Harvard Business School 9-797-099

Rev. November 13, 1998

Wal-Mart, 1997
As Wal-Mart entered 1997, it had clearly established itself as the largest, most profitable
retailer in the world. With $104.8 billion in revenues, $3 billion in profit, and 734,000 associates
working in 2,742 stores, Wal-Mart remained the envy of the industry. Yet four issues weighed
heavily on Wal-Mart’s management: the emergence of new channels, the challenges of international
expansion, declining growth rates, and a stock price that was flat for three years.

Declining growth rates and a flat stock price As Wal-Mart’s share of U.S. retail grew, its growth
rate started to converge with the growth rate of U.S. retail: annual sales growth for Wal-Mart was
only 11% in 1996, and same store sales grew at 4.6%. Domestically, the largest area of growth had
been in Supercenters, with almost 200 established over the past three years (see Exhibit 1). While
11% total growth was respectable for most retailers, it was disappointing to investors. Except for
brief peaks reaching $28/share, stock prices had hovered in the low $20s since 1993.

Electronic commerce In the past, Wal-Mart had aggressively attacked alternative channels of
distribution, such as warehouse clubs and supercenters. The newest threat perceived by management
was electronic commerce over the internet. Starting in 1994, the explosion of interest in the World
Wide Web led retail companies to flock to the Web for its potential in advertising and sales.
Commercial sites had grown from 1,000 in April 1994 to over 110,000 in just 18 months. According to
the Internet Society, this figure would double every month in 1997. To address the potential of
electronic commerce, Wal-Mart went online in July 1996 with Web sites for Wal-Mart and SAM’s
Club. Working in cooperation with Microsoft to develop standard Web-retailing procedures, Wal-
Mart offered customers a simple site layout and shopping system that would be the same every time
they visited the on-line retailer. The site featured “greeters,” “shopping carts,” guaranteed secure
transactions, “customer favorites,” and new products for Internet users.1 By September 1996, Wal-
Mart’s site ranked in the Top 25 shopping sites.2
The size and profitability of electronic commerce, however, was uncertain. Estimates for total
internet commerce ranged widely, from $6.9 billion in 2000 (from Forrester Research) to $150 billion
(from International Data Corporation). To many, on-line shopping was too slow or lacked the
tangibility (e.g., trying on clothing, seeing the actual size/color of an item) essential to the shopping
experience. Fears about credit card security also kept shoppers at bay. Problems for on-line retailers
included the loss of customers to manufacturers offering products directly on the Web and the great
expense of shipping low-value, low-margin, high-mass goods. Although brand name companies and
well-recognized retailers had a distinct advantage over lesser-known competitors, many analysts

1 Wal-Mart Press Release, July 30, 1996.

2 “Guys, the Big Cybershoppers; CDs and Computer Software, the Big Sellers, Says PC-Meter...” PR Newswire,
December 9, 1996.

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warned that the Web was a tool for direct marketing, not mass marketing.3 Analysts estimated that
the most successful companies, such as Amazon.com, Internet Shopping Network, and Virtual
Vineyards, generated only $20 million to $25 million in revenues in 1996.

Globalization Foreseeing future saturation of the domestic market, Wal-Mart had been expanding
globally since 1991. Over the previous six years, Wal-Mart built or bought almost 250 stores in seven
countries in North and South America and in Asia (see Exhibit 2). By January 31, 1997, this
expansion had turned profitable: the International division’s operating profit for the 1997 fiscal year
had reached $24 million, compared to a loss of $16 million the fiscal year prior.

Wal-Mart began its global expansion by teaming up with Mexico’s largest retailer, Cifra S.A.
The joint venture, Club Aurerra, began with two stores in the suburbs of Mexico City at the end of
1991, beating competitor Price Club by just a few months. By 1997 Wal-Mart had 41 Wal-Mart and
SAM’s Clubs stores in Mexico with an additional 89 retail outlets under separate brand names.
SAM’s Club stores were geared primarily toward wholesalers who sold merchandise to smaller
retailers. Although the 1995 economic crisis in Mexico had seriously affected Wal-Mart’s revenues,
by 1996 the venture was turning a profit.

Wal-Mart expanded into Canada in 1994, purchasing 122 Woolco Stores from Woolworth
Corp. (18% of the Canadian discount market). By early 1996, the number of stores had grown to 133
units, giving Wal-Mart a 40% share of the Canadian discount market. The establishment of 5
additional stores was expected before year’s end. As in Mexico, the Canadian venture was posting
profits in 1996.

Wal-Mart’s next target was Brazil. In early 1996, Wal-Mart entered into a JV with Lojas
Americanas S.A., Brazil’s largest discount chain, with Wal-Mart controlling 60% of the 5-store
venture. The first few weeks of 1996 brought repeated sellouts on many products in Wal-Mart stores.
However, multinational retailers with large operations in Brazil did not stand still: in retaliation for
Wal-Mart’s aggressive pricing, France’s Carrefour and the Netherlands’ Makro launched a price war,
leading to declining margins of less than 10% for Wal-Mart, and a $21 million loss for the first quarter
of 1996. In January 1997 Wal-Mart announced a plan to lay off 300 of its 2,500 Brazilian workers.
Nonetheless, Wal-Mart officials were optimistic about Wal-Mart’s future in Brazil and planned to
open four hypermarkets over the next year. Executives were equally hopeful about the promise of
their new operations in Argentina.

China Reflecting on the prospects of doing business around the world, Wal-Mart CEO David Glass
told a group of students, “. . . learn two languages: Mandarin Chinese and Spanish.” By 1993, Wal-
Mart decided it was time to test the waters outside of the Americas and look toward Asia. Its first
step was to provide about $60 million in private label products for sale in Japan, Hong Kong,
Malaysia, Thailand, Singapore, Indonesia, and the Philippines through agreements with Japanese
retailers, Ito-Yokado and Yaohan. The second step was to set up operations in Hong Kong. In
October 1994, Wal-Mart entered a joint venture with Ek Chor Distribution Systems, a subsidiary of
Thai Agribusiness conglomerate Charoen Pokphand Group (C.P.), to build 3 outlet stores and a
distribution center in Kowloon and the New Territories in Hong Kong. In Thailand, the C. P. Group
operated a supermarket chain, 420 7-Eleven Stores, and a chain of 8 general merchandise stores with
a European partner. C. P., with more than 55 joint ventures already in China, was expected to
contribute its China expertise by helping to identify “locations, to build government relations, and to
clarify import and export issues,” said Rob Walton, chairman of Wal-Mart.

Advertised as purveyors of “brand name quality goods at factory direct prices,” Value
Clubs—as the joint venture outlets were christened—were Wal-Mart discount stores cum SAM’s
Clubs hybrids. In-store merchandise of greater than 1,000 different branded products included dry
groceries, frozen foods, health and beauty aids, home furniture, office supplies, houseware and

3 Scansaroli, Jay, “Interactive Retailing: Supply Chain,” Chain Store Age, January 1997.

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hardware, frozen confectionaries and snacks, sporting goods, and beverages. Initially, the Hong
Kong stores were to sell merchandise bought from Wal-Mart’s U.S. distribution centers, though there
were plans to localize 30% of stock purchases within two months after opening.
Investment in the Hong Kong retail outlets ranged from US$2 million to US$40 million. Store
sizes in the British Colony ranged from 10,000 to 20,000 square feet, in contrast to its U.S. counterpart
whose measure, on average, exceeded 100,000 square feet. Nonetheless, Value Clubs were
considered large within the local context. Competitors in the proximity, such as Watson’s pharmacies
and supermarkets Park-n-Shop and Dairy Farms, occupied a fraction of the retail space. Value Club
stores were spare with minimalist decorations and concrete floors. Goods were displayed, wherever
possible, on warehouse racking. Located beyond the priciest retail estates of Hong Kong in the New
Territory towns of Tsuen Wan, Tuen Mun, and Homatin in Kowloon, Value Clubs were well centered
within nexuses of public transportation: the Tsuen Wan emporium connected with 10 bus lines and
was served by water ferry; the Tuen Mun shop connected with 9 bus lines; while the Homatin store
site was a station shop for 11 bus lines. Catering to the needs “for business and home,” Value Club
individual memberships were purchased for HK $150 annually. Although merchandise was already
priced at 10% to 20% less than its competitors, membership granted a further 5% discount. Moreover,
bulk purchasers, euphemistically titled “truckload sales,” enjoyed additional savings.

Responding to an interview question in 1994, Rob Walton had noted that “the time line for
going in there [China] is going to be pretty darn long.” 4 In 1995, Wal-Mart announced plans to build
stores in Shenzhen (immediately across from Hong Kong’s border), Shenyang in the northeastern
province of Liaoning, and Shanghai in the Pudong economic district. The Shanghai store opened in
the spring of 1996, the Shenyang store in November of 1995, and the Shenzhen store in mid-1996;
investment in each China outlet was estimated between US$20 million to US$25 million. However,
Wal-Mart’s honeymoon with C.P. was short-lived. Disputes over management led Wal-Mart to
dissolve the partnership with the C.P. Group in the spring of 1996. According to the agreement, Wal-
Mart would retain rights to the SAM’s Club and Supercenter in Shenzhen, and the C.P. Group would
retain the store developments in Shanghai and Shenyang, as well as the three Value Club stores in
Hong Kong.

In August 1996, Wal-Mart proceeded on its own to open a SAM’s Club and Wal-Mart
Supercenter in Shenzhen to rave reviews.5 In September, Wal-Mart suffered a brief spate of public
relations problems (accusations ranging from intellectual property rights’ infringement to false
product-manufacturing information), reportedly the result of a purposeful smear campaign by local
competitors. Soon after, six main local retailers joined together to force Wal-Mart suppliers to sell
them products at the same prices being offered to Wal-Mart. In addition, these retailers began
copying Wal-Mart by adopting everything from floor layout to management style. Despite the
competition, business continued to boom.6

Indonesia Wal-Mart’s newest target in Asia was Indonesia. In August 1996 and January 1997,
Wal-Mart had two stores up and running in a licensing deal with the Lippo Group. Under this
arrangement, Lippo paid Wal-Mart a fee for services. The stores opened in two of the newest malls in
the country with the slogan, "Harga murah selalu" which translates as "Cheap prices always." Like
Wal-Mart’s start-up experiences in other countries, logistical problems, especially with middlemen in
the distribution system, continued to plague the retailer. In addition, cultural differences impeded
staff adoption of Wal-Mart’s corporate culture and management practices. Analysts commented that
while the road ahead in Indonesia appeared promising, it was sure to be a long one.7

4 Wall Street Journal, August 22, 1994.

5 Part of Wal-Mart’s success was due to Wal-Mart’s domestic sourcing of 90% of its products, a practice which
played to Chinese consumers’ sense of nationalism. Supermarket News, November 4, 1996.
6 Business Times, December 5, 1996.
7 Discount Store News, January 20, 1997.

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797-099 Wal-Mart, 1997

Exhibit 1 Wal-Mart Selected Information

Wal-Mart 1994 1995 1996 1997

Income statement (millions)

Net sales $63,344 $82,494 $93,627 $104,859

Other income—net 641 918 1,122 1,288
Cost of sales 53,444 65,586 74,564 84,664
Operating, selling, and general and
administrative expenses 10,333 12,858 14,951 16,788
Net income 2,333 2,681 2,740 3,056

Balance Sheet

Current assets $12,114 $15,338 $17,331 na

Total assets 26,441 32,819 37,541 na
Current liabilities 7,406 9,973 11,454 na
Shareholders’ equity 10,753 12,726 14,756 na

Other Year-end Data

Number of domestic Wal-Mart Stores 1,950 1,985 1,995 1,962

Number of domestic Supercenters 72 147 239 344
Number of domestic SAM’s Clubs 417 426 433 436
International units 24 226 276 314
Average Wal-Mart store size (sq. ft.) 83,900 87,600 91,100 na
Number of associates 528,000 622,000 675,000 734,000

Source: Company financial reports and Reuters.

FYE: January 31.

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Wal-Mart, 1997 797-099

Exhibit 2 International Retail Divisions as of January 31, 1997

Puerto
Rico Mexico Canada Brazil Argentina China Indonesia

Total number
of Wal-Mart
stores 7 13 136 2 2 1 0
Total number
of SAM’s
Clubs 4 28 0 3 2 1 0
Supercenters
or other units 0 111 0 0 2 0 2
Total number
of associates 3,172 9,732 22,126 2,421 1,766 1,479 831
Wal-Mart
Start Date 8/92 9/93 3/94 11/95 11/95 8/96 8/96
SAM’s Club
Start Date 1/94 12/91 - 5/95 8/95 8/96 -
Currency U.S. dollar peso Can. dollar real peso renminbi rupiah
Official Spanish, English, Mandarin Bahasa
language(s) English Spanish French Portuguese Spanish Chinese Indonesia
Population
(millions) 3.8 92.2 28.6 155 33 1200 203.6

Source: Wal-Mart Store Info, Wal-Mart On-line and PR Newswire press releases.

Exhibit 3 Wal-Mart Stock Price Historical Graph

$35

$30

$25

$20
S t ock pr ice
$15

$10

$5

$0
1/ 1/ 92 6/ 30/ 92 1/ 1/ 93 6/ 30/ 93 1/ 1/ 94 6/ 30/ 94 1/ 1/ 95 6/ 30/ 95 1/ 1/ 96 6/ 30/ 96 1/ 1/ 97

Source: Microsoft Investor