Wal-Mart Economic Trend Economic Trends

Wal-Mart Economic Trend

Economic Trends

There are a number of different factors that will affect the economic trends of Wal-Mart over the next three to five years to include: interest rates, unemployment rates and inflation rates.

Interest Rates

When looking at the effect that interest rates will have on Wal-Mart, it is clear that it will have a dramatic impact on the company's bottom line. What happens is when interest rates are increasing; the overall amount of lending standards will become tighter. This makes it more difficult for consumers and businesses to arrange financing for large purchases / equipment. At which point, many businesses will begin to layoff workers and economic activity around the country will slow. (Seabury) This will have a positive impact upon Wal-Mart, as their overall costs are lower than their competitors. The reason why, is because Wal-Mart will seek to purchase the different products from the manufacturer / whole seller, at the lowest prices possible. This is the basic formula that has allowed the company to maintain low prices. While at the same time, seeking other ways to reduce prices such as: utilizing their supply chain management tools (to more quickly respond to the needs of different stores). These strategies have been used to reduce costs for the general public, as Wal-Mart is able pass the savings on to customers. During times of economic prosperity or challenges, many consumers will shop at Wal-Mart as way to keep their overall costs low. The effect that this has had on consumer prices has been dramatic. Evidence of this can be seen with a study that was conducted by IHS Global Insight. Where, they found that between 1985 and 2004, Wal-Mart was able to help consumers see a 3.1% reduction in prices. This is significant, because it shows that the lower prices offered to consumers, allows the company to prosper when interest rates are low or high. ("Measuring the Economic Impact of Wal-Mart on the U.S. Economy")

Unemployment

When unemployment rates begin to rise, is when consumers will be more inclined to go to Wal-Mart during times of economic challenge. What happens is, as the unemployment rate begins to increase, consumers will dramatically reduce spending. This is because the rising unemployment rate is having an effect on consumer confidence. Once this takes place, it means that many consumers will reduce spending and find ways to save money. One way to do this is to purchase more items at Wal-Mart, as their prices are more than likely to be cheaper than competitors. This will have an impact upon the overall bottom line of the company, as their earnings and sales will increase during times of economic contraction. An example of this can be seen when the company was reporting their earnings in February 2009. Where, they reported that fourth quarter 2008 earnings per share, were above expectations of $.94 cents coming in at $.98 cents. While during the same period, retail sales increased 1.7%. This is significant, because it shows how during times of severe economic challenge, when unemployment is increasing, consumers will spend more at Wal-Mart. ("Wal-Mart Delivers the Best Ever 4Q Result in History")

Inflation Rates

During times of sustained economic expansion, inflation rates will begin to rise. This is because as the economy is continuing to grow, there will be increased demands placed on commodities. Over the course of time, this will lead to higher prices for producers, to manufacture various goods. At which point, they will pass these prices on to consumers. Once this take place, it means that the overall inflation rate will begin to rise sharply. (Seabury) in the case of Wal-Mart, they have been affected by higher fuel prices, in delivering goods to local stores. However, the company has found a way to keep their fuel costs as low as possible. Currently, they have been contracting out delivery services, from the manufacturer to its different distribution centers. What is happening is the company using two strategies. One is: delivering various products between the distribution center and the stores. The second part is: the delivery between the manufacturer / whole seller, which has been traditionally contacted out. Over the last couple of years, as fuel prices have increased, the company is seeking to take over delivery services between manufacturers and whole sellers. The reason why, is because as an organization, they can use strategies to reduce the effects of fuel prices such as: hedging. This is significant, because it shows how the increase in inflation rates, has allowed the company to begin taking over delivery options. Where, they are using a similar model of demanding low prices from manufacturers. While at the same time, they are seeking ways to reduce the cost to deliver various products to the stores. (Perry) When you combine this with the low prices that they offer to consumers, it means that the company can maintain their cost structure despite increases in inflation. This has a dramatic impact upon the bottom line of the company, where it will see a strong increase in sales and earnings. As consumers are desperately seeking out the lowest prices possible, to avoid the tremendous impact that inflation is having on their budgets. A good example of this can be seen in August 2008, when the company beat earnings expectations and raised sales forecast. This is because consumers were seeking out bargains, to help mitigate the effects of rising inflation. (Cheng)