Thesis on "Wal-Mart Analysis Industry Information in Completing"

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Wal-Mart Analysis

Industry Information

In completing an analysis of the Big Box Retailing industry of which Wal-Mart is the most dominant participate, the key factors of the industry's growth potential, industry profitability, degrees of risk in the industry's future, and how this industry is confronting the current economic challenges in the retailing environment. As an industry, Big Box Retailing is considered to be in the mature phase of its product lifecycle (Sampson, 2008). Many research firms and the Department of Commerce consider the Big Box Retailing industry one of three industries that comprise the U.S. General Merchandise Stores Sector. According to industry analysts real sector revenue increased 14.1% over the last five years. Of the three industries that comprise this sector, the Big Box Retailing industry generated the majority of growth, average a Compound Annual Growth Rate (CAGR) of 5.8% during this time period (Sampson, 2008).

Key factors relating to this industry are analyzed in this analysis.

Big Box Retailing Growth Potential

Of the three industries that comprise the U.S. General Merchandise Stores Sector, only Big Box Retailing shows growth between 2008 and 2013 according to industry research services including IBIS World (Sampson, 2008). Industry analysts predict that Big Box Retailing will grow 3.6% per year from 2008-2013 (French, 2007). The growth of Big Box Retailing is seen as countercyclical to fuel pricing and the uncertainty consumer's sense about gas prices, the economic and their jobs. Growth of this sector overall and Wal-Mart specifically is being driven by the reliance on these stores by middle-class consumers who live paycheck to paycheck and look to Wal-Mart to assist them in keeping their budget balanced (Birchall, 2008).

Industry Profitability

Big Box Retailing will support the revenue and profit growth of U.S. General Merchandise Stores Sector during the 2008-2013 timeframe due to the operations efficiencies Wal-Mart and its competitors are investing in. Foremost of these operational efficiencies are the increasing reliance on ERP systems, distributed order management and the adoption of RFID throughout their supply chains (Boarnet, Crane, Chatman, Manville, 2005). With revenues growing at 3.6% through 2013 and expenses staying flat even with operational performance gains, the challenge of attaining industry profitability and generating Return on Assets of 8% and a consistent $180,000 Sales Per Employee achieved on a consistent basis. Profitability long-term in the Big Box Retailing industry is more reliant on operating efficiencies than top-line revenue growth.

Degrees of Risk

There are very large risks associated with the Big Box Retailing industry as it is heavily dependent on supply chains (Boarnet, Crane, Chatman, Manville, 2005) and inventory turns to be successful (French, 2007). The risks of supply chain disruptions and the lack of consistent quality from suppliers could significantly change the profitability of this industry rapidly.

Overcoming Industry Challenges

Big Box Retailers in general and Wal-Mart specifically have redefined retailing to concentrate on a low-price value proposition that is supported by exceptionally high levels of operating efficiency. For the Big Box Retailing industry to overcome the economic slow-down impacting most the world's economies today, operational efficiencies are going to be crucial to achieving consistent Return on Assets performance and sustainable profitability as well.

Competitor Analysis

Wal-Mart has three major competitors in the U.S. including Costco Wholesale Corporation with 20.2% market share, Meijer with 4.2% market share and BJs Wholesale Club with 2.7% market share as of 2007. Figure 1 shows the market shares of Wal-Mart relative to its competitors in the Big Box retailing segment of the U.S.

Figure 1: Big Box Retailing Market Shares, 2007

Market Share

Wal-Mart Stores, Incorporated

Costco Wholesale Corporation

Meijer, Inc.

BJ's Wholesale Club, Inc.

Sources: (French, 2007) (Sampson, 2008).

The most entrenched and effective competitor Wal-Mart has is Costco. This competitors' supply chain, distribution channel, pricing and location-based expansion strategies most closely resemble Wal-marts' and as a result, they are the largest big box retailer competitor they have in the U.S.

The Costco supply chain management system is designed to support the big box retailer's prioritization of electronics as the product area of the most competitive importance to their product strategy, followed by apparel and perishables. The Costco business model has also supported Internet-based selling through Costco.com that uses the same distributed order management system as the store network. The entire network is comprised of 537 warehouses, 393 of which are located throughout the U.S. In 40 different states and Puerto Rico. The company has also initially launched a series of 19 stores throughout the UK, 75 in Canada, six in Japan, five in Taiwan and a total of 31 throughout Mexico. While other big box retailers including Wal-Mart concentrate on 40,000 SKUs, Costco concentrates on just a tenth of the number of items, 4,000 (Sampson, 2008).

Costco however is significantly different than Wal-Mart in that it is highly dependent on its base in California, so much so that from an Operations standpoint that it's a liability from a logistics standpoint. Costs of transporting perishable products to their central warehouses in California have also been significantly increased by the cost of oil and fuel. Operations are also highly dependent on California's economic and logistical support networks for supply chain management and integration. On any given year 31% of total sales are generated from California. The economic dependency on this state is a continual financial and operational challenge for this company for the long-term.

In terms of distribution, Costco is currently supporting 31 warehouses throughout the U.S. expanding to over 50 by FY 2008, with the balance of the growth coming from international growth (Sampson, 2008). Costco also has a high reliance on traditional logistics functions including manually-based Vendor Managed Inventory (VMI) functions and Direct Store Distribution (DSD) through the use of 3PL service providers. In addition, Costco intensively relies on bar coding and manually oriented technologies for managing inventories and optimizing inventory positions.

From a sales and marketing standpoint, Costco is heavily reliant on a low-cost leader strategy, choosing to compete on price above all other aspects of their marketing. In addition, this competitor relies on event marketing focused on new warehouse openings and new partner announcements in their centers. Costco conducts direct mail marketing to potential new members and direct marketing to existing members to promote selected merchandise as well as part of their broad-focused marketing strategies.

One of the key differentiators Costco relies on vs. Wal-Mart is service. To fully take advantage of this differentiator, Costco has instituted one of the most comprehensive returns policies in the big box retailing industry, encompassing electronics in their definition of this service. Costco also relies on an intensive distributed order management system and catalog that makes it possible to manage customer queries both online and over the phone with greater accuracy than has been possible for Wal-Mart over their websites including WalMart.com.

Costco's regional strength in the western U.S. And throughout the Pacific Northwest are a potentially significant competitive threat for Wal-Mart nationally. To date however Costco has not been able to scale their operations nationally or globally.

Additional competitors include Target, who most often competes with Wal-Mart on loss-leader consumer electronics sales, and a myriad of smaller retailers who concentrate on one specific product line Wal-Mart carries. A prime example of their smaller competitors are toy retailers, many of which have seen gross margin degradation over time due to Wal-Mart's aggressive pricing strategy in the 4th calendar quarter of every year. In the pricing discussion of this analysis are examples of how Wal-Mart seeks to create more of a competitive threat to profitability of competitors through their strategies. The impact on Toys R' Us is a case in point. Wal-Mart also is facing competition from global competitors including Carrefour and Tesco as both look to significantly increase their sales into the U.S., Asia and other regions Wal-Mart is also competing in. Briefly, their competitors are grouped into the primary set of big box retailers, followed by nationally-based retailers of which Target is the largest and most profitable. The tertiary set of competitors includes Carrefour and Tesco, based in France and the UK respectively. Both of these companies are actively moving into the U.S. And have quite a different strategy relative to Wal-Mart. Instead of just concentrating on supply chain efficiencies, these companies focus on local market knowledge and getting to know specifically what customers are looking for in the regions they enter. By doing this, these competitors are able to create smaller yet more focused and potentially more relevant product selections for consumers in the regional areas they are working to penetrate with new marketing strategies. They are also able to better understand the pricing dynamics of these areas as well.

The severity and intensity of the competition however is most acute with other big box retailers including Costco on consumer packaged goods and with Target on loss-leader electronics including flat screen televisions. In these two categories, Wal-Mart faces its most formidable pricing and availability competitors. As brands and products in these areas are the most potentially commoditized by Wal-Mart and their pervasive distribution,… READ MORE

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