Wal-Mart Store Inc.
Wal-Mart is one of the leading retail stores in the United States and the world over. It has also retail across a number of countries across the world. This paper discusses the business environment of the retail sector in the United States in which Wal-Mart operates in. With regard to Wal-Mart, the paper focuses on an analysis of the business strength and weaknesses through SWOT analysis. Additionally, the paper also gives an analysis of the financial status of the company in the last four years by specifically examining income statements, balance sheets, cash flow statements, financial ratios. The paper goes ahead to explore human resources issues of the company as well giving an overview of Wal-Mart corporate governance, management, and strategies.
Wal-Mart current strategy
Wal-Mart strategies are categorized as either domestic or international strategies. Its strategies are tightly focused on low-cost leadership in the industry. The aim of this strategy is to achieve cost advantage in the industry that is characterized by intense competition from the other large retail chains in the industry. Wal-Mart achieves this through vast economies of scale and hard bargaining with its suppliers. Additionally, the company ensures low-cost through aggressive deployment of technology and inventory control. At the same time, Wal-Mart effectively achieves this strategy through shrinkage reduction to avoid losses resulting from product handling. The company also encourages bulk buying and cutting edge distribution network as a means of gaining cost advantage. This explains why the company has been able to maintain low product prices over a very long period (Crain, 2009).
It is important to note that to survive in the current market situations that are characterized by intense competition. This is due to deregulation and globalization companies need to adopt high-variety strategies. Wal-Mart realizes this through growth strategies that aim at expanding the operation of the United States and the entire world. The company is accelerating its growth through the establishment of Supercenter stores in the United with the major aim of rivaling Kroger, one, of its fiercest competitors in the United States (Franklin, 2001). Then again, the company is accomplishing this through mergers and acquisitions to strengthen its market presence. At the same time, the company also focuses on establishing of retail stores in foreign countries. The company has strategically established itself in the United Kingdom, Canada, Brazil, Mexico, Germany, Japan, and also South Korea.
Provision of superior customer service is another strategy widely explored by Wal-Mart. The company strives to achieve customer needs through distinct retail options. This is met through retail stores such as Sam’s Clubs, supercenters, discount stores, and neighborhood markets that serve the customer with a specific range of retail products.
Wal-Mart SWOT analysis
This analysis is important in trying to ascertain the strength and weaknesses of Wal-Mart Company. At the same time, it identifies opportunities and threat from the external environment (industry, legal, customers, and government) that might affect the company. The opportunities represent advantages that the company can utilize to overcome its internal weaknesses and business challenges posed by external threats.
Wal-Mart major strength includes core information technology infrastructure that is a source of company core competence. This supports its local and international logistics. Wal-Mart is a powerful retail brand due to the positive its wide range of products in its stores as well as good reputation for good value for money. Additionally, being the largest in the U.S and the whole world at large, its strong market position gain is also the strength of the company. Its strong market capabilities, as well as strong financial conditions of the company, is another strength of the company. Efficient and extensive distribution, pricing advantages, and economies of scale offer the company other strength as compared to its rivals in the industry.
The major weaknesses of the company include high staff turnover, weak reputation, numerous legal challenges from customers, industry players and employees, and lagging behind other competitors in terms of e-commerce. Additionally, its complex strategy is also a source of its weaknesses at the corporate level. Tough experiences in international merchandising reflect other important weaknesses at the global level. Furthermore, the image of the company in the public domain has over the years been tainted by the numerous lawsuits by employee unions. The weaknesses are compounded by questionable management and weak reputation.
The retail market has tremendously expanded over the past few years, presenting an opportunity for the company to expand to a new geographical location locally and internationally. This is also an opportunity for the company to serve new market segments. The increasing deregulation and falling of trade barriers in the international market offer another opportunity for the company to expand its international coverage through merger, acquisition, and new startup in more countries. Technological breakthrough offers opportunity for exploitation of new technologies by the company. Another opportunity for the company is to increase its sales through an online sales platform which is proving profitable for other companies in the industry.
There are numerous threats that pose a number of challenges for the company. Firstly, entry of new competitors in the industry coupled with already intense competition presents a major threat to Wal-Mart. Entry of Kroger has proved to be one the fiercest Wal-Mart competitor. Other competitors include Kmart, Target, ShopKo, Costco, and Meijer. Additional the ever increasing buyer and supplier power in the industry that the company needs to strategically address. At the same time, the changing demographic patterns in the United States call for the company to reevaluate its marketing strategies. Emergence of new and boom of specialty stores threatens Wal-Mart to great extends. Specialty stores target market segment that are not well served by the mainstream retail stores hence a threat to sales of Wal-Mart. Such stores include Home Depot, Toy R U, Bed Bath, Beyond as many other stores.
Wal-Mart has a strong governance framework which is rooted in strong values and principles that were taught by Sam Walton, the founder. The company maintains separate Chairman of the board and Chief Executive Officer to enhance oversight leadership and facilitate management development. Currently, Wal-Mart has sixteen members Board of Directors. The Board has independent directors as well as inside directors. The Board has five committees that are appointed annually. These committees include compensation, nominating, and governance, executive, global compensation, strategic planning and finance, and technology and e-commerce. Robson S. Walton is the current chairperson of the board. The current CEO is Michael Terry Duke. Other top managers at Wal-Mart are Charles M. Holley, Del Sloneker, Neil M. Ashe, and Shelley G. Broader. Some of the top managers are also members to the Board of Directors.
Wal-Mart organization has over the years nurtured an excellent culture that ranges from the top to the low level manager. The culture was engineered by the Sam Walton the founder of the company. According to Forbes Global 2000 the company is the largest public corporation in the world in terms of revenue. The company is governed by a board of director who are elected yearly by the shareholders. The managers of the organization also work as members of the board. Executive members of the board should not multi task as managers of the retail store. This is geared in safeguarding the interest of the shareholders which should be separated from the interest of the managers. Corporate governance is crucial in separating the powers of the board and the managers. The function of the board is to protect the interest of the shareholders through checking the function of the managers. The managers are thus responsible for the well running of the organization and how operations of the organization are effected. The board has a task of appointing the managers for the organization and thus managers should not act as members of the board as they may not exercise their powers well when it comes to hiring and appraising managers. The managers are responsible for implementing the strategic plans instituted by the board of directors and thus should be professional in their duties. The managers are responsible for preparing the financial reports which are approved by the board of directors. Some of the management team that should act as members of the board may include the chief executive officer. Then the already prepared reports should be reported to the shareholders during the annual general meetings (Schein, 2007).
Good corporate reputation is ideal for any particular company or organization. Strong corporate reputation is important for its potential value creation and making it hard for other competitors to replicate it. The success of Wal-Mart is attributed to the strong culture with even its workers being referred to as “Walmartian” which depicts its cultural uniqueness. The additional strong corporate structure is thought to have large magnitude that has sustained Wal-Mart entrepreneurial spirit in the past decades.
However, the corporate culture of Wal-Mart has over the years been questions by competitors, employees, and consumers. The company is widely blamed for underpaying of its employees as compared to other market players who are even much behind in profitability. Being the American largest employer and most profitable retail chain, it is ethically justified for the company to pay good salaries to its employees as compared to other rivals. This is hugely blamed on the corporate culture of the company. The company is also perceived as militant anti-union, which portrays the company as culturally insensitive. Additionally, it has been widely thought Wal-Mart practices and culture to be behind the killing of small local retailers due to extremely low pricing strategies by Wal-Mart. Various lawsuits against the company over the years over gender-based discrimination in term of hiring, promotion, and pay made people and the corporate world question its culture (Schein, 2007). Additionally, Wal-Mart overtime policies and use of sweatshop products has also been called its corporate culture into question at some points. The recent incident that called into question Wal-Mart culture was a case filed by California State Teachers’ Retirement System, one of the largest Wal-Mart shareholders. The case was related bribery cover-up and opportunistic stock sales revealed alleged misconduct by executives and board members. Furthermore, the company has been blamed for providing indecent health care as well as weak environmental policies (Wilbert, n.d.). This is attributed to the frugal corporate culture of Wal-Mart. On top of this, Wal-Mart culture is defined as a culture of control whereby there is tight management, which permits little deviations at all corporate levels. Efforts to have the organization change this authoritative culture has failed to materialize (Gondziola, 2005).
Despite the questioning of Wal-Mart culture, the company has remained hesitant to change. Few efforts are being given to address its authoritative nature of control. At the same time, the company remains anti-union in the United States. However, the company has rapidly changed in terms of gender discrimination in terms of hiring, promotion and pay. The number of women managers and members of the board has increased in the recent past as compared to the past decade. Wal-Mart has increased its commitment to increase economic commitment for women by supporting women’s employment, education, and business opportunities (Wal-Mart, 2012a). Moreover, a sign of culture change, Wal-Mart has allowed its employees in China to form or join worker unions, which shows a culture change in the future. At the same time, the company has strived to engage in and strengthen its transparency and social accountability. It has set an ambitious, long term social and environmental sustainability initiatives through the use of renewable green energy across its stores. It has initiated waste management strategies that its collaborators in that supplier and other environmental stakeholders are engaged.
The company has witnessed an increasing trend in operating income in the last four years. It recorded operating income of $22, 767, 000, $24,002, 000, $ 25,542,000, $26,558,000 in the years 2009, 2010, 2011, and 2012 respectively. The bottom line of this increase in operating income is sales devoted to cost of goods sold that has been increasing steadily. The company recorded net sales of $401,087,000 and $405,132,000 in the year 2009 and 2010 respectively. The total sales revenue then increased from $418,952,000 in the year 2011 to $443,854,000 in the years 2012. Total expense accrual also increased in the same period whereby a total of $77,546,000, $79,917,000, and $81,361,000 were spent in 2009, 2010, and 2011 respectively. The total of $ 85,265,000 was spent in the year 2012 (Wal-Mart, 2012b).
Wal-Mart’s inventories have increased from $34 013,000 to $40 714,000 from 2009 to 2012 (Wal-Mart, 2012b). The increase in inventory is strategic to the company’s goal of providing value to the customer. Managing such a big inventory is not easy, and it has necessitated the use of a point-of-sale system in which the system identifies all goods sold in real time and analyses all sales preparing for re-ordering of diminished products. It avoids overstocking that is expensive and also stock-out.
Wal-Mart has experienced a growth of net sales which has been accompanied by a growth of their operating expenses and a corresponding growth in their operating income. This combination of growth indicators implies that there is effective management of costs and leveraging of operating expense. Generally, companies aspire to achieve a faster rate of growth for net income than the rate of growth of operating expenses and a faster rate of growth of operating income than the rate of growth of net sales. This objective was met in 2011 where the operating expenses increased 1.7% more in fiscal year 2011 as compared to fiscal year 2010. Fiscal year 2011 saw a 3.4% more increase of net sales than in the year 2010. During the period of analysis, the operating expenses grew at a slower rate than the net sales. This positive indicator might have resulted from a number of factors such as increased labor productivity, implementation of an expense reducing incentive plan and strengthened and streamline operations due to organizational change. In 2010, the objective of growing operating expenses at a lower rate than the net sales was not met. This is attributed to higher expenses incurred in restructuring, higher health benefit costs and higher advertising costs.
The objective of growing the operating income at a faster rate that a net sale was met in the fiscal years 2011 and 2010. In this case, the operating income grew by 6.4% and 3.4% more than the net sales in the two respective years. Breaking down these results into segments, Wal-Mart US and Wal-Mart International achieved this objective but Sam’s Club did not. This is due to a $174 million charge incurred in the restructuring of this segment and closure of 10 clubs.
Wal-Mart has no enough liquid assets to satisfy its current obligations. However, its operating profits are adequate to service the debts. Its accounts receivable are worsening though they are typical to industry general trends. The total current assets for the company consist of cash and short term investment as well as accounts receivable. The company recorded a total of $48,949,000 and $48,032,000 total current assets in the years 2009 and 2010. The total current assets increased steadily to reach $51,893,000 and $54,975,000 in the years 2011 and 2012 respectively.
The Net property plant and equipment assets has also increased in the last four years with the company recording a total of $95,653,000, $102,307,000, $105,098,000, and $109,603,000 in the years 2009, 2010, 2011, and 2012 respectively. These assets are an indication of good financial standing as they support business growth and are a source of income (Wal-Mart, 2012c).
The total current liabilities figure was $55,390,000, $55,543,000, $58,603,000, and $62,300,000 in the years 2009, 2010, 2011, and 2012 respectively. The company long term debt for the company stood at $44,070,000 in the year 2012 and $40,692,000 in the years 2011. In the years 2009 and 2010, the long term debt of the company was $ 31,366,000 and $33,251,000 respectively.
From company Cash flow statements, it is observed that that the company net income has increased by over $2,000,000 in the last four years. However, the company has witnessed a drop in the net cash flow in the last four years where it recorded a net cash flow of $1,706,000 and $632 in the years 2009 and 2010 respectively. The net change in cash slumped further to recorded $-521,000 and $-845,000 in the years 2011 and 2012 respectively. From the cash flow statements Wal-Mart recorded net profit of $ 13,381,000 in the years 2009. In the years 2010 and 2011, the company recorded net income of $14,370,000 and $16,389,000 respectively before dropping to $15,699,000 as of January 31 2012. Cash from operation stood at $ 23,147,000, $26,249,000, $23,643,000, and $24,255,000 in the years 2009, 2010, 2011, and 2012 respectively. Cash flow from investing was $-10,742,000, 000 $-11,620,000, $-12,193,000, and $-16,609,000 in the years 2009, 2010, 2011, and 2012 respectively (Business Week, 2012 b). The general company liquidity and cash investment are revealed from financial ratio analysis below.
Jan 31, 2012
Jan 31, 2011
Jan 31, 2010
Jan 31, 2009
Debt to equity
Debt to capital
Source: Based on data from Annual Reports of Wal-Mart Stores Inc.
There are a number of ratios in Wal-Mart’s annual report that give a positive outlook on the company’s financial health. It is clear that it dominates over other firms in the industry. This section is going to look into these ratios and analyze their implications.
Current ratio: this ration compares the current assets with the current liabilities to give an indication of how many liabilities the company has, compared to its liabilities (Gupta 2011). Over the four year period, the current ratio has not differed very much and it has fluctuated around 0.87 to 0.89. This figure is generally strong taking into account the current ratio of Wal-Mart’s main competitors.
Quick ratio: this is defined as “the current assets minus inventory divided by the current liabilities and is used to measure the power of a company to honor short term obligations” (Gupta 2011). This has not changed much and just like the current ratio, it is well above that of Wal-Mart’s main competitors. The quick ratio and the current ratio both serve as a measure of liquidity. Wal-Mart is not as liquid as Costco or Family Dollar Stores Inc. This may be due to the fact that that they are investing in growth and expansion.
Inventory ratio: “this is the cost of sales divided by the average inventory” (Gupta 2011). The inventory ration for Wal-Mart has been trending at around 9.0-9.2 over the four year period. This is very good compared to the industry average of 8.5. Although other competitors have the same inventory rations, they have much lower sales. Wal-Mart can afford to have a big inventory because it has much higher sales.
Debt ratio: as indicated in the tables, Wal-Mart’s debt ratios have been improving over the four year period. The debt ratio is obtained by dividing the total debts by the company’s total assets. Wal-Mart’s debt ratio is the best in the retail industry so far.
Profit margin ratio: Basically, this ratio measures the return of sales for a company. This has been trending at around 3.4% over the four years. This is the average figure for the industry.
ROI: this is the return on investment and it is used as a measure of the efficiency of an investment. With a ROI of around 8% over the four years, Wal-Mart registered the highest investment efficiency in the industry. Their consistency has been remarkable, an indicator of good financial health.
ROE: this is the return on net worth of the return on stockholder’s equity. It gives a better picture of the company’s performance. The ROE has been maintained at an average of 24% over the period of analysis indicating that it has dependable profits.
P/E ratio: this is obtained by dividing the market price per share over the current earnings per share. The average P/E ratio over the period of analysis has been 14.1%, considerably higher than that of other companies in the industry. High P/E ratios are an indication that investors will expect a higher growth in earnings in the future than in companies with lower P/E ratios.
Wal-Mart has had a steady growth in the last few years and this has been attributed by the successive culture of customer satisfaction and competitive pricing for its goods and services. The management has been demonstrated a clear show of leadership that is geared towards remaining on top in the retail industry. The store mainly faces competition from Kmart and Meijer and thus these department stores do not offer much competition. Thus the store is able to operate with a competitive advantage over other retail stores in many markets. The management has applied supply chain management which is a more efficient strategy in delivery of services and goods to its customers in the countries it operates in. the supply chain management has been beneficial to the operations of the firm in that it has led to reduced inventory carrying cost and low product costs thus maximizing its revenue collection on the other hand with increased sales. The strategy has been fruitful in setting competitive prices for the goods and this has made Wal-Mart to be a global market player in the retail industry not only on the American market but in other countries too. This competitive advantage has helped Wal-Mart to focus on other markets that conquering more ground and creating a brand name in different countries. The firm has been able to focus on improving its efficiency by incorporating technology to its operations and incorporating innovations that are more efficient. The company has been very successive and thus its shares on the stock market are doing so well. Investors are led by the need to have returns for their investment and thus investing in Wal-Mart is a worthy investment. The organization offers a good working environment to workers and this has led to its interactive working relationship between management and the employees.
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