What’s Next For This Retailer?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wal-Mart (NYSE: WMT) reigns supreme in the retailing world with over 10,500 stores throughout the world. Its stores are a focal point at most shopping centers in suburbia and they draw in thousands of customers, from up to a 50 mile radius in some areas, to take advantage of low prices enabled by Wal-mart’s massive distribution network. With Wal-Mart around every corner, an investor needs to ask: Is there any room for expansion? Looking at Wal-Mart’s strengths, weaknesses, opportunities and threats represents a good way to ascertain this.

Strengths

Ask anyone why they shop at Wal-Mart and the answer almost always winds up being “low prices.” Wal-Mart truly lives up to its reputation as a low price leader. Customers will pass up two grocery stores along their 30-50 mile journey to take advantage of it.

Wal-Mart’s combination of low prices and profitability stems from volume buying. Wal-Mart represents a huge percentage of revenue for a number of suppliers who manufacture large volumes of merchandise for the discount chain, thereby lowering fixed cost per unit. Lower overhead per unit means suppliers can pass cost savings to their No. 1 customer: Wal-Mart. Wal-Mart can then pass its savings on to the final consumer: you.

The competition realizes the benefit of a low price reputation and tries to emulate it. One department store, JC Penney (NYSE: JCP), introduced an “everyday low price” strategy where the company offers one low price all year round to avoid confusion among various price displays such as suggested retail price, monthly markdown price, sales price, etc.

This strategy might work if it had a low price reputation to start with. Speaking from personal experience the people I know don’t want to shop at Penney’s because they are left with the impression that its prices now remain high indefinitely. Sales gave people the impression of a good deal and enticed them into the stores to buy. This lack of enticement is driving consumers away from Penney’s and toward discount retailers like Wal-Mart.

Weaknesses

The one thing that gives Wal-Mart its volume leverage, size, also represents its weakness. Wal-Mart’s size makes it difficult to find avenues of growth. It also makes it difficult to manage its current empire. The highly saturated U.S market grew revenue 4% for the nine months ending Oct. 31 compared to 8% in the less penetrated international market.

The softening Chinese economy had a negative effect on Wal-Mart’s operating income in that region. Traffic declined an incredible 8% combined with an increase of 8% on average ticket sales. Economic uncertainty causes the Chinese to consolidate trips to the store, a phenomenon also observed in its U.S. stores. Negative consumer sentiment among the Japanese led to negative results in Japan. Net sales, comparable store sales, average ticket and traffic all decreased in Japan.

High fuel prices in the U.K. put pressure on consumer spending in that country. Comparable store sales in the Asda chain decreased 40 basis points. Traffic declined 1%; however, average ticket sales increased 1% which means consumers made good use of time spent in the stores.

Opportunities

Wal-Mart wants to conquer areas currently ruled by smaller stores such as Dollar Tree, Family Dollar, and Dollar General (NYSE: DG). A smaller Wal-Mart provides low price merchandise in a store downsized for smaller towns and markets. In Wal-Mart’s latest conference call, Bill Simon president of Wal-Mart U.S. said, Wal-Mart added 33 “Neighborhood Markets” in the last quarter bringing the total to about 250. Wal-Mart also wants to expand with more stores roughly the size of Dollar Tree known as Wal-Mart Express.

If anyone possesses the resources to compete with Amazon (NASDAQ: AMZN), it's Wal-Mart. Wal-Mart reported growth in at least some of its product categories stemming from e-commerce. For example, online sales of electronics and baby care grew. However, Wal-Mart’s specialty lies more with the brick and mortar side of retailing.

The vast majority of Wal-Mart International’s territories experienced robust numbers with the exception of China, Japan, and the U.K. Otherwise growth was robust in the international scenes. Sales grew at a double digit pace in regions such as sub-Saharan Africa and Mexico. While the United States may overflow with Wal-Mart stores, it has yet to conquer the international scene.

Layaway makes it easier for the cash strapped consumer to purchase more expensive items such as bicycles and educational toys. This will drive sales in the mature domestic markets.

Threats

Going to Wal-Mart involves fighting traffic and crowds which can prove quite unpleasant. This increases the appeal of shopping online with Amazon. Amazon, a smaller nimbler online retailer, grew its sales 27% to roughly $14 billion in its most recent quarter versus $11 billion this time last year. Comparatively speaking, Wal-Mart grew its sales 3.4 % to $113 billion from roughly $110 billion.

Heavy investment in Amazon’s distribution infrastructure will make this company a formidable competitor in selling low priced merchandise. Amazon plans to open 19 fulfillment centers for the holiday season.

The desire for Wal-Mart to expand into smaller towns with downsized stores will meet head on with the many dollar stores already operating in that market. For example, Dollar General stores number around 10,300 and they plan to open 625 more in fiscal year 2012. Dollar General is everywhere in small town America. Dollar General carries groceries including many sold under its private label brands such as Clover Valley. Of course, unlike the Wal-Mart’s Neighborhood Markets, Dollar General doesn’t contain a pharmacy.

Wal-Mart’s employee relations remain notoriously strained. Walkouts staged in October and on black Friday indicate less than stellar satisfaction of its employees. Unhappy employees could undermine any organization by giving less than 100% to its customers, the lifeblood of any business.

Conclusion

Wal-Mart’s ability to profitably sell products at a low price represents a huge advantage. Opportunities for the company lie in smaller markets away from the traditional big box territories. Layaway can stimulate demand in its existing store base. Wal-Mart’s website can serve as convenience for frustrated customers not wanting to fight crowds.

However, its large size makes it difficult to find areas for growth. Global economic volatility serves as a weakness in international growth. The dollar stores already established in small town markets serve as threats to Walmart’s expansion plans. Amazon serves as a threat to Wal-Mart’s low price leadership due to Amazon’s investment in a distribution network that will allow it to purchase in increasing volume. Walkouts bespeak of unsatisfied employees.

Finally, I believe the good outweighs the bad with this company. Wal-Mart’s low price leadership alone will ensure its market dominance for some time to come.


stockdissector has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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