Wal-Mart Stores Inc SWOT Analysis Report

Wal-Mart Stores Inc SWOT Analysis Report

 

Wal-mart Stores Inc

Strategic Evaluation

Swot analysis

Strengths

·         Bargaining power with suppliers – Wal-Mart’s sheer size and scale of operations give the retailer strong power to obtain the best prices and conditions from its suppliers.

·         Low operating costs – compared with some competitors such as Sears, prices at Wal-Mart are lower due to low overhead costs, due to its edge-of-town store locations, as well as its efficient logistics.

·         Strong positions in North America and Mexico – Wal-Mart benefits from well-established brands and loyal customers in North America and Mexico, and has outlets in many key locations so that most of the population in these countries live in the vicinity of its stores.

·         Level of profits – at over US$11 billion in the year to January 2007, Wal-Mart’s net profit dwarfs that of any of its competitors, while its margins are steady, which gives the company considerable scope to fund expansion through the opening of new stores and the acquisition of other retailers.

Weaknesses

·         Strong dependence on mature US market – with around 75% of its revenues derived from domestic sales, Wal-Mart relies heavily on the US market, which is highly mature and offers limited potential for growth compared with emerging markets. As a result, most of the suitable cities for big box retailers already have a Wal-Mart store, which limits opportunities to open stores in new areas, or leads to a greater sales cannibalisation between stores, which is likely to limit growth in average sales per store.

·         Absence from several major high-growth markets – Wal-Mart is not present in some fast-growing markets, such as Eastern Europe, especially in Poland, Romania and Russia, and has a modest presence in Asia-Pacific. Wal-Mart failed to enter Russia, where it could not reach an agreement with local partner Ramstore, and closed its Global Sourcing subsidiary in Hungary, as it decided against entering the market.

·         Too reliant on big stores – Wal-Mart depends mostly on bigger retail formats such as hypermarkets and mass merchandisers, and has little or no presence in some high-growth grocery retailing formats such as convenience stores and discounters.

·         Store concept needs updating – the big box store concept based on a replication of a “one size fits all” formula shows its limitations, and Wal-Mart realises that it needs to make more local adaptations of its concepts.

·         Lack of adaptation to foreign market environments – the adaptation to the local market environment has not been satisfactory in several countries, as illustrated by the withdrawal from South Korea in 2006, where Wal-Mart’s adaptation to local demand compared unfavourably with rival Tesco, and by a subsequent exit from Germany.

·         Costly lawsuits – due to controversial work practices, many employees and former employees have sued Wal-Mart, and the retailer had to pay compensation. Common accusations include rolling back employees' earned pay, skimping on work breaks, not promoting women employees and failing to control sweatshop working conditions at its suppliers' factories outside the US.

Opportunities

·         Growth in emerging markets – Wal-Mart will develop its presence in some Asian markets, most notably China, where it will open new outlets and venture into new cities, and will also shortly enter the Indian market through a new joint venture. In Latin America, the expansion in Mexico and Brazil is likely to continue apace.

·         Development of internet retailing – Wal-Mart is likely to continue expanding the range of products available through internet retailing in the US and the UK. In addition, it could venture into new markets such as Latin America.

·         New services – Wal-Mart will continue to innovate in offering new services, as illustrated by recent ventures into banking, credit cards and mobile phone services, which will generate more revenues in new areas.

·         Move towards more premium products and remodelled stores – the move towards more premium food such as organic products, together with the remodelling of the Wal-Mart stores in the US, should broaden the appeal of Wal-Mart stores and attract new consumers, while increasing average till receipts.

·         Improved image – advertising campaigns combined with large-scale investment to make the company's operations more environmentally friendly and raise its corporate social responsibility (CSR) profile could improve the corporation's image. Renewed consumer trust would generate better customer loyalty.

Threats

·         Stronger competition from dollar stores – the strong dynamism experienced in 2005 and 2006 by variety store chains operating dollar stores in the US, such as Dollar General and Family Dollar, creates a more difficult competitive environment for Wal-Mart, with a risk that these chains will be better able than Wal-Mart to meet the demand of consumers with low incomes.

·         Losing its core customer base – with its strategy to focus on more premium products, Wal-Mart risks alienating some of its loyal customers, who are often highly price-conscious, and are thus likely to shop increasingly at other chains such as dollar stores.

·         Consumer backlash – risks of consumer backlash over Wal-Mart’s dominance and its impact on local communities will increase. Consumers and pressure groups in the US increasingly protest against the opening of new stores, as the retailer is criticised for various CSR issues, including wages, a heavy reliance on imports from low-cost countries and its role on the closure of small specialist retailers. As communities block the opening of new stores, this restricts locations where Wal-Mart can build new stores.

·         External economic factors – rising oil and raw material prices globally will impact retailers' costs, and will particularly affect retailers positioned at the lower end of the price scale such as Wal-Mart. In addition, the possible depreciation of the US dollar compared with the Chinese renminbi will make it more costly for the group to import goods from China. By becoming a more global retailer, Wal-Mart also becomes more exposed to the fluctuations of the global economy, especially in developing countries in Asia-Pacific and Latin America, many of which have seen major economic crises at some point over the last decade.

·         Shareholder pressures – Wal-Mart’s shares have under-performed other retailers over the last few years, and pressures from Wall Street investors could influence the company’s future strategy. For example, shareholders wishing to limit expenditure on building new stores in the US could ultimately damage Wal-Mart’s ability to extend its scale of operations. In addition, its long-term plans to operate a profitable chain in Japan could be jeopardised, if pressures from shareholders to divest from this unprofitable venture became too intense.

12 Month Highlights

2007

·         The acquisition of a 35% share in Trust-Mart, one of China's largest retailers, for US$1 billion in early 2007, illustrates the group's high ambitions in China.

·         In Japan, Wal-Mart increased its share in Seiyu from 49% to 95.1% in November 2007, and de-listed Seiyu from the Tokyo stock exchange.

Prospects for Wal-mart Stores Inc in Retailing

Core Businesses

Hypermarkets and mass merchandisers facing more difficult conditions in the US

·         Global sales through Wal-Mart’s two major channels, hypermarkets and mass merchandisers, are forecast to grow by 26% and to decline by 5% respectively over the 2007-2012 period, and a similar discrepancy between the growth trend of the two channels is expected in the US, with sales forecast to increase by 33% and to decline by 12% respectively. As a result, Wal-Mart is expected to continue focusing on the faster growing hypermarkets rather than on the more saturated mass merchandisers format in its domestic market.

·         Total retail sales are expected to grow by only 16% in constant value terms in the US over the 2007-2012 period, as the macroeconomic conditions in the country are set to be less favourable in the beginning of the forecast period than in previous years, with a decline in property prices leading to low consumer confidence.

·         This market environment is likely to affect Wal-Mart negatively, as consumers will be more inclined to restrain from purchasing big items. However, the company’s low-price positioning should make the retailer relatively more immune to a downturn in the economy than its pricier rivals such as Target, as Wal-Mart should take advantage of its low-price positioning to appeal to households whose disposable income has contracted.

World’s largest retailer position undisputed

·         Wal-Mart’s share of global retail sales remained unchanged at just over 3% in 2007. Among the world’s largest grocery retailers, the company’s number one position was strengthened, with its share rising from 5.4% in 2006 to 5.6% in 2007, while its nearest rival Carrefour held a stable share of 2.6% and third-placed Tesco’s share increased from 2% to 2.1%.

·         Wal-Mart recorded lower sales growth than Tesco, which expanded rapidly abroad while still remaining dynamic in its UK home market, but was higher than Carrefour’s, as the French group suffered from relative stagnation in its home market.

Steady growth in the US driven by new hypermarket openings

·         Wal-Mart is expected to remain highly dependent on its domestic market, which accounted for around 76% of its global sales in 2007. However, this proportion is likely to be reduced as the company will seek to expand its activities abroad more rapidly than in the US, with a focus on emerging markets.

·         Growth through new store openings in the US is expected to slow down in 2008 and 2009. Wal-Mart has become so ubiquitous in the US that there is a risk for the company that new stores will increasingly cannibalise sales from existing ones, which is reflected in lower like-for-like sales. Hence, the number of new Supercenter openings is expected to fall to about 140 in 2009, about half of its historic number.

·         In its domestic market, in 2007 Wal-Mart generated 74% of its retail sales through hypermarkets and 24% through mass merchandisers. Growth rates differed significantly between the two channels, with its hypermarket sales up by 8% and mass merchandisers sales down by 4%. This reflects the group’s strategy to focus its expansion through the hypermarkets channel and by converting some mass merchandiser stores to the hypermarket format.

·         Within the mass merchandisers channel, Wal-Mart’s US share declined from 45% in 2006 to 43% in 2007, while its arch-rival Target continued to gain share, as its stores and product assortment better appealed to consumers thanks to a more upmarket and trendier feel. The remodelling of some 1,800 Wal-Mart US stores in 2006 and early 2007, with the introduction of wood floorings and new displays, was designed to appeal to Target’s customers.

·         Variety stores, whose sales are forecast to grow by 22% in constant value terms over the 2007-2012 period, partly driven by the growing popularity of dollar stores, will intensify competitive pressure against Wal-Mart, appealing to its core customers, and this channel is not as saturated as the company’s traditional formats.

Development of non-retail services offers potential

·         As part of their strategy to increase customer loyalty and to venture into activities generating higher margins, grocery retailers increasingly offer a wide range of non-retail services, often in partnership with other companies, and this trend is expected to continue. Tesco and Wal-Mart have both been at the forefront of this trend, although other leading retailers, such as Auchan, Carrefour and Lidl, also adopt a similar strategy.

·         Hence, the rapid development of the offer by the leading grocery retailers gathered pace. Wal-Mart is attempting to venture into banking in the US, while in the UK, flights and holidays can be booked online at Wal-Mart’s Asda Travel website, thanks to a partnership with travel agent Wefly.

·         Several retailers in Europe, including Auchan, Carrefour and Tesco, operate virtual mobile phone networks, and Asda also unveiled this service in April 2007 in partnership with Vodafone. As Asda launched its mobile phone network several years after its main rival Tesco, it had only 100,000 customers by the end of 2007, compared with well over one million for Tesco. However, the low-priced call plans should be popular among Asda’s regular customers, and could enable a steady rise in the number of subscribers.

·         In the US, Wal-Mart developed its offer of financial services targeted at low-income consumers in 2007, with the introduction of the re-loadable pre-paid card Wal-Mart MoneyCard, and with the opening of numerous Wal-Mart MoneyCenters, whose total number is set to reach 1,000 in 2008, up from 225 in early 2007. Wal-Mart is a pioneer amongst US retailers in this area, and can rely on its large customer base to attract a large number of users.

Growth Opportunities

New market entries to focus on emerging markets

·         Wal-Mart has in the past often used acquisitions as a means to enter new markets, for example, in Canada, Germany, Mexico and the UK. Partnerships and joint ventures have also been used to enter Brazil, China and Japan, as well as India more recently. Wal-Mart’s recent acquisitions enabled the company to increase significantly its presence outside its domestic market.

·         Wal-Mart’s international ambitions mean that the company is constantly seeking to venture into new markets, with a focus on emerging countries with a large population and where retail sales grow rapidly, such as India and Russia. Following the market exits from Germany and South Korea in 2006, the group will need to select countries where it can most successfully apply its business model, and is likely to seek local partners in order to take advantage of their experience rather than opt for organic growth.

·         The group is studying potential market entry into markets in Eastern Europe, and there is potential in dynamic markets such as Russia, as well as in smaller EU member states such as the Baltic States, Bulgaria and Slovenia. There also remains great potential in markets such as Romania, where hypermarkets is not a mature channel, as opposed to the relative saturation experienced in the Czech Republic and Poland.

·         Although the company may opt to build new stores, possibly under the Asda fascia, it is more probable that it will seek to acquire a local company which could provide it with the required expertise. However, as the best sites around the large cities in Eastern Europe are already occupied by other global retailers, including Auchan, Carrefour, Metro and Tesco, Wal-Mart will struggle to gain a leading position in Eastern Europe, and will need to spend more resources than its European competitors do.

·         In Asia-Pacific, Wal-Mart sees major potential for development in India, as retail sales are expected to increase by 42% in constant value terms over the 2007-2012 period. As a result of the law restricting foreign direct investment (FDI), the retailer opted to enter the Indian market through an agreement with a local player, which led to the signature in 2007 of a joint venture agreement with Bharti Enterprises. The two partners aim to open between 10 and 15 wholesale cash-and-carry outlets over the coming seven years, with a first store due to open in 2008.

·         As Wal-Mart is among the first foreign retailers to take steps towards a presence in India's major cities, it is likely that it will be successful, should the law about FDI be amended. However, its competitor Metro has a significant advantage, having already opened cash-and-carry outlets. In addition, Indian retailers will also increasingly attempt to compete against foreign chains by creating retail giants, the most ambitious players being Pantaloon Retail and Reliance.

Expansion in China high on the agenda

·         In 2008, Wal-Mart will focus its organic expansion on three major existing markets, Canada, China and Mexico, which the group stated would together account for around 80% of additional selling space outside the US, and China will be a particular subject of attention.

·         Wal-Mart saw its sales double in 2007 in China, mostly as a result of the acquisition of a controlling stake in the Trust-Mart chain. However, the company also achieved this performance thanks to new store openings under the Wal-Mart fascia, which gave it greater presence in second-tier cities. The Trust-Mart acquisition could enable Wal-Mart to overtake Carrefour as the largest foreign retailer in upcoming years.

·         Although Wal-Mart is expected to continue its rapid expansion in China, it will be a challenge for the company to find some more prime locations for new stores, as they are already taken up by domestic players, and because other foreign retailers including Auchan, Carrefour and Tesco also seek to open many new stores. Wal-Mart’s expansion could also face government plans to pass new legislation to regulate the expansion of large chain stores.

·         Wal-Mart could resolve this problem by forming strategic alliances with selected domestic and foreign property developers, and the acquisition of the Trust-Mart chain in late 2006 also eases the pressure for the company to find new suitable sites. Chinese-owned retailers also have the advantage of having a monopoly on tobacco sales.

Latin America set to remain a bright spot

·         The two main channels for Wal-Mart in Latin America are hypermarkets and discounters, which are forecast to see strong sales growth of 25% and 20% respectively in constant value terms over the 2007-2012 period.

·         Nearly 9% of Wal-Mart’s global sales were derived from Latin America in 2007, compared with just under 8% in 2006. Despite a relatively modest share of total retail sales of 4.1%, up from 3.9% in 2006, the company remained the largest retailer in Latin America in 2007, well ahead of its nearest competing international retailers, Casino and Carrefour. This reflects the fact that no retailer has a presence across many Latin American countries.

·         Strong organic growth continued in Mexico in 2007 through new store openings, especially hypermarkets and discounters, although the company recorded almost stable same-store sales, due to a slowdown in the Mexican economy. Mexican consumers find discounters an attractive channel due to their low prices compared with other retail formats, and because of the stores’ location in neighbourhoods with a large population of lower- and middle-income households.

·         The profitability of the Wal-Mex Mexican subsidiary remained high in the first half of 2007, with a net margin of almost 6%, which will give Wal-Mart the resources to invest in further expansion.

·         The group will continue to invest significantly in Latin America, with a particular focus on Brazil, where it announced plans to invest over US$600 million in 2008 in the opening of 36 new outlets and one distribution centre. Wal-Mart will seek to attract customers with low incomes, and will expand its presence throughout the country and in both hypermarkets and supermarkets.

·         Wal-Mart’s operations in Latin America benefit from experience in marketing to the Hispanic community in the US, where it produces advertising campaigns and sells books in Spanish, as well as food produce aimed at the Hispanic community

Ambitious plans north of the 49th parallel

·         Beyond emerging markets, Wal-Mart opened its first Supercenter in Canada only in 2006, and the success of this format in 2007 was apparent. This encouraged the company to plan a major expansion through further openings of new Supercenter outlets.

·         In addition, Wal-Mart has adopted an aggressive price strategy in Canada, which gave it a competitive edge over its main rivals, most notably the largest domestic retailer Loblaw. In autumn 2007, Wal-Mart and Loblaw were drawn into a “price war”, which led to lower margins and a sharp reduction in Loblaw’s quarterly profits. As Loblaw is under increasing pressure from Wal-Mart, there was mounting speculation that Wal-Mart’s arch-rival, Target, may eventually consider taking over Loblaw in order to achieve its stated ambition of entering the Canadian market.

Western Europe: can the UK satisfy Wal-Mart’s appetite?

·         In Western Europe, where Wal-Mart is only present in the UK as of late 2007, it is less likely that the group will attempt to enter a new market, as grocery retailing is concentrated. However, Wal-Mart may seek to acquire a local retailer in more fragmented markets in Southern Europe, especially Italy.

·         In addition, potential expansion into Ireland would fit the company's strategy, as its experience of the UK market could be an advantage. The hypermarket format remains in its infancy in Ireland, with Tesco the sole operator, and price pressure on prices are not as high as in the UK. Since Asda stores are already present in Northern Ireland, logistics constraints would be relatively minor, should the Asda fascia be adopted. However, a law in 2001 stipulating that the size of grocery retailers cannot exceed 3,500 sq m in the Dublin area and 3,000 sq m outside would limit Wal-Mart’s potential development.

Internet retailing to remain dynamic

·         While global store-based retailing sales are forecast to grow by 14% over the 2007-2012 period, internet retailing sales are expected to double. Internet retailing is expected to continue increasing especially rapidly in developed markets, as consumers among all generations will be more familiar with the internet, and so-called “silver surfers” will make more online purchases.

·         In 2007, only less than 1% of all Wal-Mart’s sales were through internet retailing, but this figure is set to increase significantly, as the group intends to take a greater share of this dynamic channel through a more diverse offer.

·         With high fuel costs becoming a growing concerns among a significant proportion of Wal-Mart’s core customers, internet retailing could appeal to a greater number of consumers who are not willing to spend money and time travelling to and from Wal-Mart’s stores and opt to order from the click of a mouse. However, the company will also face more intense competition in internet retailing, as most grocery retailers and non-grocery retailers alike will invest in developing their presence in this channel.

·         Wal-Mart has expanded the range of products available through internet retailing in 2007, as illustrated by the summer launch of the internet pharmacy site asda-pharmacy.co.uk, selling over the counter medicines. It is likely that the company will continue to diversify its internet retailing operations and will start offering grocery products in the near future, although it has denied rumours that it was planning such a launch.

·         However, as Wal-Mart opted to halt its film download services in the US at the end of 2007, as a result of its limited success against rival Apple’s iTunes, this highlights the need for the company to make effective decisions regarding which products it will focus on as part of its online strategy.

Store innovations and new concepts

·         In highly mature markets such as the US and Japan, where organic growth through new store openings will be more difficult to achieve due to the lack of suitable sites, Wal-Mart is likely to increase same-store sales through widening its product assortment and range of services, as well as by improving the store environment.

·         In the US, Wal-Mart is increasingly moving away from the “one-size fits all” store types and adapts the product assortments to target specific consumer groups depending on the store location, and has identified five main categories: suburban/affluent, urban multicultural, Hispanic, baby boomer and rural. Typical store adaptations include more space for pet supplies and baby clothes for the baby-boomer segment and financial services with more bilingual signage for Hispanic customers.

·         In its domestic market, the company is planning to launch in affluent urban areas a new test concept of small grocery stores 10 times smaller than its standard Supercenter under the Marketside brand in 2008. These outlets would compete against the Fresh & Easy chain opened by Tesco in South Western US states in autumn 2007. As Wal-Mart has no experience of operating such grocery outlets with an emphasis on fresh and perishable food, this could create a complex challenge for the group in terms of logistics.

·         This follows the 2006 opening of a test store in Plano in Texas, with features and products not usually present in its other stores, such as a sushi bar, less cluttered aisles and expensive wines. The outlet is located in an area where the average income is around US$100,000, which is an unusual location for the company.

·         In an attempt to benefit from growing demand for heath and beauty products and the good performance of leading health and beauty retailers such as CVS and Walgreen, Wal-Mart announced in April 2007 the opening of 400 in-store clinics offering basic services over the coming three years. Ultimately, the company states that its goal is to be among the largest healthcare companies in the US.

·         In Japan, the remodelling of 70 Seiyu outlets in 2006 was intended to revive the chain’s lacklustre performance, although the remodelling did not result in the expected sales boost.

Limited Potential

Lack of presence in small grocery retailing formats in Western Europe

·         Amongst major grocery retailing formats, smaller stores, especially convenience stores and discounters, are expected to record faster growth than Wal-Mart’s traditional format, hypermarkets. As Wal-Mart has no convenience stores or discounters chain in Western Europe, it misses significant growth opportunities.

·         Discounters in Western Europe are forecast to see sales grow by 15% over the 2007-2012 period, more rapidly than overall grocery retailing, and especially supermarkets, which represent the format competing, most directly against discounters.

·         The decision to open test discounter stores under the Asda Essentials fascia in the UK in 2006 highlights the company's strategy to venture into these sectors. However, the disappointing results of the test stores and their subsequent closure in 2007, although partly due to their inadequate locations, also illustrate the challenge that the group faces in order to gain the experience of operating smaller stores.

·         Although Wal-Mart’s Asda subsidiary announced in February 2007 that it was to launch a convenience stores fascia in the UK, the retailer had not confirmed details of such a move by the end of 2007. Meanwhile, its two other main competitors in UK grocery retailing, Tesco and Sainsbury’s, have both gained a significant share of convenience stores. As a result, Wal-Mart will struggle to catch up, and as a late entrant will lose out on the most profitable high street locations, unless it can acquire a small chain which has stores at strategic locations.

·         Should it opt instead for organic growth and try another smaller store concept, Wal-Mart will face strong competition from established and profitable global players, most notably the discounters Aldi and Lidl and the convenience stores operator Seven & I Holdings.

Wal-Mart remains absent from Eastern Europe

·         By not having yet entered Eastern European markets, Wal-Mart has missed on growth opportunities that were offered to international retailers. The group has thus left its competitors such as Auchan, Carrefour, Metro and Tesco take the top spots, which will make it more difficult for Wal-Mart to obtain the required scale in these markets. This also led to a lack of suitable locations to open large edge-of-town stores in the largest cities, especially in more mature markets such as Poland. Hence, the option of organic expansion in Eastern Europe is at this stage an unlikely option for Wal-Mart, and it will more probably look for a suitable takeover target among home-grown retailers.

Profitability an issue in Japan

·         Wal-Mart’s operations have not been profitable in Japan since the company took control of the struggling Seiyu chain. Several years of non-profitability in Germany led Wal-Mart to withdraw from this market in 2006, and if pressures from investors to sell unprofitable operations were to intensify, Wal-Mart could potentially face the same dilemma in Japan.

·         In Japan, retail sales through mass merchandisers are expected to grow by only 2% over the 2007-2012 period, which indicates the saturation of this channel. Wal-Mart saw a moderate decline in sales through this channel in 2007, which followed stagnation in 2006. Hence, there is little sign of a recovery for the group’s Seiyu chain. Wal-Mart has not managed to turn around its Seiyu subsidiary into a profitable division over the financial year ending January 2007, and it is likely to continue making a loss over the fiscal year to January 2008.