Wal-Mart Stores (Wal-Mart) is the largest retail company in the world with a strong market position in the US. The company derives almost 75% of its revenues from the US. Revenues from the US are largely instrumental in making Wal-Mart one of the leading corporations of the world. The company advanced its position in the Fortune 500 ranking from the second largest company (2006) to the largest company (2007) in the world in terms of revenues. The company’s strong market position in the US provides economies of scale and enhances the brand image to the company. It also enables the company to penetrate the market more effectively and serve a wider range of customers. However, the company faces stiff competition in the industry from players like Target, Costco and Sears Holdings. Intense competition could adversely affect the revenues and profitability of Wal-Mart.
Strong market position in the US Balanced brand mix Strong marketing capabilities
Exit from South-Korean and German markets Product recall Numerous legal issues
Expanding brand portfolio Rising US healthcare spending Increasing online sales Increasing store network
Opposition and resistance from communities
Affects of the sub prime crisis
Strong market position in the US
Wal-Mart has a strong market position in the US. The company derives almost 75% of its revenues from the US. Revenues from the US are largely instrumental in making Wal-Mart one of the leading corporations of the world. The company advanced its position in the Fortune 500 ranking from the second largest company (2006) to the largest company (2007) in the world in terms of revenues.
Wal-Mart operates 971 discount stores in 47 states in the US; 2,447 Wal-Mart supercenters in 48 US states; 132 neighborhood markets in about 15 US states; and 591 Sam’s Clubs in 48 US states. These stores serve over 127 million customers per week in the US. A strong market position in the US provides economies of scale, and enhances the brand image of the company. It also enables the company to penetrate the market more effectively and serve a wider range of customers.
Balanced brand mix
Wal-Mart has a balanced brand mix, comprising private labels and external brands. The company sells merchandise under its private label brands such as Sam’s Choice, Great Value, Everstart, Ol’ Roy, Puritan, Equate, No Boundaries, George, Athletic Works, Durabrand, HomeTrends, Mainstays, Metro 7, Parent’s Choice, Ozark Trail, ReliOn, White Stag, Sand N Sun, Canopy and Kid Connection. Additionally, the company stocks prominent brands. Moreover, the company sells merchandise under licensed brands including General Electric, Disney, McDonald’s, Mary-Kate and Ashley and Starter. A balanced brand mix allows the company to provide greater choice to customers and encourages customer loyalty.
Strong marketing capabilities
Wal-Mart has strong marketing capabilities. The company employs many programs designed to meet competitive pressures within the retail industry.These programs include Every day Low Prices (EDLP), Rollbacks, Store Within a Store, and Store of the Community. EDLP is Wal-Mart’s pricing philosophy under which the company prices items at a low price every day so that the customers trust that prices will not change erratically under frequent promotional activity. Rollbacks is an instance of Wal-Mart’s commitment to pass on its internal and external cost savings to the customer by lowering prices on selected goods. Store Within a Store is a program to provide accountability to assistant managers and department managers for merchandise planning and overall department performance.While, Store of the Community is a program to ensure that the merchandise assortment in a particular store fits the demographic needs of the local community in which it is located. Such strong marketing capabilities of the company offer value and service to its customers, largely adding to the company’s competitive position within the retail industry.
Exit from South-Korean and German markets
Wal-Mart disposed its underperforming business in South-Korea and Germany in fiscal 2007. The company sold its South-Korean retail outlets to Shinsegae, a local retailer. The company had to exit from the South-Korean market because of its inability to cater to the taste of the South Korean consumers. Moreover, the company failed to win more customers as it was slow to open retail outlets in the South-Korean market. This put Wal-Mart at a disadvantage with respect to bargaining power with suppliers. Another cause for Wal-Mart’s failure in South-Korea was its inability to compete with aggressive Korean discounters. By contrast, Tesco, a major UK based retailer has been successful in the South-Korean market as it adapted its outlets to the local taste and culture. Tesco entered the South-Korean market in a joint venture with Samsung. The joint venture of Tesco-Samsung generates about a third of Tesco’s overseas sales revenue. Inability to adapt to new market conditions would restrict the growth of the company.
Wal-Mart was involved in several product recalls lately. In April 2008, Wal-Mart recalled in cooperation with the US Consumer Product Safety Commission (CPSC) recalled ‘Holiday Times’ candleholders. The product was recalled as the candle holder could tip over and result in a fire hazard. Further, the glass holder could break and pose the danger of a scratch to customers. In the same month, the company recalled around ‘Hip Charm’ key chains.The product was recalled as it contains high levels of lead, which could be toxic if ingested resulting adverse health. Frequent product recalls indicate lax quality control measures. Further, they could damage the consumer’s perception about the company leading to a fall in number of customers to its stores.
Numerous legal issues
Wal-Mart is involved in a number of legal issues. The company is currently a defendant in various class action suits pertaining to deviation from federal and state wager laws. Wal-Mart is presently involved in a class action suit, Dukes vs Wal-Mart Stores. The suit was laid down on behalf of the former and current female employees across its US retail and warehouse club store operations. These employees totaling to 1.6 million alleged that the company is showed gender discrimination at the time of promotions, pay, training and job assignments. The claimants sought $11.5 billion for injunctive relief, front pay, back pay, punitive damages and attorney’s fees. The suit, which is one of the biggest gender discrimination cases in the US, was retained as a class-action suit by the three-judge panel of 9th Circuit Court of Appeals.
In another suit, the company was accused of violating California labor law with respect to provision of lunch and meal breaks to employees working over six hours in a shift. The court in April 2008 declared a compensation of more than $170 million. Such proceedings may adversely affect employees’ perception about the company. Any unfavorable outcome from the investigations could affect the company’s brand image. Further, it could also result in additional expenditure to the company brining pressure on the company’s margins.
Expanding brand portfolio
Wal-Mart offers products under a number of private labels such as Great Value, Puritan and Athletic Works. The company plans to increase is private label portfolio. In March 2008, the company expanded its private labels in the home category by launching Canopy. The Canopy line comprises comforter sets, bed linens, dec pillows; shower curtains, bath towels and accessories; tabletop; furniture; dinnerware; and décor. The company is expected to price these goods at 40% lower than its competitors. In the apparel category, the company launched two new private labels: Garanimals, OP and l.e.i. In comparison with national brands the company has a greater control over the private brands. As a result, Wal-Mart incurs lower operational costs. Further, as private brands are high-quality low price alternatives to national brands, they have greater demand. These factors benefit the company in gaining higher margins.
Rising US healthcare spending
The US has the highest per capita health care spending in the industrialized world. The US health care spending is expected to reach $4 trillion by 2015, led by an aging population using more drugs. The US Census Bureau and the National Institute on Aging have predicted that by 2030, one in every five US citizens will be aged 65 or above. The 65-and-above age demographic segment represents a prime consumer segment for pharmaceuticals.
Wal-Mart, in February 2008, announced plans to open its first co-branded in-store clinic, ‘The Clinic at Wal-Mart’.These clinics are expected to be connected to the local hospitals in communities where the company has presence.The company plans to open around 400 co-branded convenience clinics by 2010. It entered into an agreement with RediClinic and local hospitals to open co-branded walk-in clinics in 200 Wal-Mart Supercenters. The company could leverage rising health care spending in the US to boost revenues of its pharmacies and health clinics.
Increasing online sales
Online shopping has steadily grown in popularity in the US. During the second quarter of 2005 e-commerce sales grew 26% as compared with the same period a year ago. US online retail sales are expected to have reached $130 billion in 2006 from $104 billion in 2005. US online retail sales are expected to grow annually by 17% through 2008.The online retail sales in the US are expected to reach $329 billion in 2010.
In addition to physical store operations, Wal-Mart sells its merchandise through online portals. The Wal-Mart Stores segment operates the online portal www.walmart.com. Sam’s club also operates an online portal www.samsclub.com. Besides offering the facility of online shopping, the company has upgraded its online site to enable online purchase of products, which are not available at Wal-Mart stores. Online sales, while offering convenience to customers, also improve a company’s margins by cutting down its operating costs. Wal-Mart is well poised to benefit from the expected increase in online sales.
Increasing store network
Wal-Mart plans to increase its store network in the near future. In the fiscal year 2008, the company opened seven discount stores, 191 supercenters, 20 neighborhood stores and 12 Sam’s Clubs in the US. In March 2008, the company opened 81 stores and clubs across 30 US states. Wal-Mart announced its plans to open around 170 supercenters by the end of the fiscal year 2009 and 140 supercenters by the end of the fiscal year 2010. The increase in store network would increase the proximity to customers. This would lead to increase in customer traffic stores and in turn result in more revenues to the company.
Wal-Mart is facing stiff competition from a large number of companies in the retail market worldwide including Carrefour, Tesco, Target, Home Depot, Sears and local companies. The company’s Wal-Mart Stores segment competes with retailers operating discount, department, drug, variety and specialty stores; supermarkets, super center-type stores; and hyper marts, as well as internet-based retailers and catalog businesses. Sam’s Club segment competes with other wholesale club operators, as well as discount retailers, retail and wholesale grocers, and general merchandise wholesalers and distributors. It also competes with internet-based retailers, wholesalers and catalog businesses. Internationally, the company competes with retailers who operate department, drug, variety and specialty stores, supermarkets, super center-type stores, hypermarts, wholesale clubs, internet-based retailers and catalog businesses. Such retailers and wholesale club operators compete in a variety of ways, including merchandise selection and availability, services offered to customers, location, store hours, in-store amenities and price. Intense competition could adversely affect the revenues and profitability of Wal-Mart.
Opposition and resistance from communities
Wal-Mart’s plans to open new retail stores in the US may run into opposition from local communities. Small retailers fear that the low price offered by Wal-Mart may force them out of business. In some of the states, residents and local governments are raising concerns about congestion due to increased traffic and the need to preserve open space. Opposition against Wal-Mart has begun in international market like India. In August 2007, a number of shopkeepers in India gathered in the country’s capital Delhi’s largest bazaar, Chandni Chowk to protest against the entry of the company into the Indian retail market. Growing opposition to new stores from local communities and entry into international markets is likely to hold back the company’s expansion plans.
Affects of the sub prime crisis
According to data compiled by the National Retail Federation, a retail trade association in the US, rising home equity was one of the significant reasons for growth in retail sales in 2005 and 2006. High home prices had allowed customers in the US to sustain spending under conditions of economic stagnation. Since the onset of sub-prime crisis, housing prices have dropped. Median price of homes sold in February 2008 fell by 8.2%, over the previous month. Currently, homeowners in the US have more debt than their homes are worth, leading to foreclosures.This has caused consumer spending to dwindle forcing not only sub-prime borrowers but also other classes of borrowers to defer discretionary spending to meet rising debt repayments. As a result, the big retailers in the US have experienced fall in sales.This is apparent from the slowing growth rate registered by the retail industry sales. According to the National Retail Federation, retail industry sales (excluding gas stations, restaurants and automobiles) are expected to record a year-on-year increase of 3.5 % in 2008 as compared with 6.3% in 2006. If the sub-prime crisis spreads to other classes of assets, then the impact could be even bigger on retail industry, and, on leading retailers such as Wal-Mart.