Wal-Mart's Focus on Core Business Keeps Momentum Going
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For those concerned, the title is not in reference to anything Paris Hilton.
I’ve spent quite a bit of time analyzing tech companies and gauging stock performance. Because I am a big consumer of tech products (I confess to having i-just about everything), this has been both informative and fun. I am both participant and observer.
Last week, I made the commitment to ‘unplug’. Never one to shut off completely, I found myself thinking of the companies that I sometimes take for granted. Companies that have been the foundation of America, that are the quiet powerhouses that continue to provide great products at good prices for consumers, as well as good returns for investors such as Wal-Mart (NYSE: WMT), Johnson & Johnson (NYSE: JNJ), Coca-Cola and McDonald’s (NYSE: MCD).
Where We’ve Come From
It was two brothers who opened a small hamburger stand in San Bernardino, CA that would later become the world’s largest fast food chain. Likewise, it was a young Sam Walton and his ‘Five and Dime’ store that evolved into a household name of Wal-Mart.
The strategies behind these companies and others that have made America great like Coca-Cola, Johnson & Johnson can be described in one word: Focus. For some, this means focus on a single product – i.e., soda. For others, it means focus on a different kind of product – convenience. It is true that Wal-Mart and Target live up to their names of ‘convenience stores’. Their claim to fame is the ‘one-stop shop’, or everything under one roof. While pricing is competitive, consumers have always been more prone to spend a little more if it means saving a trip somewhere else. This is the true secret behind Target’s recent grocery push. It is not losing sales because Wal-Mart has better products or prices, but because Wal-Mart offers more convenience.
Another previously mentioned company, Johnson & Johnson does the same. It does not offer one product, as it ranges from producing pharmaceutical and medical devices to other packaged household goods and cleaners. Nor does it focus on convenience, as it is dependent upon big-box retailers to sell its products. The focus that Johnson & Johnson takes is its brand. Spanning back to the 1880’s, this company has billed itself as a family store, providing a wide range of goods all backed by a single promise: Our family serving yours. This integrity and brand security is what consumers buy, and not merely baby powder or shampoo.
Where We Are
Ray Croc, the man behind fast food giant McDonald’s, is quoted as saying he wasn’t in the hamburger business, but in the real estate business. McDonald's actually makes the majority of its revenue from buying and selling commercial property, as well as renting the property to franchisees and collecting a franchise fee. In essence, it could sell anything and even if the product flopped, McDonald’s would still survive.
Likewise, in 2009-2010, hard economic times for many, Wal-Mart was generating numbers such as $405 billion in revenue. This revenue created over $13 billion in net income for the same period. Employing more than two million associates and 7200 stores worldwide, Wal-Mart is one of the largest private employers in North America.
And largely, this growth has come without much incident. Sure, there have been legal suits from unhappy consumers to contend with. Moreover, recent reports of investigations into its Mexico operations for possible bribery has seen Wal-Mart shares slip 4.9% to around $59.50.
Last December, company leaders filed a report with the Securities and Exchange Commission that it was conducting an internal investigation into potential bribery allegations. No details were given at the time and it was only recently that more information about the place – Mexico – and possible violator – Eduardo Castro-Wright – came to light.
Even so, this is a far cry from companies like Apple who seems to be ensnared by legal woe after legal woe. With suits ranging from copyright infringement to the latest official warning from the Justice Department alleging the possible collusion to raise the price of ebooks, the company seems to be a glutton for punishment – or perhaps enjoys the thrill of the courtroom battle.
Where We’re Going
Companies that the typical American household has come to rely upon have become great because of a simple powerful strategy. Their business decisions are researched, planned, and intentional. In other words, they pick the battles they know they can win. Sometimes winning is the annihilation of an opponent – other times its just a gradual chipping away at another’s market share.
A good example of this is Wal-Mart’s recent foray into the streaming game. It announced a deal with Ultraviolet that would allow customers to upload the DVDs they already own to a cloud-based platform for as little as $2 to $5. The current heavyweights in the movie streaming game such as Netflix and Amazon are undoubtedly feeling the fear of facing such a bulwark.
There is no doubt that the market is moving away from discs and toward streaming. The ability to have everything on demand will only draw sincere admiration from the consumer. Last year, e-books and music downloads not only surpassed CD sales, but also broke into the ‘billion-dollar business’ club. It makes owning a DVD or CD more expensive and encourages even further growth.
With Wal-Mart currently selling 40% of all DVDs in the U.S., it's main source of revenue will still come from the purchase of physical discs as these have a higher-margin than streaming content. Even so, it not only limits the appeal of its opponents, but bolsters its own in the eyes of the consumer by offering even more convenience.
Simplicity is king when it comes to a powerful business approach. Doing too many things is so often met with failure that one wonders why companies are still bamboozled by the promise of more money by doing more things. It is the clear-minded steady handed approach of doing one or a few things well that makes for a solid company.
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