Trends and Forces
3.1 Stagnant US Sales Forces Wal-Mart To Change Domestic and International Strategy
3.2 Low-Income Customers Turn to Wal-Mart in Weakened Economy... But What Happens When Economy Rebounds?
3.3 Relying on Imports from China Makes Wal-Mart Vulnerable to Currency Rate Changes
3.4 Wal-Mart Uses Large Size to Maintain Low Cost Leadership
3.5 Too Many Stores Means Cannibalization Reduces Comparable Store Sales
4 Competition
4.1 Domestic Competitors
4.2 Other Retailers
4.3 International Competitors
5 References
Wal-Mart earned $408 billion in revenue in FY2010, a 1% increase from 2009.[4] The company operates 8,416 stores worldwide, with over 4,000 of them in international markets. Due to Wal-Mart's low prices, consumers gravitate to Wal-Mart stores during economic downturns. As a result, the company's comparable store sales increased by 3.5% during the worst toughest year. However, as the global economy emerges from recession, stands to lose a lot as consumers opt to buy higher quality and more expensive items. In 2010, the company's US comparable store sales fell by 0.8%.[5]
Company Overview
Wal-Mart operates 8,000 stores across three business segments of retail stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and small appliances. In addition, the company is the world's largest retailer and grocery chain by sales and just over half of the company's sales comes from grocery items.[6] Over 54% of the company's stores are located in the United States, with the majority of international stores located in Central and South America and China. The company focuses on offering the lowest prices across its business segments, which together earned $408 billion in revenue in 2010, a 1% increase from sales in 2009.[4] Wal-Mart's largest business segment is its namesake Wal-Mart stores, which accounted for 63.8% of the company's revenue in 2010. The company also earns revenue through its Sam's Club and international business segments which accounted for 11.5% and 24.7% of the company's 2010 net revenue each, respectively.[6]
Business Segments[6][5][7]
Wal-Mart Stores (63.8% of Revenue)
Wal-Mart's 4,304 domestic namesake stores accounted for over $300 billion of the company's revenue during fiscal year 2010 which was a 0.9% increase from sales in 2009. This moderate growth differs from the 0.7% decrease in comparable store sales the store suffered in 2010. Wal-Mart blames the slow growth in comparable store sales to declines in consumer spending, particularly in apparel categories as well as cannibalization caused by new store expansions. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. Wal-Mart stores earned 51% of their revenue from grocery sales in 2010, with sales of entertainment, electronics, and toys a distant second at 13% of Wal-Mart stores' revenue. The company plans to open 145-160 new stores in 2011.
Wal-Mart stores come in one of three traditional formats:
Supercenters average about 185,000 square feet in size and carry general merchandise and include a supermarket. Wal-Mart operated 2747 Supercenters at the end of 2010, an additional 135 locations from 2009 which were primarily from conversions of Wal-Mart Discount Stores.
Discount Stores average approximately 108,000 square feet in size and carry a wide assortment of general merchandise, but a limited assortment of food products. Wal-Mart operated 803 Discount Stores at the end of 2009.
Neighborhood Stores are usually about 42,000 square feet in size and carry a limited assortment of general merchandise, but have a full supermarket. Wal-Mart operated 158 Neighborhood format stores at the close of 2010.
Sam’s Club (11.5% of Revenue)
Provides goods for stores, restaurants, offices, daycares and schools, and motels. Sam’s Club management remains focused on growing this foundation and improving its relationships with small business owners. To this end, the company has expanded its offerings of office furniture and restaurant supplies. The company also has services geared towards small business, such as prescription drug plans and worker’s compensation claims billing.
At the end of 2010, the company operated 596 Sam’s Club locations nationwide, which generated $46 billion in total sales. Sales at Sam's Club stores fell 0.4% in 2010 due to a 1.4% decline in comparable store sales. Sam's Club stores earn revenue through the sale of bulk brand name merchandise including grocery items, electronics, and furniture, but also sells private-label merchandise under the Member's Mark, Bakers & Chefs, and Sam's club brands. In 2011, Wal-Mart plans to open 5-10 new Sam's Club locations nationwide.
In Janurary 2010, the company announced that it planned to cut more than 11,000 jobs at Sam's Clubs and outsource its product sampling and demonstration to a third party company called Shopper Events. This was part of a new program called Tastes and Tips which aimed to bolster product demand. 10,000 of the cut jobs were mostly part time jobs for product sampling and demonstration and the remaining 1,000 jobs belonged to member-recruitment workers. Earlier in the month, Wal-Mart announced that it would close 10 underperforming Sam's Club stores, which would eliminate 1,500 jobs.[8]
Wal-Mart International (24.7% of Revenue)
Wal-Mart operates international locations of its Wal-Mart and Sam's Club stores as well as other retail and supermarkets in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. Wal-Mart operated 3,121 international locations in 2010, an increase of 991 stores compared to 2009. Altogether, the international business generated $100 billion in revenue in 2010, a 1.3% increase from 2009 sales. Wal-Mart has made commitments to continue its rapidly increasing international business.[9]
In January 2010, the company announced that it had set up a new global e-commerce unit called Global.com. The purpose of the site is to drive online growth in new and existing markets. Wal-Mart hopes to finally establish a single global e-commerce platform that would be replicable in all of its markets (previously, the company had separate e-commerce sites in the US, UK, Mexico, and Brazil). By bringing the e-commerce businesses closer to its stores, Wal-Mart hopes to give itself an advantage over e-commerce rival Amazon.com (AMZN).[10]
Reorganization of US Operations
In January 2010, Wal-Mart announced that is was going to restructure its US operations to give more independence to executives in regional markets in order to reinvigorate US growth. In order to do this, the company plans to combine its realty, store operations, and logistics divisions, and reorganize operations under three geographic units, West, South, and North, each of which would be headed by a regional president. Wal-Mart believes that this move will allow the company to more closely connect with its customers, increase efficiencies, and help create growth in new markets.[11] The restructuring also continued into February 2010 when on February 4th Wal-Mart announced that it was cutting 300 jobs at its headquarters in northwest Arkansas as they were looking for opportunities to eliminate duplication and reduce costs.
Wal-Mart Acquires Online Movie Service VUDU
On February 22, 2010, Wal-Mart announced that it was acquiring VUDU, a sells and rents downloadable movies and TV shows on-demand that can be viewed on Web-connected devices such as computers and Blu-ray disc players. The acquisition strengthens Wal-Mart's position in the digital market, already dominated by Apple (AAPL), Amazon.com (AMZN), and Netflix (NFLX). [12] [13]
Wal-Mart To Invest In Green Dot
On June 16, 2010, Wal-Mart announced that it was buying 2 million shares in Green Dot, a prepaid debit-card seller. These cards act like portable checking accounts because they are refilled by making deposits at retail stores instead of banks . The company already managed Wal-Mart's prepaid card business. The investment brings Wal-Mart closer to commercial banking.[14]
Wal-Mart Family Mobile Service
In September 2010, Wal-Mart announced the Wal-Mart Family Mobile service, the company's first cell phone plan that uses the company's own branding. The service runs on T-Mobile USA's network and features postpaid unlimited calling and texting plans for $45 per month and $25 for each additional line. The company's postpaid plan, meaning that the bill isn't paid until the end of the month, and lack of contract requirement or termination fees attract low-income consumers.[15]
Wal-Mart Invests in China's 360buy.com
In December 2010, Wal-Mart confirmed that it, along with five other companies, was investing $500 million into 360buy.com, one of China's largest and fastest growing online retailers. The investment increases Wal-Mart's international presence.[16]
Business Growth
FY 2010 (ended January 31, 2010)[4]
Wal-Mart's 2010 net sales were $405 billion, a 1% increase from sales in 2009. The company attributed its increase in revenues to global store expansions and strong sales in international markets. For the year, international sales were slightly more than $100 billion, an increase of 1.3% from the prior year; U.S. sales only increased by 1% for the year.[6]
Although Wal-Mart's sales continued to increase, its comparable store sales slumped in 2010 due to weakness in consumer spending because of the economic downturn. Domestic comparable store decreased 0.8% in 2010, compared to a 3.5% increase in 2009.[6] As a result, the company shifted focus to international expansion, particularly in areas without Wal-Mart stores. Approximately 75% of stores opened in 2010 were international, with 275 built in Mexico.[7] In FY2011, the company plans to continue its international growth by opening 300 stores in Mexico[17] and 35-40 supercenters in Canada. [18]
Wal-Mart's net income reached almost $14.4 billion in 2010, a 7% increase from 2009. This increase was much greater than the company's 1% increase in net sales due to higher income from continuing operations. In 2010, Wal-Mart Stores operating income increased 5%, compared to a 1% increase in sales; domestic sales increased 1%, but domestic operating net income grew by 5.2% due to decreased expenses. Sam's Club stores, however, had a -0.4% decline in sales and a 8.1% decline in operating income, because of increased expenses. Overall, Wal-Mart's operating expenses as a percentage of sales increased to 19.7% in 2010, up from 19.1% in 2009, but didn't have a large effect on the company's growth in operating income.[5]
Q1 2011 (ended April 30, 2010)[19]
Wal-Mart posted net income of $3.32 billion, a 10% increase from $3.02 billion in the previous year's quarter.
Net sales increased 6% to $99 billion, primarily lead by a 21.4% growth in the company's international business. Domestic Wal-Mart and Sam's Club sales grew by 1.1% and 4.6% respectively.
Company-wide comparable store sales fell 1.1%. Domestic Wal-Mart comparable store sales fell 1.4% but increased 0.7% for Sam's Club stores.
The company added 3.6 million square feet of retail space during the quarter. 60% of it was in its overseas businesses.
Q2 2011 (ended July 31, 2010)[20]
Wal-Mart's second quarter net income increased 3.6% to $3.59 billion, up from $3.47 billion in the prior year. The company said that it benefited from cost-cutting measures and global growth in China, Brazil, and Mexico.
Net sales increased 3% to $103.7 billion, powered by 11% growth at International stores and 2.2% growth at Sam's Club. However, sales at Wal-Mart US stores remained flat for the quarter due to the economic environment.
US comparable store sales decreased 1.4% due to a 1.8% decline in Wal-Mart stores, which was offset by a 1% increase at Sam's Club stores.
Q3 2011 (ended October 31, 2010)[21]
Wal-Mart's third quarter net income increased 9.3% to $3.44 billion. The company benefited from strong international sales and increased its full-year guidance.
Wal-Mart's net revenue increased 2.6% to $101.95 billion. The company's 9.3% increase in international sales (2.4% on a same-store basis) generated enough revenue to offset the 1.3% decline in US same-store sales.
The firm expects that its US same-store sales will range from a 1% decline to a 2% increase in Q4 2011. US same-store sales have decreased for six straight quarters.
Trends and Forces
Stagnant US Sales Forces Wal-Mart To Change Domestic and International Strategy
Since Q1 2010, Wal-Mart has reported five straight quarters of declining comparable store sales inside the US. Although part of this can be attributable to recessionary effects, the company believes it is time for new strategies.
Domestically, the company is pursuing an urban market strategy to revive growth. Over the summer of 2010, Wal-Mart was active in searching for small retail locations in major cities like New York and San Francisco. The size of these locations averaged 20,000 square feet, a massive reduction from its average super-store size of 150,000 square feet. By pursuing smaller store-format, Wal-Mart will be able to push into the urban market, expand its potential customer base, and increase store traffic. These small stores will also allow customers to make more frequent visits, compared to the previous concept of having customers come into stores weekly or bi-weekly depending on when paychecks arrived. Since 2008, Wal-Mart has been experimenting with the small-store format. The company owns four fresh-food based Marketside stores, which average 15,000 square feet each. The company also owns 200 Neighborhood Market by Walmart stores that average 42,000 square feet and offer a range of products and services including fresh food, pharmacy, beauty, stationary, and pet supplies. The company plans to fuse these two ideas in its new urban stores.[22]
Internationally, Wal-Mart is looking to expand into South Africa and the sub-Saharan region where the IMF estimates output will grow 6% annually. In Janurary 2011, South Africa's Massmart Holdings, the third largest retailer in the country, agreed to Wal-Mart's bid to buy 51% of the company. Massmart operates 232 stores in the country. International growth has been a spark for Wal-Mart during the sluggish economic environment as international sales increased by 11% in FY 2010 compared to stagnant US growth during the same period. Wal-Mart has an opportunity to further increase its international expansion into South Africa and the surrounding region.[23][24] In line with the company's international expansion plans, rumors arose in November 2010 that Wal-Mart was looking to bid on the hypermarket operations of Indonesia's Matahari, a transaction that may be $1 billion.[25] As for the Asian region, Wal-Mart, along with five other companies, invested $500 million in China's 360buy.com, a large and quickly growing online retailer, at the end of 2010.[16] In South America, Wal-Mart plans to open more stores in Brazil during FY 2012 than the 50 it built in FY 2011.[26]
Low-Income Customers Turn to Wal-Mart in Weakened Economy... But What Happens When Economy Rebounds?
Wal-Mart's main customer base has an average annual income of $35,000[27], versus the overall U.S. median of $50,303.[28] Wal-Mart has found success using its price leadership to take control of the low-end market and grow. However, its reliance on a poorer demographic makes the company vulnerable to the same macroeconomic trends that threaten its low-income customers, including rising health care costs, energy costs, interest rates, and a softening real estate market. These macro factors impact a greater percentage of the Wal-Mart customer's income than they do the average American's, affecting these customer's buying power and, therefore, the company's earning potential. Conversely, because of its position as a low-price provider, many value-driven consumers navigate to Wal-Mart during rough economic times. Wal-Mart's low price proposition lead to a 3.5% increase in comparable store sales in FY 2009[5]
However, as the economy rebounds in 2010 and into 2011 and consumers regain confidence,[29] Wal-Mart faces a problem - will its newly found customers continue to look for low-prices, or will they be willing to spend a little more for more quality items? This creates a problem for Wal-Mart because if it can't sustain its customer base, its bottom line will see the negative impacts. The effect is noticeable as in FY 2010 Wal-Mart comparable store sales decreased by 0.8%.[5]
Additionally, Wal-Mart faces challenges as they cut back on their rollback discounts and prices increase. In September 2010, a basket of goods increased 2.7% compared to that in August, and a 5% increase compared that at the beginning of 2010.[30] As a result, the company's Q2 2011 comparable-store sales declined 1.4% as consumers were turned away from higher prices. As the company tries to increase profit margins in light of stagnant US sales, they also risk losing some of its lower income customers.
Relying on Imports from China Makes Wal-Mart Vulnerable to Currency Rate Changes
Wal-Mart depends heavily on China for manufacturing its merchandise as it purchases billions of dollars worth of merchandise every year. Additionally, many of the company's suppliers like Mattel (MAT) manufacture their products in China, which in turn are sold in Wal-Mart stores. Wal-Mart's imports are so substantial in fact, that if Wal-Mart were a country, it would be China's sixth-largest export market.[2] By outsourcing to China, Wal-Mart is able to secure lower costs of inventory, which the company in turn passes on to low prices for customers.
However, as a result of its dependency on Chinese manufacturing, Wal-Mart is vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. If, for example, the dollar weakens compared to the Yuan, the price of Wal-Mart's Chinese imports would rise. As a result, the company would either have to raise its prices or would have to cope with narrowed gross margins, reducing its profitability. Additionally, the company is vulnerable to adverse legislation, such as higher tariffs, that would raise the cost of its Chinese imports.
In the summer of 2010, the People's Bank of China announced that it would "enhance the renminbi exchange-rate flexibility" which would allow the value of the Yuan to rise.[3] A rising Yuan will mean that commodities prices will increase and Wal-Mart will have to pay more for its imported goods. If Wal-Mart sticks with obtaining its merchandise from China, it will face the decision of whether or not to pass along the rising costs onto the consumers or absorb them and have margins fall.
Wal-Mart Uses Large Size to Maintain Low Cost Leadership
Wal-Mart is the largest retailer in the world by sales, with almost 50% higher sales than its 5 closest competitors combined, including Target (TGT), Sears Holdings (SHLD), and Macy's Inc. (M). Wal-Mart uses its enormous size and buying power to pressure its suppliers into extremely low prices, offering orders of high volumes of merchandise in exchange for low prices. Wal-Mart then passes on these savings to its customers. Since many suppliers depend on Wal-Mart for a majority of its business, companies often give in to Wal-Mart's cost cutting demands, narrowing their margins or even redesigning their product offerings.
Wal-Mart's bargaining power has helped the company maintain its low price leadership despite fluctuating commodities prices. For example, to fight rising prices of gasoline, grain, and dairy products, Wal-Mart pressured companies like General Mills (GIS) to shave its costs by implementing redesigns of its products and packaging.
Too Many Stores Means Cannibalization Reduces Comparable Store Sales
Like any retailer, Wal-Mart’s long term sales and income growth depend in large part on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures, effectively competing with itself for market share. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. In 2010, Wal-Mart's comparable store sales decreased by 0.8%.[5]
As a result of overexpansion domestically, Wal-Mart has transitioned to focusing on international expansion to markets with little or no presence of Wal-Mart stores. For example, the company opened 991 international stores in 2010, with the most growth occuring in Mexico, China, and Central America.[7] This was about 5 times more than the number of stores Wal-Mart opened domestically during the year.
Wal-Mart is also poised to open hundreds of stores in India if the country opens up the sector to foreign direct investment. India's $450 billion retail sector is largely closed to foreign firms and favours small mom-and-pop stores, which provide livelihoods for hundreds of thousands and serve a market of more than 1 billion. Currently there is a cap of 51% foreign direct investment in single-brand retail outlets, while retailers that carry multiple brands (like Wal-Mart) are restricted to cash-and-carry or wholesale outlets.[31] A change in India's policy would allow Wal-Mart to open hundreds of superstores and generate revenue from Asia's third largest economy.
Competition
Domestic Competitors
Target (TGT) is Wal-Mart's most direct competitor, offering a range of general merchandise in a similar store format (standard Targets, with limited food offerings, compare to Wal-Mart's discount stores, and Supertargets compare directly to supercenters). Target’s major competitive advantage over Wal-Mart lies in its customer base: the average household income for Target customers is about $50,000 a year, whereas the average yearly income for a Wal-Mart customer is only $35,000[27]. Finally, because of its focus on low prices, Wal-Mart has found it difficult to promote higher-quality items or private labels that come in at a higher price point; meanwhile, Target has had success with its quality-at-value-prices strategy among higher-income demographics, where price is not the only influence on sales. This higher-income customer base gives Target more stability than Wal-Mart, particularly as energy costs rise and the real estate market slows.
Kmart (SHLD), as the third discount retailer of the "Big Three", has seen steadily declining sales since 2000, losing considerable market share to both Wal-Mart and Target.
Other Retailers
As a large-scale retailer, Wal-Mart competes with a wide variety of other, specialized retailers, such as Safeway in groceries, Best Buy (BBY) in consumer electronics, and department stores such as Macy’s in apparel and home decor. Wal-Mart’s focus on price differentiation means that these companies, while competing in overall market share, are not necessarily competing for the same type of customer; however, in more volatile or price-sensitive markets, such as consumer electronics, discounters like Wal-Mart are able to leverage their pricing advantage and apply increasing pressure on other retailers.
Sam's Club directly competes with Costco Wholesale (COST) and BJ's Wholesale Club (BJ) in the warehouse club sector, where Costco has the advantage in terms total sales.
International Competitors
Wal-Mart's major international competitors are Britain's Tesco, France's Carrefour, and Germany's Metro. Each of these companies have a competing presence in China, the UK, and Japan, with Wal-Mart contending with at least one of them in many of its other markets.
Wal-Mart has 8,500 stores in 15 countries, with 55 different names.[9] The company operates under its own name in the United States, including the 50 states. It also operates under its own name in Puerto Rico. Wal-Mart operates in Mexico as Walmex, in the United Kingdom as Asda ("Asda Wal-Mart" in some branches), in Japan as Seiyu, and in India as Best Price. It has wholly owned operations in Argentina, Brazil, and Canada. Wal-Mart's investments outside North America have had mixed results: its operations in the United Kingdom, South America and China are highly successful, while it was forced to pull out of Germany and South Korea when ventures there were unsuccessful.
Wal-Mart Stores, Inc. (NYSE: WMT) is the world's largest retailer and grocery chain by sales. Wal-Mart is so large that its 2010 sales were almost 50% more than its 5 closest competitors combined, including Target (TGT) and Sears Holdings (SHLD).[1] Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers. Many suppliers give in to Wal-Mart's pressure because they depend on the discount retailer for a majority of their sales.
Conversely, however, Wal-Mart's reliance on Chinese-made imports makes the company vulnerable to a weakening dollar or strengthening of the Yuan. Wal-Mart purchases billions worth of merchandise directly from China every year with many of its other inventory from companies like Mattel (MAT) coming indirectly from China. In fact, if Wal-Mart were a country, its imports are so substantial that it would be China's sixth largest export country.[2] In the summer of 2010, the People's Bank of China announced that it would "enhance the renminbi exchange-rate flexibility" which would allow the value of the Yuan to rise.[3] A stronger Yuan means that Wal-Mart will have to pay more for its merchandise from China, an issue that threatens Wal-Mart's bottom line.
Contents
1 Company Overview
1.1 Business Segments[6][5][7]
1.1.1 Wal-Mart Stores (63.8% of Revenue)
1.1.2 Sam’s Club (11.5% of Revenue)
1.1.3 Wal-Mart International (24.7% of Revenue)
1.2 Reorganization of US Operations
1.3 Wal-Mart Acquires Online Movie Service VUDU
1.4 Wal-Mart To Invest In Green Dot
1.5 Wal-Mart Family Mobile Service
1.6 Wal-Mart Invests in China's 360buy.com
2 Business Growth
2.1 FY 2010 (ended January 31, 2010)[4]
2.2 Q1 2011 (ended April 30, 2010)[19]
2.3 Q2 2011 (ended July 31, 2010)[20]
2.4 Q3 2011 (ended October 31, 2010)[21]
3 Trends and Forces
3.1 Stagnant US Sales Forces Wal-Mart To Change Domestic and International Strategy
3.2 Low-Income Customers Turn to Wal-Mart in Weakened Economy... But What Happens When Economy Rebounds?
3.3 Relying on Imports from China Makes Wal-Mart Vulnerable to Currency Rate Changes
3.4 Wal-Mart Uses Large Size to Maintain Low Cost Leadership
3.5 Too Many Stores Means Cannibalization Reduces Comparable Store Sales
4 Competition
4.1 Domestic Competitors
4.2 Other Retailers
4.3 International Competitors
5 References
Wal-Mart earned $408 billion in revenue in FY2010, a 1% increase from 2009.[4] The company operates 8,416 stores worldwide, with over 4,000 of them in international markets. Due to Wal-Mart's low prices, consumers gravitate to Wal-Mart stores during economic downturns. As a result, the company's comparable store sales increased by 3.5% during the worst toughest year. However, as the global economy emerges from recession, stands to lose a lot as consumers opt to buy higher quality and more expensive items. In 2010, the company's US comparable store sales fell by 0.8%.[5]
Company Overview
Wal-Mart operates 8,000 stores across three business segments of retail stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and small appliances. In addition, the company is the world's largest retailer and grocery chain by sales and just over half of the company's sales comes from grocery items.[6] Over 54% of the company's stores are located in the United States, with the majority of international stores located in Central and South America and China. The company focuses on offering the lowest prices across its business segments, which together earned $408 billion in revenue in 2010, a 1% increase from sales in 2009.[4] Wal-Mart's largest business segment is its namesake Wal-Mart stores, which accounted for 63.8% of the company's revenue in 2010. The company also earns revenue through its Sam's Club and international business segments which accounted for 11.5% and 24.7% of the company's 2010 net revenue each, respectively.[6]
Business Segments[6][5][7]
Wal-Mart Stores (63.8% of Revenue)
Wal-Mart's 4,304 domestic namesake stores accounted for over $300 billion of the company's revenue during fiscal year 2010 which was a 0.9% increase from sales in 2009. This moderate growth differs from the 0.7% decrease in comparable store sales the store suffered in 2010. Wal-Mart blames the slow growth in comparable store sales to declines in consumer spending, particularly in apparel categories as well as cannibalization caused by new store expansions. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. Wal-Mart stores earned 51% of their revenue from grocery sales in 2010, with sales of entertainment, electronics, and toys a distant second at 13% of Wal-Mart stores' revenue. The company plans to open 145-160 new stores in 2011.
Wal-Mart stores come in one of three traditional formats:
Supercenters average about 185,000 square feet in size and carry general merchandise and include a supermarket. Wal-Mart operated 2747 Supercenters at the end of 2010, an additional 135 locations from 2009 which were primarily from conversions of Wal-Mart Discount Stores.
Discount Stores average approximately 108,000 square feet in size and carry a wide assortment of general merchandise, but a limited assortment of food products. Wal-Mart operated 803 Discount Stores at the end of 2009.
Neighborhood Stores are usually about 42,000 square feet in size and carry a limited assortment of general merchandise, but have a full supermarket. Wal-Mart operated 158 Neighborhood format stores at the close of 2010.
Sam’s Club (11.5% of Revenue)
Provides goods for stores, restaurants, offices, daycares and schools, and motels. Sam’s Club management remains focused on growing this foundation and improving its relationships with small business owners. To this end, the company has expanded its offerings of office furniture and restaurant supplies. The company also has services geared towards small business, such as prescription drug plans and worker’s compensation claims billing.
At the end of 2010, the company operated 596 Sam’s Club locations nationwide, which generated $46 billion in total sales. Sales at Sam's Club stores fell 0.4% in 2010 due to a 1.4% decline in comparable store sales. Sam's Club stores earn revenue through the sale of bulk brand name merchandise including grocery items, electronics, and furniture, but also sells private-label merchandise under the Member's Mark, Bakers & Chefs, and Sam's club brands. In 2011, Wal-Mart plans to open 5-10 new Sam's Club locations nationwide.
In Janurary 2010, the company announced that it planned to cut more than 11,000 jobs at Sam's Clubs and outsource its product sampling and demonstration to a third party company called Shopper Events. This was part of a new program called Tastes and Tips which aimed to bolster product demand. 10,000 of the cut jobs were mostly part time jobs for product sampling and demonstration and the remaining 1,000 jobs belonged to member-recruitment workers. Earlier in the month, Wal-Mart announced that it would close 10 underperforming Sam's Club stores, which would eliminate 1,500 jobs.[8]
Wal-Mart International (24.7% of Revenue)
Wal-Mart operates international locations of its Wal-Mart and Sam's Club stores as well as other retail and supermarkets in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. Wal-Mart operated 3,121 international locations in 2010, an increase of 991 stores compared to 2009. Altogether, the international business generated $100 billion in revenue in 2010, a 1.3% increase from 2009 sales. Wal-Mart has made commitments to continue its rapidly increasing international business.[9]
In January 2010, the company announced that it had set up a new global e-commerce unit called Global.com. The purpose of the site is to drive online growth in new and existing markets. Wal-Mart hopes to finally establish a single global e-commerce platform that would be replicable in all of its markets (previously, the company had separate e-commerce sites in the US, UK, Mexico, and Brazil). By bringing the e-commerce businesses closer to its stores, Wal-Mart hopes to give itself an advantage over e-commerce rival Amazon.com (AMZN).[10]
Reorganization of US Operations
In January 2010, Wal-Mart announced that is was going to restructure its US operations to give more independence to executives in regional markets in order to reinvigorate US growth. In order to do this, the company plans to combine its realty, store operations, and logistics divisions, and reorganize operations under three geographic units, West, South, and North, each of which would be headed by a regional president. Wal-Mart believes that this move will allow the company to more closely connect with its customers, increase efficiencies, and help create growth in new markets.[11] The restructuring also continued into February 2010 when on February 4th Wal-Mart announced that it was cutting 300 jobs at its headquarters in northwest Arkansas as they were looking for opportunities to eliminate duplication and reduce costs.
Wal-Mart Acquires Online Movie Service VUDU
On February 22, 2010, Wal-Mart announced that it was acquiring VUDU, a sells and rents downloadable movies and TV shows on-demand that can be viewed on Web-connected devices such as computers and Blu-ray disc players. The acquisition strengthens Wal-Mart's position in the digital market, already dominated by Apple (AAPL), Amazon.com (AMZN), and Netflix (NFLX). [12] [13]
Wal-Mart To Invest In Green Dot
On June 16, 2010, Wal-Mart announced that it was buying 2 million shares in Green Dot, a prepaid debit-card seller. These cards act like portable checking accounts because they are refilled by making deposits at retail stores instead of banks . The company already managed Wal-Mart's prepaid card business. The investment brings Wal-Mart closer to commercial banking.[14]
Wal-Mart Family Mobile Service
In September 2010, Wal-Mart announced the Wal-Mart Family Mobile service, the company's first cell phone plan that uses the company's own branding. The service runs on T-Mobile USA's network and features postpaid unlimited calling and texting plans for $45 per month and $25 for each additional line. The company's postpaid plan, meaning that the bill isn't paid until the end of the month, and lack of contract requirement or termination fees attract low-income consumers.[15]
Wal-Mart Invests in China's 360buy.com
In December 2010, Wal-Mart confirmed that it, along with five other companies, was investing $500 million into 360buy.com, one of China's largest and fastest growing online retailers. The investment increases Wal-Mart's international presence.[16]
Business Growth
FY 2010 (ended January 31, 2010)[4]
Wal-Mart's 2010 net sales were $405 billion, a 1% increase from sales in 2009. The company attributed its increase in revenues to global store expansions and strong sales in international markets. For the year, international sales were slightly more than $100 billion, an increase of 1.3% from the prior year; U.S. sales only increased by 1% for the year.[6]
Although Wal-Mart's sales continued to increase, its comparable store sales slumped in 2010 due to weakness in consumer spending because of the economic downturn. Domestic comparable store decreased 0.8% in 2010, compared to a 3.5% increase in 2009.[6] As a result, the company shifted focus to international expansion, particularly in areas without Wal-Mart stores. Approximately 75% of stores opened in 2010 were international, with 275 built in Mexico.[7] In FY2011, the company plans to continue its international growth by opening 300 stores in Mexico[17] and 35-40 supercenters in Canada. [18]
Wal-Mart's net income reached almost $14.4 billion in 2010, a 7% increase from 2009. This increase was much greater than the company's 1% increase in net sales due to higher income from continuing operations. In 2010, Wal-Mart Stores operating income increased 5%, compared to a 1% increase in sales; domestic sales increased 1%, but domestic operating net income grew by 5.2% due to decreased expenses. Sam's Club stores, however, had a -0.4% decline in sales and a 8.1% decline in operating income, because of increased expenses. Overall, Wal-Mart's operating expenses as a percentage of sales increased to 19.7% in 2010, up from 19.1% in 2009, but didn't have a large effect on the company's growth in operating income.[5]
Q1 2011 (ended April 30, 2010)[19]
Wal-Mart posted net income of $3.32 billion, a 10% increase from $3.02 billion in the previous year's quarter.
Net sales increased 6% to $99 billion, primarily lead by a 21.4% growth in the company's international business. Domestic Wal-Mart and Sam's Club sales grew by 1.1% and 4.6% respectively.
Company-wide comparable store sales fell 1.1%. Domestic Wal-Mart comparable store sales fell 1.4% but increased 0.7% for Sam's Club stores.
The company added 3.6 million square feet of retail space during the quarter. 60% of it was in its overseas businesses.
Q2 2011 (ended July 31, 2010)[20]
Wal-Mart's second quarter net income increased 3.6% to $3.59 billion, up from $3.47 billion in the prior year. The company said that it benefited from cost-cutting measures and global growth in China, Brazil, and Mexico.
Net sales increased 3% to $103.7 billion, powered by 11% growth at International stores and 2.2% growth at Sam's Club. However, sales at Wal-Mart US stores remained flat for the quarter due to the economic environment.
US comparable store sales decreased 1.4% due to a 1.8% decline in Wal-Mart stores, which was offset by a 1% increase at Sam's Club stores.
Q3 2011 (ended October 31, 2010)[21]
Wal-Mart's third quarter net income increased 9.3% to $3.44 billion. The company benefited from strong international sales and increased its full-year guidance.
Wal-Mart's net revenue increased 2.6% to $101.95 billion. The company's 9.3% increase in international sales (2.4% on a same-store basis) generated enough revenue to offset the 1.3% decline in US same-store sales.
The firm expects that its US same-store sales will range from a 1% decline to a 2% increase in Q4 2011. US same-store sales have decreased for six straight quarters.
Trends and Forces
Stagnant US Sales Forces Wal-Mart To Change Domestic and International Strategy
Since Q1 2010, Wal-Mart has reported five straight quarters of declining comparable store sales inside the US. Although part of this can be attributable to recessionary effects, the company believes it is time for new strategies.
Domestically, the company is pursuing an urban market strategy to revive growth. Over the summer of 2010, Wal-Mart was active in searching for small retail locations in major cities like New York and San Francisco. The size of these locations averaged 20,000 square feet, a massive reduction from its average super-store size of 150,000 square feet. By pursuing smaller store-format, Wal-Mart will be able to push into the urban market, expand its potential customer base, and increase store traffic. These small stores will also allow customers to make more frequent visits, compared to the previous concept of having customers come into stores weekly or bi-weekly depending on when paychecks arrived. Since 2008, Wal-Mart has been experimenting with the small-store format. The company owns four fresh-food based Marketside stores, which average 15,000 square feet each. The company also owns 200 Neighborhood Market by Walmart stores that average 42,000 square feet and offer a range of products and services including fresh food, pharmacy, beauty, stationary, and pet supplies. The company plans to fuse these two ideas in its new urban stores.[22]
Internationally, Wal-Mart is looking to expand into South Africa and the sub-Saharan region where the IMF estimates output will grow 6% annually. In Janurary 2011, South Africa's Massmart Holdings, the third largest retailer in the country, agreed to Wal-Mart's bid to buy 51% of the company. Massmart operates 232 stores in the country. International growth has been a spark for Wal-Mart during the sluggish economic environment as international sales increased by 11% in FY 2010 compared to stagnant US growth during the same period. Wal-Mart has an opportunity to further increase its international expansion into South Africa and the surrounding region.[23][24] In line with the company's international expansion plans, rumors arose in November 2010 that Wal-Mart was looking to bid on the hypermarket operations of Indonesia's Matahari, a transaction that may be $1 billion.[25] As for the Asian region, Wal-Mart, along with five other companies, invested $500 million in China's 360buy.com, a large and quickly growing online retailer, at the end of 2010.[16] In South America, Wal-Mart plans to open more stores in Brazil during FY 2012 than the 50 it built in FY 2011.[26]
Low-Income Customers Turn to Wal-Mart in Weakened Economy... But What Happens When Economy Rebounds?
Wal-Mart's main customer base has an average annual income of $35,000[27], versus the overall U.S. median of $50,303.[28] Wal-Mart has found success using its price leadership to take control of the low-end market and grow. However, its reliance on a poorer demographic makes the company vulnerable to the same macroeconomic trends that threaten its low-income customers, including rising health care costs, energy costs, interest rates, and a softening real estate market. These macro factors impact a greater percentage of the Wal-Mart customer's income than they do the average American's, affecting these customer's buying power and, therefore, the company's earning potential. Conversely, because of its position as a low-price provider, many value-driven consumers navigate to Wal-Mart during rough economic times. Wal-Mart's low price proposition lead to a 3.5% increase in comparable store sales in FY 2009[5]
However, as the economy rebounds in 2010 and into 2011 and consumers regain confidence,[29] Wal-Mart faces a problem - will its newly found customers continue to look for low-prices, or will they be willing to spend a little more for more quality items? This creates a problem for Wal-Mart because if it can't sustain its customer base, its bottom line will see the negative impacts. The effect is noticeable as in FY 2010 Wal-Mart comparable store sales decreased by 0.8%.[5]
Additionally, Wal-Mart faces challenges as they cut back on their rollback discounts and prices increase. In September 2010, a basket of goods increased 2.7% compared to that in August, and a 5% increase compared that at the beginning of 2010.[30] As a result, the company's Q2 2011 comparable-store sales declined 1.4% as consumers were turned away from higher prices. As the company tries to increase profit margins in light of stagnant US sales, they also risk losing some of its lower income customers.
Relying on Imports from China Makes Wal-Mart Vulnerable to Currency Rate Changes
Wal-Mart depends heavily on China for manufacturing its merchandise as it purchases billions of dollars worth of merchandise every year. Additionally, many of the company's suppliers like Mattel (MAT) manufacture their products in China, which in turn are sold in Wal-Mart stores. Wal-Mart's imports are so substantial in fact, that if Wal-Mart were a country, it would be China's sixth-largest export market.[2] By outsourcing to China, Wal-Mart is able to secure lower costs of inventory, which the company in turn passes on to low prices for customers.
However, as a result of its dependency on Chinese manufacturing, Wal-Mart is vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. If, for example, the dollar weakens compared to the Yuan, the price of Wal-Mart's Chinese imports would rise. As a result, the company would either have to raise its prices or would have to cope with narrowed gross margins, reducing its profitability. Additionally, the company is vulnerable to adverse legislation, such as higher tariffs, that would raise the cost of its Chinese imports.
In the summer of 2010, the People's Bank of China announced that it would "enhance the renminbi exchange-rate flexibility" which would allow the value of the Yuan to rise.[3] A rising Yuan will mean that commodities prices will increase and Wal-Mart will have to pay more for its imported goods. If Wal-Mart sticks with obtaining its merchandise from China, it will face the decision of whether or not to pass along the rising costs onto the consumers or absorb them and have margins fall.
Wal-Mart Uses Large Size to Maintain Low Cost Leadership
Wal-Mart is the largest retailer in the world by sales, with almost 50% higher sales than its 5 closest competitors combined, including Target (TGT), Sears Holdings (SHLD), and Macy's Inc. (M). Wal-Mart uses its enormous size and buying power to pressure its suppliers into extremely low prices, offering orders of high volumes of merchandise in exchange for low prices. Wal-Mart then passes on these savings to its customers. Since many suppliers depend on Wal-Mart for a majority of its business, companies often give in to Wal-Mart's cost cutting demands, narrowing their margins or even redesigning their product offerings.
Wal-Mart's bargaining power has helped the company maintain its low price leadership despite fluctuating commodities prices. For example, to fight rising prices of gasoline, grain, and dairy products, Wal-Mart pressured companies like General Mills (GIS) to shave its costs by implementing redesigns of its products and packaging.
Too Many Stores Means Cannibalization Reduces Comparable Store Sales
Like any retailer, Wal-Mart’s long term sales and income growth depend in large part on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures, effectively competing with itself for market share. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. In 2010, Wal-Mart's comparable store sales decreased by 0.8%.[5]
As a result of overexpansion domestically, Wal-Mart has transitioned to focusing on international expansion to markets with little or no presence of Wal-Mart stores. For example, the company opened 991 international stores in 2010, with the most growth occuring in Mexico, China, and Central America.[7] This was about 5 times more than the number of stores Wal-Mart opened domestically during the year.
Wal-Mart is also poised to open hundreds of stores in India if the country opens up the sector to foreign direct investment. India's $450 billion retail sector is largely closed to foreign firms and favours small mom-and-pop stores, which provide livelihoods for hundreds of thousands and serve a market of more than 1 billion. Currently there is a cap of 51% foreign direct investment in single-brand retail outlets, while retailers that carry multiple brands (like Wal-Mart) are restricted to cash-and-carry or wholesale outlets.[31] A change in India's policy would allow Wal-Mart to open hundreds of superstores and generate revenue from Asia's third largest economy.
Competition
Domestic Competitors
Target (TGT) is Wal-Mart's most direct competitor, offering a range of general merchandise in a similar store format (standard Targets, with limited food offerings, compare to Wal-Mart's discount stores, and Supertargets compare directly to supercenters). Target’s major competitive advantage over Wal-Mart lies in its customer base: the average household income for Target customers is about $50,000 a year, whereas the average yearly income for a Wal-Mart customer is only $35,000[27]. Finally, because of its focus on low prices, Wal-Mart has found it difficult to promote higher-quality items or private labels that come in at a higher price point; meanwhile, Target has had success with its quality-at-value-prices strategy among higher-income demographics, where price is not the only influence on sales. This higher-income customer base gives Target more stability than Wal-Mart, particularly as energy costs rise and the real estate market slows.
Kmart (SHLD), as the third discount retailer of the "Big Three", has seen steadily declining sales since 2000, losing considerable market share to both Wal-Mart and Target.
Other Retailers
As a large-scale retailer, Wal-Mart competes with a wide variety of other, specialized retailers, such as Safeway in groceries, Best Buy (BBY) in consumer electronics, and department stores such as Macy’s in apparel and home decor. Wal-Mart’s focus on price differentiation means that these companies, while competing in overall market share, are not necessarily competing for the same type of customer; however, in more volatile or price-sensitive markets, such as consumer electronics, discounters like Wal-Mart are able to leverage their pricing advantage and apply increasing pressure on other retailers.
Sam's Club directly competes with Costco Wholesale (COST) and BJ's Wholesale Club (BJ) in the warehouse club sector, where Costco has the advantage in terms total sales.
International Competitors
Wal-Mart's major international competitors are Britain's Tesco, France's Carrefour, and Germany's Metro. Each of these companies have a competing presence in China, the UK, and Japan, with Wal-Mart contending with at least one of them in many of its other markets.
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