Wal-Mart Stores Discount Operations

Team - iStore
Anupam Bara P.Swetha Pritesh Shikha Singh Vinay Dhok Saurabh Jain

Wal-Mart stock still remains a good buy at a P/E multiple of 26

Population in Sunbelt rose faster than other areas, competitors are encroaching on WalMarts areas

Rapid expansion has increased logistics cost from 2.8% in 1984 to 4% in 1985

As Wal-Mart moves into larger, more contested town, rentals have risen by 0.1% and might increase further

Convincing Analysts

Increasing Competition

Increasing Logistics Cost

Rise in Rental Price

Hard Goods constituting 28% of Wal-Marts sales had lower margins despite higher sales per sqft and lower markdowns.

Satellite Technology, UPC Technology and changing computation technology might cause higher spending on technology upgrades

People purchased price sensitive categories from Wal-Mart but were not influenced by it in apparel, hardware and consumer electronics

Shrinkage thoough reduced, is still ~1.3% of sales

Increased reliance on Hard Goods

Technology changes

Perception of Walmart = Discount

Handling Shrinkage

Over 100 warehouses of 12+ competitors have been established, while the market is profitable only for players with high economies of scale

Only 2 companies have made any profit in warehouse club business. Wal-Mart is one of them, however, competition was rapidly rising

Competition in nearby locations meant that the early mover got the advantage

Due to saturation, Sams Warehouse Clubs were started beside a Walmart Discount Store in 3 markets. This meant an internal competition and also unnecessary additional costs

High Competition in Warehouse Club Business

Low Chances of Positive Return in Warehouse Club Business

Competition in same locations for warehouses

Cannibalization

Previously Unsuccessful Attempts at Diversification might deter future attempts

Diversification

Everyday Low Prices in a Cash Strapped Economy

First Mover Advantage in Towns where they opened stores

Location advantage Lower Rentals, Less Competition

High Bargain Power as no more than 1/5 of volume purchased from 1 vendor

Superior Technology, Close-Knit Communication reduced Reaction time

Good Human Resource Management, High Power to Managers ensured good implementation

Economics of Discounting in 1984 (% of net sales)

Industry 1984 Walmart 1984 Walmart 1985

Net Sales License Fee and other income Cost of Goods Sold Payroll Expense@ Advertising Expense* Rental Expense# Miscellaneous Expense^ Operating Income Net Income

100% 1.10% 71.90% 11.20% 2.30% 2.20% 7.60% 5.90% 2.70%

6401 52 4722 556.98 54.33 121.62 448.07 498.00 271.00

100.00% 0.81% 73.77% 8.70% 0.85% 1.90% 7.00% 7.78% 4.23%

8451 100.00% 55 0.65% 6361 75.27% 678.53 8.03% 54.33 0.64% 160.57 1.90% 591.57 7.00% 605.00 7.16% 327.00 3.87% CAGR Sales and Net Income have reduced in 1984-85 compared to historical data

Revenue from License fee and other income has reduced while COGS has increased. Has Wal-Mart reduced licensing at the cost of Gross Margin?

Net Margin has reduced in 1985 compared to 1984, yet it is higher than industry average

1976 - 1985

1984 - 1985

CAGR Sales
CAGR Net Income

37.57%
39.83%

32.03%
20.66%

*Assuming TV Ad Expense is 30% of total Promotion Expense #Taking rental expense at 1.9% as per data in case text ^Miscellaneous expense has been considered slightly less than industry value at 7% @Payroll Expense = Admin & Other Expense from Exhibit Ad Expense Rental Expense Miscellaneous Exp calculated as detailed above