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Harold F. Roberts

Walmart: Strategy to Remain King of

Professor Parthiban David

Kogod School of

University Honors in Business Administration

Spring 2014

Abstract

The purpose of this strategic analysis is to provide 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 started the company in 1962 when he opened the First Walmart Discount City in

Arkansas. Coincidentally, the first Target and 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, 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 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 (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, , check cashing, cell phone services, and tax preparation services.

According to their 2014 annual report, “Customers choose Walmart for our broad assortment including national 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 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 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 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 and can purchase a variety of goods in one visit. The company engages in a variety of activities such as groceries, consumer products, , 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 . 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 , Walmart operates as a monopsony where it is the main buyer interacting with many suppliers. This bully pulpit allows

Walmart to demand low prices from suppliers since it can simply switch to another manufacturer.

The suppliers, conversely, are obligated to cede to Walmart in order to get the massive sales volume that comes with being on Walmart shelves. Friedman argues, “Walmart's immense buying power enables the company to drive down prices and impose efficiencies on the economy” (Lynn, 2013).

8 In this case, Walmart is indirectly saving suppliers money by forcing them to cut costs. However, with lower margins the suppliers health can be put at risk. For example, Walmart provided 30% of Vlasic Pickles business but forced Vlasic’s profit margins down by 25%. Of Walmart’s top ten suppliers in 1994, four sought bankruptcy protection by 2006 (Traub, 2012). Therefore, suppliers are impacted by Walmart’s low-cost strategy and must adapt their own strategy to do business with Walmart.

3) Competitors

Walmart’s major competitors include Target, Kmart, and . However, Walmart Stores, Inc. has a market capitalization of around $254 billion while Costco, the next largest has a cap of only $51 billion and Target is $39 billion (Jones, 2013). Clearly Walmart trumps these stores and is able to set the tone for the industry. To compete, Target has followed Walmart’s lead and now offers groceries. This defensive strategy helped Target increase profits in recent years but it still lags behind Walmart.

4) Entrants

There are few entrants in the retail industry due to the high barriers to entry. Retail stores cost millions to establish and Walmart, Costco, and Target already have economies of scale in place

(Lerman, 2014). Walmart’s efficient supply chain and global reach lead manufacturers to work with Walmart rather than other smaller retailers.

9 5) Substitutes

Instead of Walmart, consumers may elect to shop at Costco or Target. All of these retailers strive for low prices, but Walmart still offers the lowest prices consistently. A substitute could also be small mom and pop shops that have higher prices but provide stimulus to the local economy rather than going back to Walmart’s headquarters.

6) Complements

Small shops could also be considered a complement to Walmart. Consumers may elect to purchase some goods at Walmart and support local with other types of purchases.

B) Political, Economic, Social, and Technological Impacts

In the retail industry, politics are important because Walmart is affected by changes in regulations and corporate taxes. Furthermore, there has been controversy over minimum wage and Walmart depends on low wages to provide inexpensive products. For example, D.C. lawmakers passed a law raising the minimum wage for large retailers such as Walmart from

$8.25 to $12.50 per hour. This caused Walmart to reconsider opening stores since it would impact consumer prices and its profit margins (France-Presse, 2013). Mayor Gray vetoed the bill so Walmart went ahead opening stores in D.C.

Societal debate over employee benefits and minimum wages has put Walmart in the spotlight as it is the world’s largest private employer. The company is forced to choose between public goodwill and cutting already slim margins. Fortunately, technological advancements in manufacturing and supply chain management have allowed Walmart and its suppliers to cut

10 costs. As additional processes become automated in the future, Walmart can become even more cost efficient.

IV. Internal Analysis

Walmart Target Target Customers • Low and middle class • Attracts higher income • 20% of customers on food consumers stamps • 4.4% make over $150,000/year (Wilson, 2014) Inbound Logistics • Sustainability standards for • Similar to Walmart but on a suppliers (O"Reilly, 2013) smaller scale • Increased management of inbound freight Operations • 12,000 locations globally • US, , and • Divisions in , • Only 2,000 stores total , Canada, and UK Marketing • “The Real America” • Bullseye dog mascot campaign • Similar commercials to Walmart R&D • E-commerce • Marona and Market Pantry • Reducing transport costs brands • Great value brand • Similar to Walmart Management • New CEO Mcmillon led • CEO Steinhafel worked up Walmart International then from trainee. CEO since Sam’s Club 2008 Customer Service • Limited customer service • Better customer service than Walmart, still limited IT • Customer data analytics • Same as Walmart • Supply Chain Management HR/Infrastructure • Limited employee benefits • Slightly better benefits than • Network of stores Walmart Procurement • Suppliers submit application • Vendors register to be and must meet minimum chosen standards Expansion • Opening 300 small • Following Walmart into “Neighborhood Market” Canada and Mexico stores (Gustafson, 2014) • More international stores

11 V. Business Models

Walmart’s Red Ocean Strategy

Walmart mainly operates in a red ocean where it competes for market share with similar competitors such as Target, Kmart, and Costco. According to Michael Porter, companies “have to make a strategic choice between differentiation by offering the customers something special for which they are willing to pay a premium price, or having a lower cost structure as exemplified by Walmart” (Koontz, 2010). Maintaining the lowest prices in retail has allowed

Walmart to excel in the red ocean strategy.

Since there are few uncontested markets in the big box retail industry, Walmart’s size and clout facilitate further red ocean strategies. Its competitor Costco is known for high wages and employee benefits while Walmart is considered the laggard in labor issues. Entering of employee goodwill is a potential ocean for Walmart to battle with Costco.

VI. Quantitative Analysis

When Walmart went public in 1970, stock prices were $16.50 per share. Today, after a stock price boom in the late 1990s and again after the 2008 financial crisis, the price hovers around

$80 per share. However, Walmart investors do not only achieve yields on capital gains. The company also offers a high-yield dividend and has increased its annual dividend every year since it began paying them in 1974.

12 The chart below shows the stock price over the past five years:

Source: TD Ameritrade

As seen in the graph, the stock price has steadily risen with few drastic changes. This is partly due to Walmart’s low beta and strong earnings growth in recent years. The dividends are also visible as they are regularly paid and increasing annually. According to Chuck Carnevale, an analyst at Forbes, “At its current valuation, Wal-Mart appears to be the perfect dividend growth stock that it deserves to be” (Carnevale, 2013).

With a current dividend yield of 2.52%, Walmart is poised to continue increasing the dividend for the known future. The following chart illustrates rising sales and in the past five years:

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Source: Hoover’s

Sales increased 4.97% from 2012 to 2013 while Net Income increased 8.28% in the same period, meaning Walmart is not only increasing sales but its profit margin as well. Any strategy shifts should attempt to expedite the rise in net income rather than hinder it. As Net Income rises, the company has more Retained Earnings to pay out as dividends to investors. Furthermore,

Walmart has a beta of around .37 which makes it significantly less volatile than the market as a whole.

According to Hoover’s, the business research company, Walmart stock is owned by about 85% of institutions such as pensions and mutual funds (Biesada, 2013). This means that portfolio managers consider the stock a positive asset in a portfolio. Other interesting financial ratios for

Walmart include its ROE of 21% and Debt to Equity of 70%. Both of these are above the industry average and Walmart’s Return on Equity is the highest in the Food & Staples Retailing industry.

14 Since Walmart is widely held and such a large company, there are numerous analyst reports advising whether to buy, sell, or hold the stock. One report by The Street considers Walmart stock a buy. It claims, “The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, growth in earnings per share, increase in net income and increase in stock price during the past year” (The Street Ratings, 2013). These ratios and analysis illustrate the dominant position Walmart holds in its industry.

VII. Strategic Recommendation

With its strong financial position and overwhelming market share, Walmart is poised to make strategic changes. The company can afford to take risks to become even more successful in the future. The following recommendation is regarded as the most feasible to implement and generate the greatest return:

Raise the minimum wage of associates to make them ineligible for food stamps.

Many argue that if Walmart were to raise the minimum wage of its employees the company would no longer be able to stay true to its mission of saving people money so they can live better.

This argument contends that the increase in costs would force Walmart to raise prices by so much that they would lose their competitive advantage. Peter Schiff, CEO of Euro Pacific

Capital, claims, “If they actually tried to raise all the hourly pay of the low-skill workers to $15 an hour, Wal-Mart would lose 80% of its profits. They would have to get rid of their dividend, the stock would crash, and the whole business would fall apart” (Schiff, 2013). To avoid losing profits, Walmart would instead have to raise prices to offset the cost of wages.

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Research done by UC Berkeley shows that Walmart can raise prices and remain the lowest priced retailer. Nearly 20% of Walmart employees are on food stamps and earn on average

$8.81/hour. Furthermore, Walmart takes in 18% of all food stamps in the United States, or about

$13 billion every year. There exists a feedback loop where Walmart employees on taxpayer funded food stamps shop at Walmart and contribute to Walmart profits. Walmart uses these profits to pay employees too little and they must receive food stamps.

However, statisticians at UC Berkeley determined that raising the wage of a cashier to

$13.63/hour up from the $8.81 would make them ineligible for food stamps. At a cost of $4.8 billion per year, Walmart would need to raise prices by 1.4%. This would make a $20 shirt cost

$20.28 or a $.68 box of Macaroni and Cheese cost $.69, a negligible amount for consumers.

If Walmart were to implement this change, it could see competitive response from Target or

Kmart. Costco is already a leader in employee treatment but Walmart does not need to surpass

Costco’s wages to create value. At its core, Walmart is a retailer that excels at delivering the lowest prices. Raising prices 1.4% would still keep prices less than Target and Costco without impacting profits.

To roll out the wage increase, Walmart should issue a press release claiming it will raise employee wages to above the poverty line. Since the company wants to help people live better, it must start with employees who interact with customers everyday. Public goodwill is the ultimate return on this strategy. Walmart must remove itself from the spotlight on poor employee

16 treatment. Labor strikes lessen brand equity and the reputation of a company looking to improve lives.

There are potential risks to this strategy. Aside from research costs to determine the optimal wage for each state based on poverty level and cost of living, Walmart could see a decrease in sales. If prices seem significantly more to consumers, they could switch to Target or other competitors. Fortunately, Walmart caters to a different audience than Target with most shoppers making less than $75,000. As long as prices are low these consumers will continue to choose

Walmart.

A) Diagnostic Controls

Once the plan is implemented and minimum wages are raised, Walmart can monitor the changes with levers of control. Walmart can first measure any increase or decrease in sales for the quarters following the raise. Ideally, consumers who have avoided Walmart due to its poor treatment of employees will shift to shopping at the largest retailer. Diagnostic controls such as customer satisfaction ratings and employee turnover rates can be measured as well. Higher pay will attract more qualified employees and could lead to more efficient checkouts or convert more sales through the store. With the price increases, Walmart will need to closely monitor its profits to ensure profits do not decrease.

B) Belief Systems

When Sam Walton founded Walmart, he put in place a code of conduct to establish a Walmart culture. The company’s purpose, according to Walton, is, “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

17 have a better life” (Farfan, 2014). Since associates are the face of the company when customers interact, it is important for employees to be satisfied. The three values of Walmart are: Respect for the Individual, Service to our Customers, and Striving for Excellence. This strategy aligns with these values because for Walmart to respect its consumers it must first respect its employees. Satisfied employees can better serve customers and deliver excellent service. By raising wages, Walmart will set an example in the industry by helping its own employees to live better.

C) Boundaries

In regard to business conduct, Walmart has a statement of ethics that all employees must follow.

The statement of ethics binds all associates, from cashiers to the board of directors, and violation is grounds for termination. If employees are earning a higher wage, they are likely to adhere to the standards at risk of losing their job. Higher wages could also attract more honest and trustworthy employees.

Walmart has determined that green space for the company includes selling general merchandise, groceries, and the other services such as the pharmacy and auto repair. This business model is replicated around the world so Walmart has already deemed international stores green space. By aggregating global stores under divisions in South America, Canada, and Europe, Walmart can adapt to cultural differences while maintaining a consistent brand image. However, Walmart’s model has not succeeded in every country. In 2006, Walmart was forced to pull out of Germany due to poor sales. The company found that, “its formula for success — low prices, zealous

18 inventory control and a large array of merchandise — did not translate to markets with their own discount chains and shoppers with different habits” (Landler, 2006).

Therefore Germany, as well as South Korea and , have become red space. Walmart cannot compete with local retailers in these countries and has devoted resources to the countries that accept the brand and are willing to shop at a Walmart. Another area of red space for Walmart is luxury products. Walmart sells products of high quality and low quality but has avoided products a consumer would purchase at upscale department stores such as or Bloomingdale’s.

Clothing at these stores is more expensive due to brand name or higher quality material while

Walmart sells goods that simply achieve their purpose.

Raising the wage of employees is consistent with Walmart’s boundaries. As long as prices remain lower than competitors and profits are unchanged, the increased wages will not affect the business model and will most likely strengthen the code of conduct associates follow.

D) Interactive Controls

As a global company with 12,000 stores interactive controls are difficult to implement. However, since the wage increases will be initially confined to the United States the strategy implications can be monitored. Data must be collected on consumer behavior and how employees will respond to no longer needing food stamps. Walmart management in the United States must discuss whether the increase in goodwill is worth small rises in price. The company has achieved success by keeping wages low and squeezing suppliers, so shifting from this strategy could raise concerns.

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There are a variety of uncertainties in this type of strategic decision because once the raises are in place they cannot easily be removed. If the 1% price raise deters customers, Walmart will be forced to either cut salaries or lower prices thereby diminishing profits. A profit decline would spell disaster for investors and the stock price could decline all due to a show of good faith by raising wages. To monitor changes, Walmart must review any quarterly changes in sales and the

Public Relations team needs to keep up on media coverage. Closely observing results is the key to making this strategy implementation successful.

XIII. Happy Employees Make Happy Customers

Walmart employs approximately 1% of all Americans (Walmart, 2014). With 1.4 million associates in the United States alone, the company has one of the most commanding positions as an employer. However, 20% of these employees are on food stamps and struggling to make ends meet. This statistic has put the company in the sights of labor unions and activists across the country. Some consumers may even avoid Walmart altogether due to its treatment of employees.

Raising the wages of these employees is a feasible solution to this problem. As an established company and the king of retail around the world, Walmart does not need to engage in short-term tactical strategy. Instead, the company must focus on long-term strategic options that will help maintain its position as leader and fend off competitors chipping away at market share.

Although a defensive strategy rather than offensive, raising wages will help Walmart compete on an employee satisfaction level with Costco. Walmart, along with Sam’s Club, can attract the

20 talent that has gravitated towards Costco due to their high wages and superior benefits.

According to Rick Ungar of Forbes, “With those on site being paid a wage so low that it is difficult to expect much in the way of pride or motivation—Wal-Mart merchandise remains stacked on pallets in the warehouse rather than making it to the floor where customers can find the products they want” (Ungar, 2013). A higher wage will likely motivate employees and give

Walmart more productivity. Currently, Costco’s sales per employee are double what Sam’s Club is getting despite Walmart cutting employees by almost 2%. Therefore, there exists a disconnect between the company’s vision and its treatment of employees.

All strategic decisions entail an assumption of risk to achieve potential returns. As of February

2014, Walmart is merely “looking” at supporting an increase in the federal minimum wage

(Dudley, 2014). As an industry leader, Walmart should be setting standards itself rather than simply support minimum wage hikes. The company can instead enact its own minimum salaries and offer employees a living wage without the need for government assistance.

While it is possible the raise could produce negligible returns or even cause a decrease in sales, the potential rewards are even greater. With a mission of “Save Money, Live Better” Walmart must start at home. Its employees are forced to require food stamps while being expected to help customers live better. A simple strategy such as raising wages will earn public goodwill, increase employee productivity, and help Walmart stay true to its mission within the company itself. Sam

Walton built a company on the foundation of saving people money by offering low priced products.

21 Walmart has since expanded to become the global leader in big box retail and is emerging as a competitor in the e-commerce market. However, it is important to put its own house in order by showing appreciation for the employees that are vital to day-to-day operations. These satisfied employees will in turn become more motivated and deliver more efficient and higher quality work. Walmart Store’s Inc. has no immediate danger of losing its position as king of retail.

However, long-term strategic decisions such as raising associate wages will safeguard Walmart’s dominance for years to come.

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