Harold F. Roberts Walmart: Strategy to Remain King of Retail Professor Parthiban David Kogod School of Business University Honors in Business Administration Spring 2014 Abstract The purpose of this strategic analysis is to provide Walmart with recommendations for future success. To develop recommendations, an analysis of the company’s current position in the industry was completed. Researching the impacts of key players on the retail industry as well as a comparison to competitors determines the type of strategy a company should engage in. Results of the study found that Walmart can achieve the greatest returns for the least risk by raising the minimum wage of its associates. This strategy would help Walmart better align with its mission to save people money and help them live better. The significance of this study is that it can be replicated for any company or business in need of strategic changes. The analytical framework is applicable to any business and delivers meaningful results based on research and evidence rather than arbitrary ideas. I. Company Overview Walmart Stores, Inc. was ranked number one in sales in the Fortune 500 for fiscal year 2013 (CNN, 2013). Recording revenues of $469 billion, it surpassed Exxon Mobil by nearly $20 billion. As the world’s largest retailer, Walmart’s mission statement is to “save people money so they can live better” (Walmart, 2014). To accomplish this, Walmart has developed methods to save itself money and pass the savings onto consumers in the form of lower prices. These cost-saving techniques have put the company under scrutiny in recent years and could require shifts in strategy to succeed in the future. 2 Source: Walmart.com A) Founding and Growth Sam Walton started the company in 1962 when he opened the First Walmart Discount City in Arkansas. Coincidentally, the first Target and Kmart were opened in the same year. The three would all grow to become some of the most popular retail giants. Walmart went public in 1970 with only 38 locations nationwide. By 1979, the company became the quickest ever to reach $1 billion in sales. Then in 1983, Sam Walton opened the wholesale warehouse Sam’s Club, which would become Costco’s main competitor. With Walmart as the primary source of sales, Walton continued the growth by opening Walmart Supercenters in 1988. Combining grocery stores and general merchandise allowed consumers to do all their shopping in one place. Walmart went international in 1991 and ten years later became the largest food retailer in the United States despite being known as a consumer goods company. With over 4,000 stores in the United States and another 6,000 in 22 countries around the world, Walmart is now the world’s largest private employer (Frontline, 2004). 3 B) Board and Management Today, Sam Walton’s son Robson is Chairman of the company while Doug McMillon has recently replaced Mike Duke as CEO. The company’s sixteen person board of directors features former CEO’s of Walmart as well as Marissa Mayer, the CEO of Yahoo!, and former Coca-Cola CEO Douglas Daft (Walmart.com, 2014). With a diverse group of leaders, Walmart is able to develop strategies that incorporate a variety of opinions. C) Current Strategy Walmart’s main goal has always been to offer consumers everyday low prices. The company offers a wide range of products including clothing, hardware tools, electronics, furniture, automotive goods, produce, and toys. Some locations also provide services such as auto shops, pharmacies, check cashing, cell phone services, and tax preparation services. According to their 2014 annual report, “Customers choose Walmart for our broad assortment including national brands and locally relevant merchandise, at everyday low prices (EDLP). It’s our winning formula and results in continued market share gains in key categories” (Walmart, 2014). Therefore, low prices are key to Walmart’s strategy as illustrated in their mission statement. In addition to low prices, Walmart also looks to expand opportunities for employees. In his letter to shareholders this year, McMillon wrote, “We’ll continue to invest in training and development because building the best team in retail is central to our strategy” (Walmart, 2014). Unfortunately, 4 employee relations have been a major source of criticism for Walmart. This makes treatment of employees one of the company’s key issues to consider as it formulates future strategy. II. Key Issues and Potential Recommendations 1. Limit predatory pricing and squeezing suppliers to avoid lawsuits. Walmart is able to demand the lowest prices from its suppliers because of the sheer volume of sales potential the 10,000 stores provide. Walmart gets cheaper goods from suppliers and can then sell the products cheaper to consumers. Even though margins on individual items are low, profits accumulate from sales quantities. In fact, Walmart had the worst gross profit margin among its peers in 2013 at only 24.5% (Bryant, 2014). Target, Big Lots, and Dollar General all had higher margins yet Walmart remains number one in retail due to its global sales volume. However, such practices have led to lawsuits against Walmart because the company can offer prices low enough to drive competitors and even suppliers out of business. Walmart needs to shed the monopolistic reputation to grow in the future. 2. Identify ways to improve relations with employees and labor unions. Aside from demanding low prices from suppliers, another way Walmart is able to maintain low prices is by keeping employee wages down. Although, minimum wage and labor laws can prevent Walmart from paying the low wages necessary for competitive pricing. These low wages and limited benefits have elicited numerous labor strikes against the company as well as bad 5 press. To succeed, Walmart needs to address this issue and gain the goodwill of employees and their unions. With 2.1 million global associates in a retail environment where associates are the face of the company, employee satisfaction is crucial to success. 3. Increase standards for global suppliers and avoid corrupt practices. In addition to low wages for in-store associates, Walmart has been accused of failing to supervise the working conditions of its foreign suppliers. Sweatshop conditions have been reported in factories in China and Bangladesh. Walmart has already begun to address the issue by signing a safety agreement with other U.S. retailers to improve Bangladesh factories. The agreement was signed in 2013 after fires and building collapses killed hundreds of workers in 2012 (Fox, 2013). However, the company still faces pressure to act as a role model for all global employers. Corruption charges in Mexico have further damaged Walmart’s reputation on international affairs. After paying millions in bribes in order to build stores in Mexico bypassing government regulation, Walmart was exposed in 2012 and is still under investigation from federal agencies as well as conducting internal probes (Barstow, 2012). The media backlash caused the stock price to fall and a fine could cost up to 1-2% of annual sales, or roughly $5 billion. Walmart must poise itself as a fair employer and ethical company to overcome this ongoing problem. Competitive Advantage Walmart’s competitive advantage has always been its low prices on a wide variety of goods all under one roof. According to Steve Denning of Forbes, “Wal-Mart decided many years ago that its competitive advantage is low price and variety, so now it can ‘dare to be bad’ in other areas” 6 (Denning, 2012). Denning continues by mentioning Walmart does not offer superior customer service because its focus is on low priced products. Customer service would increase costs and take away from its position as a low cost leader in the retail industry. Economic Logic and Scope Walmart is able to make money because it offers the lowest prices in the retail industry. Consumers are familiar with the brand and can purchase a variety of goods in one visit. The company engages in a variety of activities such as groceries, consumer products, pharmacy, and auto repair. However, Walmart has considered high-end merchandise with large profit margins red space and has elected to sell low priced, average quality products. III. External Analysis A) Key Players 1) Buyers Serving over 140 million customers every week, Walmart’s main source of revenue is the consumers going into its thousands of stores to purchase goods. According to a 2012 demographic study of Walmart shoppers, about 56% of customers are female. At 44%, Walmart has more male shoppers than Kmart, Kohl’s, and Target. Furthermore a majority, 52%, of Walmart shoppers are married. 7 Interestingly, customer ages are almost evenly dispersed but the range between 45-54 is the highest at 20% of shoppers. As expected in a low cost retailer, 80% of shoppers have an income of less than $75,000 per year (Carmichael, 2012). These shoppers seek inexpensive products in a convenient location. Buyers are affected by prices and the proximity to stores. In addition, customers shop at Walmart more during recession due to the lower prices. During the most recent crisis, sales increased at almost 8% (LaMotta, 2009). Walmart’s strong brand equity and consistent store layout also allows consumers to feel comfortable in any Walmart. Although Walmart offers the lowest retail prices in brick and mortar, e-commerce has begun to erode at profits. For technologically savvy consumers, prices are sometimes cheaper online in places such as Amazon. To combat this, Walmart has invested in driving online sales. In fact, Walmart’s online sales increased 30% during 2013 (Davis, 2014). 2) Suppliers Walmart’s suppliers who manufacture the goods sold in stores are largely at the mercy of the retail giant. According to Thomas Friedman of the New York Times, Walmart operates as a monopsony where it is the main buyer interacting with many suppliers.