Marketing management principles and practices

Wal-Mart Analysis

Industry Information

In completing an analysis of the Big Box Retailing industry of which Wal-Mart is the most dominant participate, the key factors of the industry's growth potential, industry profitability, degrees of risk in the industry's future, and how this industry is confronting the current economic challenges in the retailing environment. As an industry, Big Box Retailing is considered to be in the mature phase of its product lifecycle (Sampson, 2008). Many research firms and the Department of Commerce consider the Big Box Retailing industry one of three industries that comprise the U.S. General Merchandise Stores Sector. According to industry analysts real sector revenue increased 14.1% over the last five years. Of the three industries that comprise this sector, the Big Box Retailing industry generated the majority of growth, average a Compound Annual Growth Rate (CAGR) of 5.8% during this time period (Sampson, 2008).

Key factors relating to this industry are analyzed in this analysis.

Big Box Retailing Growth Potential

Of the three industries that comprise the U.S. General Merchandise Stores Sector, only Big Box Retailing shows growth between 2008 and 2013 according to industry research services including IBIS World (Sampson, 2008). Industry analysts predict that Big Box Retailing will grow 3.6% per year from 2008-2013 (French, 2007). The growth of Big Box Retailing is seen as countercyclical to fuel pricing and the uncertainty consumer's sense about gas prices, the economic and their jobs. Growth of this sector overall and Wal-Mart specifically is being driven by the reliance on these stores by middle-class consumers who live paycheck to paycheck and look to Wal-Mart to assist them in keeping their budget balanced (Birchall, 2008).

Industry Profitability

Big Box Retailing will support the revenue and profit growth of U.S. General Merchandise Stores Sector during the 2008-2013 timeframe due to the operations efficiencies Wal-Mart and its competitors are investing in. Foremost of these operational efficiencies are the increasing reliance on ERP systems, distributed order management and the adoption of RFID throughout their supply chains (Boarnet, Crane, Chatman, Manville, 2005). With revenues growing at 3.6% through 2013 and expenses staying flat even with operational performance gains, the challenge of attaining industry profitability and generating Return on Assets of 8% and a consistent $180,000 Sales Per Employee achieved on a consistent basis. Profitability long-term in the Big Box Retailing industry is more reliant on operating efficiencies than top-line revenue growth.

Degrees of Risk

There are very large risks associated with the Big Box Retailing industry as it is heavily dependent on supply chains (Boarnet, Crane, Chatman, Manville, 2005) and inventory turns to be successful (French, 2007). The risks of supply chain disruptions and the lack of consistent quality from suppliers could significantly change the profitability of this industry rapidly.

Overcoming Industry Challenges

Big Box Retailers in general and Wal-Mart specifically have redefined retailing to concentrate on a low-price value proposition that is supported by exceptionally high levels of operating efficiency. For the Big Box Retailing industry to overcome the economic slow-down impacting most the world's economies today, operational efficiencies are going to be crucial to achieving consistent Return on Assets performance and sustainable profitability as well.

Competitor Analysis

Wal-Mart has three major competitors in the U.S. including Costco Wholesale Corporation with 20.2% market share, Meijer with 4.2% market share and BJs Wholesale Club with 2.7% market share as of 2007. Figure 1 shows the market shares of Wal-Mart relative to its competitors in the Big Box retailing segment of the U.S.

Figure 1: Big Box Retailing Market Shares, 2007

Market Share

Wal-Mart Stores, Incorporated

Costco Wholesale Corporation

Meijer, Inc.

BJ's Wholesale Club, Inc.

Sources: (French, 2007) (Sampson, 2008).

The most entrenched and effective competitor Wal-Mart has is Costco. This competitors' supply chain, distribution channel, pricing and location-based expansion strategies most closely resemble Wal-marts' and as a result, they are the largest big box retailer competitor they have in the U.S.

The Costco supply chain management system is designed to support the big box retailer's prioritization of electronics as the product area of the most competitive importance to their product strategy, followed by apparel and perishables. The Costco business model has also supported Internet-based selling through Costco.com that uses the same distributed order management system as the store network. The entire network is comprised of 537 warehouses, 393 of which are located throughout the U.S. In 40 different states and Puerto Rico. The company has also initially launched a series of 19 stores throughout the UK, 75 in Canada, six in Japan, five in Taiwan and a total of 31 throughout Mexico. While other big box retailers including Wal-Mart concentrate on 40,000 SKUs, Costco concentrates on just a tenth of the number of items, 4,000 (Sampson, 2008).

Costco however is significantly different than Wal-Mart in that it is highly dependent on its base in California, so much so that from an Operations standpoint that it's a liability from a logistics standpoint. Costs of transporting perishable products to their central warehouses in California have also been significantly increased by the cost of oil and fuel. Operations are also highly dependent on California's economic and logistical support networks for supply chain management and integration. On any given year 31% of total sales are generated from California. The economic dependency on this state is a continual financial and operational challenge for this company for the long-term.

In terms of distribution, Costco is currently supporting 31 warehouses throughout the U.S. expanding to over 50 by FY 2008, with the balance of the growth coming from international growth (Sampson, 2008). Costco also has a high reliance on traditional logistics functions including manually-based Vendor Managed Inventory (VMI) functions and Direct Store Distribution (DSD) through the use of 3PL service providers. In addition, Costco intensively relies on bar coding and manually oriented technologies for managing inventories and optimizing inventory positions.

From a sales and marketing standpoint, Costco is heavily reliant on a low-cost leader strategy, choosing to compete on price above all other aspects of their marketing. In addition, this competitor relies on event marketing focused on new warehouse openings and new partner announcements in their centers. Costco conducts direct mail marketing to potential new members and direct marketing to existing members to promote selected merchandise as well as part of their broad-focused marketing strategies.

One of the key differentiators Costco relies on vs. Wal-Mart is service. To fully take advantage of this differentiator, Costco has instituted one of the most comprehensive returns policies in the big box retailing industry, encompassing electronics in their definition of this service. Costco also relies on an intensive distributed order management system and catalog that makes it possible to manage customer queries both online and over the phone with greater accuracy than has been possible for Wal-Mart over their websites including WalMart.com.

Costco's regional strength in the western U.S. And throughout the Pacific Northwest are a potentially significant competitive threat for Wal-Mart nationally. To date however Costco has not been able to scale their operations nationally or globally.

Additional competitors include Target, who most often competes with Wal-Mart on loss-leader consumer electronics sales, and a myriad of smaller retailers who concentrate on one specific product line Wal-Mart carries. A prime example of their smaller competitors are toy retailers, many of which have seen gross margin degradation over time due to Wal-Mart's aggressive pricing strategy in the 4th calendar quarter of every year. In the pricing discussion of this analysis are examples of how Wal-Mart seeks to create more of a competitive threat to profitability of competitors through their strategies. The impact on Toys R' Us is a case in point. Wal-Mart also is facing competition from global competitors including Carrefour and Tesco as both look to significantly increase their sales into the U.S., Asia and other regions Wal-Mart is also competing in. Briefly, their competitors are grouped into the primary set of big box retailers, followed by nationally-based retailers of which Target is the largest and most profitable. The tertiary set of competitors includes Carrefour and Tesco, based in France and the UK respectively. Both of these companies are actively moving into the U.S. And have quite a different strategy relative to Wal-Mart. Instead of just concentrating on supply chain efficiencies, these companies focus on local market knowledge and getting to know specifically what customers are looking for in the regions they enter. By doing this, these competitors are able to create smaller yet more focused and potentially more relevant product selections for consumers in the regional areas they are working to penetrate with new marketing strategies. They are also able to better understand the pricing dynamics of these areas as well.

The severity and intensity of the competition however is most acute with other big box retailers including Costco on consumer packaged goods and with Target on loss-leader electronics including flat screen televisions. In these two categories, Wal-Mart faces its most formidable pricing and availability competitors. As brands and products in these areas are the most potentially commoditized by Wal-Mart and their pervasive distribution, competitors including Costco and Target are relying on loss-leader pricing strategies just as Wal-Mart uses during the holiday season on toys for example.

Corporate Mission

As the largest mass merchandiser in the world, Wal-Mart's work in supply chain execution, research, and policies defines best practices for the broader high volume retailing industry worldwide. Wal-Mart is comprised of three operating segments including the Wal-Mart stores, Sam's Club and the International Stores. The typical Wal-Mart discount store as 50 departments or more and a few are offering groceries in addition to apparel, fabrics, stationery and books, shoes, house wares, hardware, electronics, home furnishings, small appliances, automotive accessories, gardening accessories, sporting goods, toys, and pet food. Wal-Mart moved into the SuperCenter retailing concept in the 1990s and has at this point 1,700 of these SuperCenters worldwide (Sampson, 2008).

These SuperCenters range in size from slightly over 90,000 square feet to 260,000 square feet. These are substantially larger than its normal stores, ranging in size from 90,000 square feet to 261,000 square feet. Wal-Mart also runs smaller stores called Neighborhood Markets in Alabama, Arkansas, Florida, Kansas, Kentucky, Mississippi, Oklahoma, Tennessee, Texas, and Utah. Wal-Mart also operates over 550 Sam's Clubs in 48 states. Sam's Clubs offer consumers bulk buys of merchandise, groceries, sundries, and selected items under the Sam's Club Member's Mark store brand. The larger Sam's Clubs also include one-hour photo processing, pharmaceuticals, optical departments, and gasoline sales. Sam's Clubs are membership only, cash-and-carry operations. Wal-Mart's International segment is one of the fastest growing and is comprised of wholly owned operations in Argentina, Canada, Germany, China, South Korea, Puerto Rico and the UK, and majority-owned subsidiaries in Brazil and Mexico. It owns joint ventures in China, and has a minority ownership interest of a retailer in Japan.

Corporate Analysis and Appraisal

In completing a corporate analysis and appraisal, an assessment of strengths, weaknesses, opportunities and threats (SWOT) is used as the framework for completing the analysis.

Wal-Mart Strengths

Globally recognized brand and a strong reputation as a global company

Wal-Mart's global brand and presence is accentuated by its many store locations and activities across many nations of the world, and the growth of stores throughout the Pacific Rim nations of Japan and Korea.

Strong management and employee development program - Many members of the management team at Wal-Mart came from managing stores, which makes their senior management adept at handling the complexities of running such a large corporation in addition to understanding its culture. Wal-Mart has a strong commitment to training programs designed to identify high-potential individuals and develop them into strong managers. A good proportion of employees, in fact, began their time with Wal-Mart as hourly employees. This is perhaps at the root of the loyalty and business understanding that Wal-Mart employees tend to show. The employees are also not governed by a union. This allows Wal-Mart more freedom on work productivity rulings, and does not suffer the threat of strike action.

Excellent logistics system - Wal-Mart has an unparalleled logistics system that continues to deliver outstanding performance. Wal-Mart was the first retailer to develop drop shipping processes for moving products directly form manufacturers to distribution center, a practice that saved millions of dollars in distribution center charges. In addition, the company has invested in over 3,500 company-owned trucks to get goods from its over 100 distribution centers in the United States alone to nearly 5,000 stores. The focus on safety and reliability in logistics is also reflected in the high standards for drivers Wal-Mart has, which requires any driver to have 300,000 accident-free miles with no major traffic violations to get hired.

Global procurement and world class supplier relationship management - Due to its size in the U.S. alone and because it sells many of the same products in many countries, Wal-Mart obtains economies of scale when it purchases goods. The company has a "no nonsense" attitude around procurement and supplier relationship management, shunning the typical fancy dinners and perks typically associated with courting and selling large retail accounts. Wal-Mart runs the tightest ship in retailing when it comes to getting the lowest price from suppliers and managing relationships with them. Their supplier relationship management strategies include setting and keeping mandates for electronic product code (EPC) technology adoption through their RFID initiatives and pilots, heavy reliance on operational reporting of results back to suppliers through a world-class distributed order management system pioneered with Proctor & Gamble in the early 1990s, and an intensity of focus around the time value of information as exemplified in their investment in direct satellite links with 1,700 of their suppliers that represent 80% of the products sold. Wal-Marts' supplier relationship management strategies are world class and are studied by many other corporations globally on a regular basis.

Intelligent use of debt financing - Wal-Mart continues to manage their debt well as is shown in the trending of their Current Ratio, which is included in the financial analysis attached.

Aggressive growth strategy - Wal-Mart's expansion strategies are continually showing high levels of growth, with the company spending aggressively on new store development and a focus on international expansion throughout the Pacific Rim including Japan and China. The challenges for Wal-Mart in global expansion however is a cultural one; their focus on low prices and exceptional service, to a large extent underwritten by quick inventory turns (see Appendix a for ratio analysis of net profit margins) as illustrated by a relatively low Return on Assets (ROA), and very thin Net Profit Margin ratio hovering at 3% or below for the last ten years signals a business model that thrives on speed and velocity of inventory turns.

Culture that celebrates service - the Wal-Mart culture is in large part a reflection of the core values of its founder, Sam Walton. His five core values of treating individuals with respect and dignity, service to customers, striving for excellence, soliciting feedback and ideas for change from all associates signifies Mr. Walton's belief that the best way to make a decision is to get feedback from the people on the store floor directly impacted by it. He also strove to create a culture that continually challenges the status quo and made it OK for anyone to challenge a process or procedure that did not directly contribute to the value delivered to a customer.

Wal-Mart Weaknesses

Insufficient European exposure - Despite its world class logistics and supplier management systems, Wal-Mart currently has an operating presence in less than twenty countries around the world. Most surprising is the lack of strength in the UK and Australia, two economies very similar to the U.S. In many respects including logistics and supplier management.

Poor Saturday store sales - Over 100 senior managers gather every Saturday morning to review the weeks' performance and also watch Saturday store performance, typically one of the slower days for stores. Wal-Mart's drop off in Saturday store sales can also be attributed to the rapid build-up of SuperCenters throughout large metro areas.

Price deflation - This is a global dynamic that is affecting Wal-Mart and their response is shown in the intense focus on managing suppliers very aggressively. At times Wal-Mart has moved to create vertical integration strategies that give themselves more control over their supply chains. The world-class approach the company uses for supplier relationships is a combination strategy to turn this area of weakness into core strength.

Wal-Mart Opportunities

Consumers showing signs of liking store variety - Wal-Mart's strength is its ability to create stores quickly and roll them out. The overall trending line for Net Profit Margin indicates the rapid inventory turns the company also relies on to continually stay profitable on such thin margins based on an analysis of their financial condition as shown in Appendix a.