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Walmart Economics

.. imited reaching levels we’d thought they’d never get to. The result is that everyday low prices are getting lower” (Saporito, 1994, p. 66). In addition, the baby-boomers are reaching their peak earnings years, when financial and personal priorities change. Thus, savings, not spending, will likely take precedence because most baby-boomers are approaching retirement.

Based on Wal-Mart’s position in 1994, which was considered a year of expansion for the company, (Wal-Mart added 103 new discount stores, 38 “Super-centers”, 163 warehouse clubs, and 94,000 new associates) interest debt increased 52.3%. The cost paid by Wal-Mart to finance property plants and equipment forced the company to increase long term debt by 4.6 times during the period 1991-1995. Long term debt for 1995 is $7.9 billion. If Wal-Mart continues its expansion plans based on more debt acquisition at 1994 levels, the company may not attain forecasted gains by as early as 1998. Operating expenses will be a key strategic issue for Wal-Mart in order to maintain its position in the market. The challenge is how to run more stores with less operating expenses.

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According to Bill Fields,”. . . the goal is to increase sales per square foot and drive operating costs down yet another notch” (Saporito, 1994, p. 66).

Trends indicate that operating expenses have been growing at a rate of 27.7% in recent years. However, Wal-Mart should reap the benefits of its investments in high technology, and be able to operate more stores without increasing its expenses. Cost of sales historically has been equal to the level of sales. If the company continues to take advantage of its buying power, Wal-Mart can expect to lower its cost of sales. Wal-Mart’s future will depend on how well the company manages its expansion plans. For the coming years, the company will need to justify its expansion plans with consistent growth in sales, in order to offset the increases in debt interest and operating expenses.

What Problems are ahead for Wal-Mart? What Risks? — Throughout the 1980s, Wal-Mart’s strategic intent was to unseat industry leaders Sears and Kmart, and become the largest retailer in the U.S. Wal-Mart accomplished this goal in 1991. But Wal-Mart’s current strong competitive position and its past rapid growth performance can’t guarantee that the company will remain as the industry leader or maintain its strong business position in the future. Carol Farmer, a retail consultant, told the Wall Street Journal that, “One little bad thing can wipe out lots of good things” (Trimble, 1990, p. 267). Every move in its business operation ought to be well thought-out and executed.

Wal-Mart needs to address two major areas in order to maintain or to capture an even stronger long term business position: 1) Single-business strategy — Wal-Mart’s success is mainly based on its concentration of a single-business strategy. This strategy has achieved enviable success over the last three decades without relying upon diversification to sustain its growth and competitive advantages. Given its current position in the industry, Wal-Mart may want to continue its single-business strategy and to push hard to maintain and increase market share. However, there is risk in this strategy, because concentration on a single-business strategy is similar to “putting all of a firm’s eggs in one industry basket” (Thompson & Strickland, 1995, p. 187).

In other words, if the retail industry stagnates due to an economic downturn, Wal-Mart might have difficulty achieving past profit performance. Also, if Wal-Mart continues to follow Sam Walton’s vision of expansion, Wal-Mart will reach its peak in the very near future. When it does, its growth will start to slow down and the company will need to turn its strategic attention to diversification for future growth. Social responsibility — Retail stores can compete on several bases: service, price, exclusivity, quality, and fashion. Wal-Mart has been extremely successful in competing in the retail industry by combining service, price, and quality. However, other merchants may object to Wal-Mart’s entry into their community.

Because of its ability to out-price smaller competitors, Wal-Mart’s stores threaten smaller neighborhood stores which can only survive if they offer merchandise or services unavailable anywhere else. This makes it very hard for small businesses, such as “mom-and-pop” enterprises, to survive. They, therefore, fight to keep Wal-Mart from entering their locales. Numerous studies conducted in different states both support and criticize Wal-Mart (Verdisco, 1994). Nevertheless, Wal-Mart did drive local merchants out of business when it opened up stores in the same neighborhood. As a result, more and more rural communities are waging war against Wal-Mart’s entrance into their market. Besides protesting and signing petitions to attempt to stop Wal-Mart’s entry into their community, the opposition’s efforts can even be found on The Internet.

Gig Harbor, a small town in Washington, recently started a World Wide Web page entitled “Us against the Wal.” The town’s neighborhood association promised that they “will fight them [Wal-Mart] tooth and nail” (PNA/Island Aerie Internet Productions, 1995/1996). The increasing opposition indicates that the road ahead for Wal-Mart may not be as smooth as Wal-Mart’s annual report would entail. This requires Wal-Mart to rethink its expansion strategy since it would not be profitable to operate in an unfriendly community. How Big Will Wal-Mart be in Five Years if all continues to go well? — Before he died, Sam Walton expressed his belief that by the year 2000 Wal-Mart should be able to double the number of stores to about 3,000 and to reach sales of $125 billion annually. Walton predicted that the four biggest sources of growth potential would be the following: 1. Expanding into states where it had no stores; 2. continuing to saturate its current markets with new stores; 3. Perfecting the Super-center format to expand Wal-Mart’s retailing reach into the grocery and supermarket arena — a market with annual sales of about $375 billion; 4.

Moving into international markets (Thompson & Strickland, 1995). Wal-Mart Super-centers represent leveraging on customer loyalty and procurement muscle in order to create a new domestic growth vehicle for the company. With few locations left in the U.S. to put a new Sam’s Club or traditional Wal-Mart, the Super-center division has emerged as the domestic vehicle for taking Wal-Mart to $100 billion in sales. Before the Super-center, Walton experimented with a massive “Hyper-mart”, encompassing more than 230,000 square feet in size. The idea failed.

Customers complained that the produce was not fresh or well-presented and that it was difficult to find things in a store so big that inventory clerks had to wear roller skates. One of Walton’s philosophies was that traveling on the road to success required failing at times. As a result of the unsuccessful experiment, Walton launched a revised concept: the Super-center, a combination discount and grocery store that was smaller than the Hyper-mart. The Super-center was intended to give Wal-Mart improved drawing power in its existing markets by providing a one-stop shopping destination. Super-centers would have the full array of general merchandise found in traditional Wal-Mart stores, as well as a full-scale supermarket, delicatessen, fresh bakery, and other specialty shops like hair salons, portrait studios, dry cleaners, and optical wear departments. Super-centers would measure 125,000 to 150,000 square feet, and target locations where sales per store of $30 to $50 million annually were feasible.

Walton’s prediction was right on target. The Super-center division more than doubled in size during 1993, then doubled again in 1994. Super-centers, once thought of as risky because of slim profit margins on the food side, will most likely make Wal-Mart the nation’s largest grocery retailer within the next five to seven years (Longo, 1994). Expanding overseas, Wal-Mart moved into the international market in 1991 through a joint-venture partnership with CIFRA S.A. de C.V., Mexico’s leading retailer.

Since then the company has entered Canada, Hong Kong, Mainland China, Puerto Rico, Argentina, and Brazil. The Wal-Mart International Division was officially formed in 1994 to manage the company’s international growth. By the year 2000, analysts expect Wal-Mart to be a huge international retailer, with numerous locations in South America, Europe, and Asia. The ever-changing market presents continuing challenges to retailers. First and foremost, retailers must recognize the strong implications of a “buyers’ market” (Lewison, 1994).

Customers are being offered a wide choice of shopping experiences, but no one operation can capture them all. Therefore, it is incumbent upon management to define their target market and direct their energies toward solving that specific market’s problems. Technology, demographics, consumer attitudes, and the advent of a global economy are all conspiring to rewrite the rules for success. Success in the next decade will depend upon the level of understanding retailers have about the new values, expectations, and needs of the customer. If Wal-Mart continues its customer-driven culture, it should remain a retail industry leader well into the next century. REFERENCES: Daugherty, R. (1993).

New approach to retail signals strong future for point of purchase displays. Paperboard Packaging, pp. 24-27. Lewison, M. D.

(1991). Retailing. New York: Macmillan. Longo, D. (1994). New generation of exec’s leads Wal-Mart into the next century. Discount Store News, pp.

45-47. PNA/Island Aerie Internet Productions (1995/1996). Us against the Wal. Gig Harbor, Washington: Peninsula Neighborhood Association. [Online] Available: http://www.harbornet.com/pna/. Saporito, B. (1994, May). And the winner is still .

. . Wal-Mart. Fortune, pp. 62-68.

Slezak, M. (1993). Seeds of “environmental store” planted in 1989. Discount Stores Inc., pp. 25-27. Stalk, G., Evans, P., Shulman, L.

(1992, March-April). Competing on capabilities: the new rules of corporate strategy. Harvard Business Review, pp. 55-70. Thompson, A. A., Jr. & Strickland, A.J. III.

(1995). Strategic management concepts and cases (8th ed.). Chicago: Irwin. Trimble, V. H. (1990).

Sam Walton: The inside story of America’s richest man. New York: Dutton. Vance, S., & Scott, S. (1994). Wal-Mart: a history of Sam Walton’s retail phenomenon.

New York: Twayne. Verdisco, R. J. (1994, October). Superstores and Smallness. Discount Merchandiser, p.

8. Wal-Mart Stores, Inc. (1995). The story of Wal-Mart. Bentonville, Arkansas: Corporate Offices of Wal- Mart Stores, Inc. Wal-Mart Annual Report, 1994 Wal-Mart Annual Report, 1995.

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