Walmart Managerial Decision Making: Market Structure Analysis

Walmart Overview and Brief History

Wal-Mart Stores, Inc. was initially founded and established in 1945 and today operates retail stores in over 27 countries. The corporation is divided into three main segments: Walmart International, Walmart United States, and Sam's Club. The business operations of Walmart encompass cafeterias, hypermarkets, retail supply stores, and warehouse clubs. The company also conducts e-commerce through its website, Walmart.com. With regard to retail products, the merchandise traded in Walmart's stores includes baby products, medical supplies, domestic goods, electronics, books, automotive products, apparel, home furnishings and décor, alcohol, groceries, paper products, and much more.

Walmart is a United States-based global retailing company that operates chains of large discount department stores and warehouse stores. The business is considered the largest private employer in the world, having hired over two million employees, and is also the leading retailing firm on a global scale. Walmart prides itself on a large, devoted, and dependable consumer base. The company earns the confidence of its customers by providing a varied range of high-quality products alongside inexpensive services. The corporation also cultivates an organizational culture that rewards mutual respect, integrity, and diversity. The majority of the company's shares are owned by the Walton family, which holds approximately 48 percent of the stock — a reflection of the company's founding by Sam Walton.

Financial Performance

The following figures illustrate the financial performance of Walmart Corporation over the years.

Figure 1: Walmart Corporation Income Statement

Figure 1 shows the income statement items — revenue, net income, and profit margin — over the past five years. The company's revenue has gradually increased over this period. Net income and profit margin, by contrast, have remained relatively steady.

Figure 2: Walmart Corporation Balance Sheet

Figure 2 presents the balance sheet items, including total debt, total assets, and the debt-to-assets ratio. The data indicate that Walmart invested significantly in assets in 2012 and 2013, and has maintained a steady asset level since then. Total debt decreased in the most recent year shown.

Figure 3: Walmart Corporation Cash Flow Statement

Figure 3 shows the cash flow items — operating activities, investing activities, and financing activities. The level of financing activities deteriorated in the most recent year, while operating activities increased considerably. Investing activities also increased, though only slightly.

Overall, these figures indicate that the financial performance of Walmart Corporation has improved consistently over the past five years.

Sources of Risk and Uncertainty

According to Walmart's annual report, the company's business operations face several risks and uncertainties — both domestic and international — some of which are beyond the company's control. Key risk factors include domestic and international macroeconomic conditions, failure to respond to consumer preferences or trends, obstacles to the expansion of international operations, changes in law, and labor-related issues. Additional risk factors involve political, economic, and regulatory risks, as well as natural disasters and climate changes that could affect the company's operations (Walmart Form 10-K, 2014).

Certain risky activities and changes have directly affected the company's financial outcomes. Notably, Walmart disclosed for the first time in its financial reports that government-funded social assistance programs have had an important impact on the company's revenue and profits (Walmart Form 10-K, 2014). This is largely because Walmart serves a significant base of low-income consumers. In the previous year, the company had not anticipated that the termination of programs such as extended unemployment benefits would affect it so substantially. In particular, reductions to the Supplemental Nutrition Assistance Program represent an ongoing source of risk to the company's operations (Young, 2014).

Walmart has also introduced new products and services in recent years. In October of the preceding year, Walmart began offering almost all the services that consumers could obtain at a bank or financial institution — including bank check cashing, prepaid debit cards, and checking accounts (Douglas-Gabriel, 2014). This diversification has had a positive impact on the company, as the expanded range of products and services has increased overall revenue levels, as illustrated in the income statement data above. Consumers regard this as a convenient alternative to waiting in lines at traditional banks and financial institutions.

Demand Elasticity and Pricing Decisions

The demand elasticity for the products and services offered at Walmart is closely tied to price changes. A change in the price of a given product or service has a direct impact on demand for it. For instance, if Walmart were to raise prices, demand would likely decline as consumers sought the same merchandise from competing outlets. This is because close substitutes are readily available at numerous other stores. This dynamic significantly affects the company's pricing decisions: an increase in prices reduces demand, while a decrease in prices tends to increase consumer demand.

The availability of close substitutes means that Walmart operates in a highly price-sensitive environment. The company must therefore maintain competitive prices to retain its customer base, and any significant deviation from market price norms risks losing consumers to rivals.

Market Structure, Competitive Environment, and Profitability

Supercenters are exceptionally large stores that retail a wide variety of products and services. They are distinguished from more traditional shopping outlets that often concentrate on a particular category. For example, supermarkets focus primarily on food — though they carry other products — whereas a supercenter retails food, apparel, prescription drugs, home office supplies, and electronic equipment all under one roof.

Walmart typically faces substantial competition from other retail outlets as well as from labor unions, which often represent workers at those competing stores. Walmart charges considerably lower prices compared to traditional retail outlets. Those conventional retailers typically respond by lowering their own prices and attempting to reduce wages for their unionized labor forces. As a result, competing retailers and their labor unions have generally opposed Walmart's market entry. Over the past several years, Walmart has become the largest supermarket chain in the United States. Excluding Sam's Club, the company currently generates supermarket-related revenues approximately 51 percent larger than those of Kroger, the second-ranked chain, and larger than Albertsons and Safeway — the third- and fourth-ranked chains — combined. Various studies have shown that food prices at Walmart are approximately 8 to 27 percent lower than at other large supermarket chains, even after accounting for competitor discounts, loyalty cards, and special offers. Consequently, other supermarkets are compelled to reduce their own prices in response to the increased competition (Hausman and Leibtag, 2005).

Despite Walmart's very large market share in the retail industry, this does not mean that the company operates in a monopoly. The market structure in which Walmart operates is best characterized as monopolistic competition. This is because there are numerous buyers and sellers in the market and there is freedom of entry and exit from the industry. Accordingly, the company makes its pricing and production decisions based on this market structure. It must set low prices because it competes in a market with many buyers and sellers. Although Walmart creates its own branded products, it is relatively easy for consumers to shift their purchasing to substitute products and services offered by other supermarkets and outlets (Douglas, 2012). This behavior is consistent with economic theory: in monopolistic competition, each firm attempts to differentiate its products slightly from those of its competitors and to emphasize those differences. Walmart does this by branding its own products and by offering a more diverse range of goods and services than its competitors.

As indicated in Figure 1, Walmart's profitability has been on a steady upward trajectory over the past five years. However, industry and economic forces do affect its costs, operations, and profitability. One key industry influence is the expectation of diversity. As a supercenter, Walmart is expected to offer a wide range of products and services. Over recent years, the company has expanded into banking services, used-car retailing, travel products, and internet access services. These expansions have increased operating costs, but the positive effect is that the company serves over 100 million consumers, which sustains profitability. Consolidating all products and services under one roof makes the shopping experience more convenient and efficient for consumers.

References

Douglas, E. (2012). Managerial economics (1st ed.). Bridgepoint Education.

Douglas-Gabriel, D. (2014). Are Wal-Mart and Apple poised to be regulated by the CFPB? The Washington Post.

Hausman, J., & Leibtag, E. (2005). Consumer benefits from increased competition in shopping outlets: Measuring the effect of Wal-Mart. MIT and Economic Research Service.

Juang, Y. (1997). Consumer protection laws and international retail operations. International Journal of Retail Studies.

Kerschberg, B. (2012). What every executive should learn from Wal-Mart's mistakes. Harvard Business Review. https://hbr.org/2012/05/how-to-make-sure-your-company

Walmart Form 10-K. (2014). United States Securities and Exchange Commission.

Walmart Website. (2015). http://www.walmart.com/

Young, A. (2014). Wal-Mart just revealed how poor its customers are. Business Insider.