Business project

Wal-Mart Final Project Example

I. Introduction

Wal-Mart (WMT) is a variety store founded in 1945 by Sam Walton. Today, their empire consists of supercenters, neighborhood markets, and Sam’s Club. They have over 11,500 stores in 28 different countries with over 2.8 million employees. Performance is reported by U.S., International and Sam’s Club segments on its financial statements. Approximately 62% of sales are in the U.S., 26% of sales are attributed to their international markets, and 12% of sales are from Sam’s Club (Form 10-K 2016).

A. Mission / Vision

According to their website, their mission is to “save people money so they can live better.” When Sam Walton was awarded the Presidential Medal of Freedom in 1992 by George H.W. Bush, he described the company’s vision that still applies today. “If we work together, we’ll lower the cost of living for everyone. We’ll give the world an opportunity to see what it’s like to save and have a better life” (corporate.walmart.com).

B. Corporate Strategy

WMT’s corporate strategy is growth. In 2015, WMT invested over $11 billion globally in new retail outlets, remodeling existing retail outlets, building distribution centers, and new technology (Form 10-K 2016). Further, they are expanding vertically. In 2016 they purchased a dairy processing plant to provide products to its stores (Layne 2016).

C. Business Strategy

WMT has a cost leadership strategy. This strategy is defined by Wheelan et al. (2014) as a company with a lower-cost competitive strategy that aims at the broad mass market and requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization. WMT has broad mass market appeal and has developed one of the world’s most efficient organizations in order to offer customers everyday low prices.

II. Corporate Governance

A. Board of Directors

According to WMT’s 2016 Proxy Statement, their BOD currently consists of 12 members, which includes 8 independent and 4 inside directors. Last year, their BOD consisted of 15 members, of which 12 were independent and 3 were inside directors. The company has wisely chosen to decrease the number of directors on their board. Since BOD size has been shown to be negatively related to firm profitability, the smaller BOD should positively affect the company this year (Yermack 1996). However, this year the BOD replaced an independent director with an inside director, thus increasing the proportion of insiders from 20 to 25%. This could be problematic to corporate governance because having more insiders on the board may influence decisions. Diversity on the BOD is limited with only 3 women and one African-American man; the rest are white men. Because board diversity has been shown to increase firm value, this lack of diversity is detrimental to shareholders (Carter et al. 2003). Further, the average age of directors is 54 with an average tenure on the board of 7.6 years. It is noted that the tenure average calculation is being skewed because of one board member that has been on the BOD for 38 years. If we omit this outlier, then the average tenure drops to only 4.8 years. According to the management friendliness hypothesis, longer term directors are more likely to befriend top management at the detriment to shareholders, so shorter tenures of directors is preferred (Vafeas 2003). The Chairman and CEO positions are separated, which is considered good corporate governance. It is thought that a CEO who is also Chairman reduces BOD independence and thus its monitoring capability. However, a study by Daily and Dalton (1997) finds that a CEO who is also Chairman provides a unified focus and communicates strong leadership to the public. WMT has a good corporate governance system in place; however, changes can be me to improve it.

B. Primary Stakeholders

The primary stakeholders of WMT include its shareholders, customers, employees, and suppliers because each is directly affected by actions taken by WMT. Share prices increase or decrease based on business decisions by WMT; the investors that hold their shares will either gain wealth or lose money depending on the outcomes of these decisions. The price WMT charges its customers is a direct result of good or bad decisions; thus, a bad decision may increase costs which will then be passed on to its customers, allowing them to buy less. Employees may lose their jobs due to bad decisions and a decrease in sales. Suppliers are dependent on WMT to sell their goods. They may not be in business if WMT decides to reduce orders; moreover, if WMT is forced to charge higher prices to make up for a bad decision, there may be a decrease in sales of the supplier’s products as a result.

C. Secondary Stakeholders

These stakeholders are those that have an indirect interest in the company. The secondary stakeholders for WMT include non-governmental organizations and communities in which WMT is located. Non-governmental organizations, i.e. ACLU, PETA, and other environmental groups, may be vocal even though they do not have a financial stake in the company; women’s rights, animal rights, as well as pollution may be important to these groups. Any criticism of WMT by these groups may affect the company’s stock price which in turn will affect its primary stakeholders’ financial well-being. The communities where WMT is located are affected in several ways. They are reliant on the corporate and sales taxes collected by and from WMT; they are also vested in WMT for employing their residents and providing them with an affordable place to shop.

III. External Environment

A. STEEP Analysis

Sociocultural

Consumer preferences may negatively affect revenues. An increase in income may result in customers switching to more expensive alternatives. Millennials want value-oriented products, low price and one stop convenience; however, the buying power of the baby boom generation decreases with age (Soni 2016). Sales growth in the retail industry is expected to come disproportionately from middle and upper income households in the future. Retailers that do not keep these customers happy will see sales decrease (Howland 2016).

Technological

Cyberattacks and data breaches are a significant threat. Any release of customer information could result in damage to their brand and decreased sales. Disruption of information services on their website, mobile site, or in stores will result in a loss of sales. Amazon has developed “just walk out” technology, where customers pick up what they want at the store and are charged automatically based on what is in their basket (Reda 2017). If WMT does not adapt to new and changing technology, it may lose sales.

Environmental

Seasonal weather patterns may affect WMT. For example, a particularly warm winter will decrease sales of coats and other winter necessities. A drought may increase commodity prices, which will increase WMT’s cost of goods sold. Catastrophic events, such as hurricanes, tornadoes or earthquakes could negatively affect the company.

Economic

Economic conditions, such as a recession can affect the way customers shop as they search for the lowest price. Interest rate increases can affect the cost of capital to WMT and thus their growth opportunities. Interest rate increases also increase the consumer’s propensity to save and thus spend less. Currency exchange rate fluctuations can affect the company. For example, a strengthening dollar makes exports from the U.S. more expensive and will decrease revenues internationally. Inflation may have a negative effect on the company as prices increase; likewise, deflation (or lowering prices of oil) may have a negative effect on the company as gas prices decrease.

Political

Any unfavorable labor laws, minimum wage increases, or increases in taxes will hurt WMT’s bottom line. Lawsuits may be filed against the company for slip and falls, product liability, and labor law violations. If WMT loses any of these lawsuits, they could face significant dollar losses. An increase in regulations by any of the communities that WMT operates in will result in increased costs of doing business. Trade restrictions between the U.S. and other countries may negatively affect their international business.

B. Industry Analysis (Porter’s Five Forces)

Threat of New Entrants

High. Although it would be difficult for another firm to enter with a low cost, broad market strategy, it is easy for a small firm to enter competing on differentiation and target a niche market. WMT competes globally with all kinds of small firms in many different product markets.

Threat of Substitutes

High. The same products that WMT sells are available at many different retail outlets, including online. Thus, substitutes are readily available. However, the consumer may have to pay a higher price if they choose to purchase the product at a different retailer.

Bargaining Power of Suppliers

Low. Because of WMT’s size, they make large purchases from suppliers regularly. For many of its suppliers, WMT is their biggest customer and they would be negatively affected by losing the contract with WMT. Further, WMT has over 100,000 different suppliers throughout the world and as a result, can easily switch suppliers for a product if they choose.

Bargaining Power of Customers

Medium. WMT appeals to a broad spectrum of consumers and has a large number of customers looking for the lowest price. Thus, because revenues are not solely based on a few customers, they are not overly reliant on a few to continue in business. However, because switching costs are low, customers could take their dollars elsewhere in search for the lowest price. Thus, the threat is medium because even though WMT has a lot of customers, consumers can easily switch to another retailer in search of lower prices or convenience.

Competitive Rivalry

High. Competition in the retail industry is high. Substitutes are easily accessible and the threat of new entrants is high. There are a lot of competitors in the industry that compete on price, product differentiation and market.

IV. Internal Environment

A. Distinctive Competency

WMT’s distinctive competency is their ability to provide a broad assortment of quality merchandise at low prices to customers. Using an everyday low prices philosophy ensures customers that prices will not change due to promotions. WMT is able to implement this pricing strategy by controlling expenses, which allows them to pass cost savings to their customers. (Form 10-K 2016)

B. Business Model

According to Wheelen et al. (2014), a firm with a switchboard model acts as an intermediary to connect multiple sellers to multiple buyers. They have a wide range of products for sale to multiple customers with different needs. Thus, WMT is a great example of a firm that employs a switchboard model because they sell a wide range of products to many customers with different needs.

V. Analysis of Strategic Factors

Strengths

WMT has operations in 27 countries, which includes internet sales in 11 countries. This has allowed it to diversify sales all over the world. Thus, its sales worldwide should not be affected by one country’s recession. WMT has successfully digitally integrated internet sales and allows for store pickup, same day pick up, and online grocery sales. They continue to improve digital integration because e-commerce sales in the retail industry have grown 15% over the last two years (Carnette 2016). Their website has over 85 million unique visitors every month, which ultimately results in increased sales. Sales in the U.S., their largest segment, grew from 2014 to 2015; this was largely a result of an increase in the sales of apparel. Moreover, WMT closed 158 non-performing U.S. stores which helped increase their profit margins. WMT sells value focused, low cost products and is a place for one stop shopping. As noted in the STEEP analysis, this helps them attract the millennial demographic.

Moreover, WMT has over 100,000 different suppliers, so if one fails to meet expectations, they are easily replaceable. Suppliers are required to adhere to WMT’s standards of conduct to ensure that the supplier does not employ children or have poor working conditions for their workers. WMT is also engaging in joint ventures in order to enter the Chinese market and has developed a financial institution to provide credit for consumers in under-banked international markets. In 2016 they expanded vertically when they purchased a dairy processing plant. By buying a supplier, WMT may reduce costs even further. WMT is also working on improving employee relations. They have changed hiring, training, and scheduling systems to help reduce turnover. Over 50% of its employees received a raise in 2015. Further, with a capital investment of $11.5 billion, they are committed to future growth.

Weaknesses

The U.S. segment accounts for 62% of sales; this makes them subject to changes in the U.S. economy. In the U.S., about 56% of sales are from the grocery segment. However, according to Peterson (2015), they are losing market share because of low customer satisfaction. Sales in the entertainment segment, which includes cell phones, electronics, and movies, has also decreased. All products are shipped to the store from a distribution center or directly from a supplier. While WMT owns the majority of the distribution centers, some of them are owned and operated by a third party. This could lead to reduced or incorrect inventory being shipped to their stores, and ultimately lost sales. They also use third parties to provide data security, content delivery and back office support. A problem with any of these third party providers can result in a loss of consumer confidence in WMT and lower sales. WMT suppliers are required to follow standards of conduct; however, on the 10-K it says that their suppliers are only required to follow local labor and worker safety laws. Since some foreign countries have lax labor and worker safety laws, bad publicity from an accident or other incident may affect sales due to a loss in brand confidence. Further, WMT may have problems expanding internationally due to differences in culture, labor laws, high taxes, and other risks. For example, WMT expanded into the market in Brazil by buying two Brazilian retailers; however, they have had to close the majority of them because of poor locations, inefficient operations, labor troubles and uncompetitive prices (Haynes and Layne 2016).

Although there is still growth from website sales, the percent of growth each quarter has fallen over the last year (Layne 2016). Therefore, in an effort to compete with Amazon, WMT purchased jet.com, an aggressive start up e-commerce retailer. However, the cultures of the two companies are very different and may pose a challenge when integrating (Carnette 2016). With an array of 8 million different products for sale on their website, too many choices may paralyze consumers.

Another weakness of WMT is its purchase of the dairy processing plant. This is not their core business and they do not have the necessary knowledge to run this plant every day. WMT may have directed important resources to the wrong business venture.

There are also several financial weaknesses. First, WMT pays a high tax rate of 30%; international sales are taxed at that country’s tax rate and then in the U.S. when profits are repatriated. With the increase in wages over the last year, WMT expenses have increased and reduced profit. From their 10-K, WMT says their profitability was down this year because of the fall in gas prices (a high percentage of sales from Sam’s Clubs comes from gasoline) and currency fluctuations. The strong U.S. dollar has resulted in fewer dollars being repatriated back to the company after conversion. Finally, WMT has only catastrophic insurance and they self-insure for weather and other disasters. Any big disaster may cost the company a lot of money.

Opportunities

WMT needs to expand online sales, as this market continues to grow. Their purchase of jet.com was a smart move to accomplish this. They can also expand international sales, by building new stores, acquiring other retailers or developing strategic alliances. Different cultures and holidays throughout the world will help reduce portfolio risk and seasonal sales. They can expand international growth even more by bringing their consumer credit financial institution to more countries that are under-banked. Microfinancing has become a fast growing industry in third world countries, and WMT has the opportunity to increase sales and provide consumers with needed products. WMT should also develop a “just walk out” technology similar to Amazon. The customers will have a wait free experience, and the store will need fewer employees, which will reduce expenses. WMT could continue to grow vertically; if they purchased some of their suppliers, they could control costs even more.

Threats

The retail industry is very competitive and WMT’s competitors are both niche and broad market stores. Economic, business and legal environments may reduce their ability to grow and expand international markets. Consumer and labor lawsuits not ruled in WMT’s favor may reduce profits. Bad publicity from a third party service provider (i.e. a data breach) or a supplier (i.e. labor) could cause consumer confidence and thus sales to decrease. Political instability in the U.S. or another country may cause losses if tax rates are increased or if there is a change in business laws. A strong U.S. dollar could reduce international sales and repatriated profits. Consumers could lose confidence in WMT if there is a food safety issue. Another threat is that they may not be able to grow because they are not able to acquire another company or new store sites, or even build alliances within other countries. Changes in environmental laws may increase costs and decrease profits.

VI. Financial Analysis

The following are 2016 financial ratios for WMT and Target (TGT), its largest competitor. Data was obtained on Morningstar.com.

Inventory Turnover
	2014	2015	2016
WMT	8.08	8.11	8.06
TGT	6.14	5.84	5.98

Inventory turnover shows how many times the company is turning over its inventory per year. WMT is turning over its inventory more than TGT. TGT has more money tied up in inventory.

Days Sales Outstanding
	2014	2015	2016
WMT	5.15	5.06	4.69
TGT	1.40	2.63	2.28

TGT has lower receivables. If WMT could collect money faster, they could use the freed up cash to reduce debt or renovate stores.

Days Inventory
	2014	2015	2016
WMT	45.19	44.99	45.30
TGT	59.46	62.58	61.04

TGT has a much higher days in inventory. WMT has less money tied up in inventory.

Days Payables
	2014	2015	2016
WMT	38.48	37.90	38.88
TGT	52.58	54.96	53.27

TGT pays its suppliers slower than WMT. Suppliers get paid faster from WMT.

Fixed Asset Turnover
	2014	2015	2016
WMT	4.06	4.14	4.14
TGT	2.34	2.53	2.88

This ratio shows how efficiently the company is using its fixed assets. For every dollar of fixed assets, WMT makes about $4 in sales; this is higher than TGT and signifies better asset utilization. However, this could also signal that WMT has older assets that may need replacing soon.

Total Asset Turnover
	2014	2015	2016
WMT	2.34	2.38	2.39
TGT	1.57	1.69	1.81

This ratio shows how much sales the company makes off of every dollar spent on assets. This ratio is different from the FATO because it uses the Total Assets figure in the calculation. Again, WMT has a higher TATO than TGT, which signals better asset utilization. This is a result of TGT having more current assets than WMT, specifically more inventory.

Gross Margin
	2014	2015	2016
WMT	24.82%	24.83%	25.13%
TGT	29.53%	29.39%	29.53%

TGT’s gross margin is about 4% higher than WMT. This is a direct result of TGT being able to charge higher prices for a perceived better quality product and better customer experience.

Operating Margin
	2014	2015	2016
WMT	5.64%	5.59%	5.00%
TGT	5.83%	6.25%	6.65%

TGT’s operating margin is higher than WMT because their selling, general and administrative expenses are lower as a percentage of revenue than WMT.

Net Profit Margin
	2014	2015	2016
WMT	3.36%	3.37%	3.05%
TGT	2.72%	-2.25%	4.56%

WMT’s net profit margin is higher than TGT. After reviewing each company’s income statements, we can see that WMT paid a lower income tax rate than TGT for 2014 and 2015. However, in 2016, TGT paid a lower income tax rate which resulted in a higher net profit margin than WMT.

ROA
	2014	2015	2016
WMT	7.86	8.01	7.29
TGT	4.25	-3.81	8.24

WMT is making a lot more money per dollar of assets than TGT, primarily because of lower selling, general and administrative expenses, as well as their lower tax rate in 2014 and 2015.

ROE
	2014	2015	2016
WMT	21.00	20.76	18.15
TGT	12.02	-10.82	24.95

WMT’s return on equity is much higher for 2014 and 2015. This is a result of a combination of factors. Using the Dupont equation for ROE, we can see that WMT's higher net profit margin and better asset utilization, are contributing factors for their higher ROE. TGT’s ROE is lower because they had a lower profit margin and lower asset utilization than WMT in 2014 and 2015. However, TGT’s ROE is higher than WMT in 2016 as a result of increased net profit due to lower taxes, and more debt. As expected, more debt means more risk, which means investors will require a higher ROE.

Financial Leverage (Equity Multiplier)
	2014	2015	2016
WMT	2.69	2.50	2.48
TGT	2.74	2.96	3.11

Defined as total assets divided by total equity. The higher the ratio, the more debt is used to pay for the company’s assets. We can see that TGT’s leverage has increased every year and is higher than WMT.

From this data we can see that WMT is underperforming in return on assets and return on equity in 2016. Further, WMT is has lower profitability in 2016, including a lower gross margin, lower operating margin and lower net profit margin. Low profit margins indicate that WMT’s costs are increasing. Since it cannot pass its increased costs on to its customers and still follow its mission, their future may be in jeopardy. Moreover, if it does not improve its financial performance shareholders may sell their shares, causing their stock price to fall.

Although days sales outstanding is only 4.69 days, because they have over $482 billion in sales, this means that they have over $6 billion of cash tied up in accounts receivable. If they do a better job of collecting on receivables, they could free up some cash and possibly give them more cash to invest in the business. WMT’s days in inventory is lower than TGT’s which is indicative of good inventory control. Their days of payables is lower than TGT. This means that WMT is paying their suppliers faster. This should help WMT to negotiate better contracts and prices with its suppliers because they are getting paid for their products quicker.

The inventory turnover ratio for WMT is 8x per year, while TGT’s is only 6x per year. This means that WMT is selling its inventory much quicker than TGT. Finally, WMT’s fixed asset turnover ratio is higher than TGT’s. This could be indicative that WMT uses their assets more efficiently and has less wasted space. On the other hand, this could signal that WMT has older assets that are in need of replacing or remodeling. Although some of WMT’s ratios are better than their largest competitor TGT, ultimately their profitability ratios are not. Costs have increased and prices have remained the same. In this scenario, customers are getting low prices, but at the expense of the shareholders. This makes WMT in worse financial health than TGT in 2016.

VII. Future Suggestions

A. What can your firm do to improve performance?

WMT needs to reevaluate supplier contracts and stop their growth initiative. They should renegotiate all third party provider contracts. They need to close non-performing stores. Further they should determine whether the company has reduced turnover and increased customer satisfaction with its wage increases. If not, then I would renegotiate wages with all employees, including management. All of these actions should reduce costs and increase profit margins.

B. Does your firm need to change its directional strategy to realize its vision?

Yes. WMT’s current strategy is growth; however, it needs to retrench. Before it can grow, it needs to make its current business more profitable. If it continues on its current path of increasing costs, its distinctive competency is in jeopardy.

C. If you were CEO, what are some of the first changes you would make?

Assuming all of the retrenchment action items are done, WMT can then continue with its growth strategy. This includes building new stores, acquiring other companies (including other retailers and suppliers), and developing more strategic alliances and joint ventures worldwide.

VIII. References

Carnette, Jamal. “There is a Hidden Risk is Wal-Mart’s Acquisition of Jet.com.” The Motley Fool, 11 August 2016. Web January 2017.

Carter, D. A., Simkins, B. J. and Simpson, W. G. (2003), Corporate Governance, Board Diversity, and Firm Value. Financial Review, 38: 33–53. 

Daily, Catherine and Dan Dalton (1997), CEO and Board Chair Roles Held Jointly or Separately: Much Ado about Nothing? The Academy of Management Executive, 11: 11-20.

Form 10-K. Wal-Mart Stores, Inc. www.sec.gov. Web January 2017.

Haynes, Brad and Nathan Layne. “Insight – Lost in Translation: Wal-Mart Stumbles Hard in Brazil.” Reuters, 17 February 2016. Web January 2017.

Howland, Daphne. “Who is the New Wal-Mart Customer?” Retail Dive, 26 January 2016. Web January 2017.

Layne, Nathan. “Wal-Mart Jumps Into Milk Processing, Hits Dean Foods’ Stock.” Reuters, 22 March 2016. Web January 2017.

Our History. http://corporate.walmart.com/our-story/our-history. Web January 2017.

Peterson, Hayley. “Wal-Mart’s Core Business is Getting Crushed.” Business Insider, 22 September 2015. Web January 2017.

Reda, Susan. “Stores Trends: January 2017.” National Retail Federation, 4 January 2017. Web January 2017.

Soni, Phalguni. “What’s Shaping Consumer Trends at Walmart Stores?” Market Realist, 18 March 2016. Web January 2017.

Vafeas, N. (2003), Length of Board Tenure and Outside Director Independence. Journal of Business Finance & Accounting, 30: 1043–1064.

Wheelen, T. et. al. (2014) Strategic Management and Business Policy: Globalization Innovation and Sustainability. Prentice Hall, 14th Edition.

Yermack, David (1996), Higher Market Valuation of Companies with Small Board of Directors. Journal of Financial Economics, 40: 185-211.