‘AMIIT SHAH, EVAN OFFSTEIN, AND TYRA PHIPPS Amit Shah, Evan Offstein, and Tyra Phipps Frostburg State University WMT www. walmart.com On February 18, 2003, Fortune announced that Wal-Mart was number one on the magazine's annual survey of Most Admired Companies. This marked the first time in the survey's 21-year history that the nation’s largest company was also the most admired. This recognition represents the end result of Wal-Mart's efforts to overcome the recent economic downturn while still maintaining the level of reputation that the company is noted for. Headquartered in Bentonville, Arkansas, Wal-Mart's sales rose from $217.8 bil- lion in fiscal year 2002 to $244.5 billion in 2003. Net income rose ftom $6.7 billion to $8.0 billion during that period. For more than a decade, Wal-Mart has been growing by leaps and bounds and rolling over large competitors such as Kmart and thousands of small businesses. Financial statements are shown in Exhibit 1 and Exhibit 2. (Note: Wal-Mart's fiscal year ends January 31.) In 1995, Wal-Mart ended a five-year battle with local leaders in Bennington, Vermont, and opened its first store in that state, thereby laying claim to having stores in all 50 states (see Exhibit 3). The Bennington store brought Wal-Mart's total number to 2,158. To get approval for this store, Wal-Mart abandoned its usual 200,000 square-foot store near a major highway exit and instead located ina downtown building containing just 50,000 square feet. Environmentalists in Vermont say the rural character of the state is endangered by “sprawl-mart devel- opment.” As of the end of fiscal year 2003, there are still only four Wal-Mart stores in Vermont. Wal-Mart does not have a formal mission statement. When asked about Wal- Mart's lack of a mission, Public Relations Coordinator Kim Ellis recently replied, “We believe that our customers are most interested in other aspects of our business, and ‘we are focused on meeting their basic consumer needs.” If, in fact, we did have a for- mal mission statement, it would be something like this: “To provide quality products at an everyday low price and with extended customer service . . . always.” The Wal- Mart culture is based on three basic beliefs of Sam Walton: (1) respect for the indi- vidual, (2) service to our customers, and (3) strive for excellence. History No word better describes Wal-Mart than growth. In 1945, Sam Walton opened his first Ben Franklin franchise in Newport, Arkansas. Living in rural Bentonville, Arkansas, at the time, Walton, his wife Helen, and his brother Bud operated the nation’s most successful Ben Franklin franchises. “We were a small chain,” said Walton of his 16 store operation. “Things were running so smoothly [that] we even had time for our families.” What more could a man want? A great deal, as it turned out.WALMART STORES, INC.—2008 495, EXHIBIT 1 Wal-Mart Stores—Income Statement ere eared enn aa etn ren nN STS IN MILLIONS OF U'S. DOLLARS (EXCEPT FOR PER SHARE ITEMS) FISCALYEARENDED JANUARY 31, 2003 2002 2001 Revenue $244,524.0 217,799.0 191,329.0 Other Revenue 2,001.0 1,872.0 1,787.0 Total Revenue 246,525.0 219,671.0 193,116.0 Cost of Revenue 191,838.0, 171,562.0 150,255.0 Gross Profit 5,686.0 46,237.0 41,074.0 Selling/General/Adm. Exp. 1,043.0, 36,1720 31,550.0 Research & Development = — — Depreciation/Amortization - aes = Interest Expense (Income) 1,063.0 1,357.0 1,383.0 ‘Unusual Expense (Income) = = = Other Operating Expenses = = — ‘Total Operating Expense 233,806.0 208,920.0 183,000.0 Operating Income 12,719.0 10,751.0 10,116.0 Interest Expense = a in Interest/Invest ment Income - = a Interest Income (Expense) — — at Gain (Loss) on Sale of Assets - = = Other, Net — = — Income Before Tax 12,719.0 10,751.0 10,116.0 Income Tax 4,487.0 3,897.0 3,692.0 Income After Tax 8,232.0 6,854.0 6,424.0 Minority Interest (193.0) (183.0) (229.0) Equity in Affiliates — — — Net Income 8,039.0 6,671.0 6,295.0 Accounting Change 00 0.0 0.0 Discontinued Operations — — — Extraordinary Item — — Net Income 8,039.0 6,671.0 Preferred Dividends = or Basic/Primary Wed. Avg. Shares 4,430.0 4,465.0 Basic/Primary EPS 1.815 1.494 Basic/Primary EPS $1815 1.494 Sours wwewinvestor stockpoint.com The company opened its first discount department store (Wal-Mart) in November 1962. The early stores had bare tile floors and pipe racks. Wal-Mart did not begin to revamp its image significantly until the mid~1970s, and growth in the early years was slow. However, once the company went public in 1970, sales began to increase rapidly. When it initially went public, 100 shares of Wal-Mart stock would have cost $1,650, Now, those 100 shares are worth over $6 million, Wal-Mart's stock was up 106 percent in 1999 and was named the number-one stock on the Dow. Such retailers as Target, Venture, and Kmart provided the examples that Wal- Mart sought to emulate in its growth. The old Wal-Mart store colors, dark blue andEXHIBIT 2 Consolidated Balance Sheet senna een rare rare RN ESTO ene (AMOUNTS IN MILLIONS) JANUARY 31, 2003 2002 ‘Assets Current Assets Cash and cash equivalents $2,758 $ 2,161 Receivables 2,108 2,000 Inventories: At replacement cost 25,056 22,746 Less LIFO reserve 165 135 Inventories at LIFO cost 24,891 22,614 Prepaid expenses and other 726 1,103 Total Current Assets 30,483 27,878 Property, Plant and Equipment, at Cost Land 11,228 10,241 Building and improvements 33,750 28,527 Fixtures and equipment 15,946 14,135 ‘Transportation equipment 1,313 1,089 2,237 33,992 Less accumulated depreciation 13,537 11,436 Net property, plant and equipment 48,700 42,556 Property Under Capital Lease Property under capital lease 4814 4,626 Less accumulated amortization 1,610 1,432 Net property under capital leases 3,204 3,194 Other Assets and Deferred Charges Net goodwill and other acquired intangible assets 9,521 8,566 Other assets and deferred charges 2,777 1,333 Total Assets $94,685 $83,527 Liabilities and Shareholders’ Equity Current Liabilities ‘Commercial paper $1079 $743 Accounts payable 17,140 15,617 Accrued liabilities 8,945, 7174 ‘Accrued income taxes 739 1,343 Long-term debt due within one year 4,538, 2,257 ‘Obligations under capital leases due within one year 176 148 ‘Total Current Liabilities 32,617 27,282 Long-Term Debt 16,607 15,687 Long-Term Obligations Under Capital Leases 3,001 3,045 Deferred Income Taxes and Other 1,761 1,204 Minority Interest 1,362 1,207 Shareholders’ Equity Preferred stock ($0.10 par value; 100 shares authorized, none issued) Common stock ($0.10 par value; 11,000 shares authorized, 4,395 and 4,453 issued and outstanding in 2003 and 2002, respectively) 440 445 Capital in excess of par value 1,482 1,484 Retained earnings 37924 34,441 Other accumulated comprehensive income (309) (1,268) Total Shareholders’ Equity 39,337 35,102 Total Liabilities and Shareholders’ Equity $94,685 383,527 Soares Wal-Mare Aveual Report, 2003,EXHIBIT 3 Fiscal 2003 End-ot-Year Store Count ce in spp ere reer eee DISCOUNT NEIGHBORHOOD STATE STORES SUPERCENTERS SAM'S CLUBS MARKETS ‘Alabama 34 49 9 2 Alaska 6 0 3 0 ‘Arizona “4 7 10 0 Arkansas 35 a 4 6 California 133 0 30 ° Colorado 7 29 “4 ° Connecticut 27 2 3 0 Delaware 3 3 1 0 Florida 66 87 37 1 Georgia 2 61 20 0 Hawaii 6 0 1 0 Idaho 3 ul 1 0 Tlinois 81 33 27 0 Indiana 2 2 4 0 Towa 7 24 7 0 Kansas 29 23 6 o Kentucky 34 41 5 0 Louisiana 35 a7 2 0 Maine 2 9 3 0 Maryland 32 5 1B 0 Massachusetts 41 i 3 0 Michigan 48 4 2 0 Minnesota 34 9 12 0 Mississip a a 5 1 Missouri 56 58 4 0 Montana 5 6 1 0 Nebraska 10 ul 3 0 Nevada u 7 5 0 New Hampshire 19 6 4 0 New Jersey 30 0 8 0 New Mexico 6 18 5 0 New York 52 2 18 0 North Carolina 7 52 7 0 North Dakota 8 0 2 0 Ohio 70 28 26 0 ‘Oklahoma 41 40 7 2 Oregon . 4 3 0 0 Pennsylvania 50 4B 20 0 Rhode Island 8 0 1 0 South Carolina 2 37 9 0 South Dakota 6 4 2 0 Tennessee 33 57 15 2 Texas 7 155 68 4 Utah 6 15 7 1 Vermont 4 0 0 0 Virginia 21 52 13 0 ‘Washington 29 6 2 0 West Virginia 8 20 3 0 Wisconsin 49 20 u 0 Wyoming 2 _7 a2 o US. Totals 1,568 1,258 525 9 (continued) 4498 AMITTSHAH, EVAN OFFSTEIN, AND TYRA PHIPPS EXHIBIT 3 (continued) DISCOUNT NEIGHBORHOOD STATE STORES SUPERCENTERS SAM'S CLUBS MARKETS INTERNATIONAL/ WORLDWIDE Argentina u 0 0 Brazil 2 8 ea Canada 0 0 0 China 20 4 2 Germany 94 0 0 Korea 15 0 0 Mexico 5 50 0 Puerto Rico 1 9 33% United Kingdom 10 0 0 International Totals, 238 a 7 Grand Totals 2,510 1,496 596 86 “Brazil includes Todo Dias + Mexico includes 118 Bodegas, 50 Suburbias, 44 Superamas, 260 Vips **Puerto Rico includes 33 Amigos United Kingdom includes 248 ASDA Stores Source: Wal-Mart Annual Report, 2003 white (too harsh), were dumped in favor of a three-tone combination of light beige soft blue, and burnt orange. Carpeting, which had long been discarded on appare sales floors, was put back. New racks were put into use that displayed the entire gar ‘ment instead of only an outer edge In 1987, Wal-Mart implemented two new concepts: (1) Hypermarkets, whic are 200,000 square-foot stores that sell everything, including food; an (2) Supercenters, which are scaled-down supermarkets, Also in 1987, Walton name David Glass as the new chief executive officer (CEO), while he remained chairman ¢ the board. In 2000, H. Lee Scott was named president and CEO of Wal-Mart Store Inc, Exhibit 4 specifies the current organizational structure of Wal-Mart and ident fies the individuals holding top management positions within the organization. Sam Walton died in 1992. Bud Walton died in 1995, Wal-Mart's 1995 Annu Report was dedicated to Bud. Sam Walton once said about Bud, “Of course, n number-one retail partner has been my brother, Bud. Bud’s wise counsel and gui ance kept us from many a mistake, Often, Bud would advise taking a different dire tion or maybe changing the timing. I soon learned to listen to him because he h exceptional judgment and a great deal of common sense.” Wal-Mart's current president and CEO, H. Lee Scott, commends the past lea ership and management standards set by Sam Walton. He states, “While our history rich with success, there’s no question that our best years are yet to come.” Divisions Wal-Mart Stores Most Wal-Mart stores are located in towns of 5,000 to 25,000. On occasion, smal stores are built in communities of less than 5,000. As indicated in Exhibit 3 for fs 2003, Wal-Mart, Inc., currently operates domestically 1,568 Wal-Mart discot stores, 1,258 Supercenters, 525 SAM’s Clubs, and 49 Neighborhood Markets. Mos Wal-Mart's $244.5 billion in fiscal 2003 sales came from Wal-Mart stores « Supercenters. Exhibit 5 provides a breakdown of net sales per division, w! Exhibit 6 provides other pertinent financial data per division.WAL-MART STORES, INC-2004 499 EXHIBIT 4 Wal-Mart's Organizational Chart Source: www frecedgae.com. EXHIBIT 5 Net Sales by Operating Segment ‘The company and each of its operating segments had net sales (in millions) for the three fiscal years ended January 31, 2003 as follows: ‘TOTAL COMPANY FISCAL WAL-MART SAM'S TOTAL _INCREASE FROM PRIOR YEAR STORES CLUB___ INTERNATIONAL OTHER _ COMPANY FISCALYEAR 2003 $157,121 $31,702 $40,794 $14,907 $244,524 12% 2002 139,131 29,395 35,485 13,788 217,799 14% 2001 121,889 26,798 32,100 10,542 191,329 16% Net sales grew by 12% in fiscal 2003 when compared with fiscal 2002. That increase resulted from our domestic and international expansion programs, and a domestic comparative store sales increase of 5% when compared ‘with fiscal 2002. The sales increase of 1496 in fiscal 2002, when compared with fiscal 2001, resulted from our do- ‘mestic and international expansion programs, and a domestic comparative store sales increase of 6%. We consider comparative stores sales to be sales at stores that were open as of February Ist of the prior fiscal year and have not been expanded or relocated since February Ist of the prior fiscal year. Stores that were expanded or relocated dur- ing that period are not included in the calculation of comparative store sales. Comparative store sales are also re- ferred to as same-store sales within the retail industry. The Wal-Mart stores and SAM’S CLUB segments include domestic units only. Wal-Mart stores and SAM’S CLUBS located outside the United States are included in the International segment. Sour: Wal-Mart Amaual Repos, 2003, 6EXHIBIT 6 WalMart Segment Data a ‘A, WAL-MART STORES SEGMENT SEGMENT SALES SEGMENT OPERATING SEGMENT OPERATING OPERATING INCOME FISCAL _ INCREASE FROM INCOME, INCOME INCREASE ‘AS A PERCENTAGE YEAR _PRIORFISCALYEAR (INBILLIONS) FROM PRIOR YEAR OF SEGMENT SALES 2003 12.9% $9 16.2% 7.6% 2002 14.19 10.2 6.3% 73% 2001 12.19% 96 10.5% 79% The Wal-Mart Stores segment sales amounted to 64.3% of total company sales in fiscal 2003, which compares to 63.9% and 63.7% in fiscal 2002 and 2001, respectively. B. SAM'S CLUB SEGMENT SEGMENTSALES SEGMENT OPERATING SEGMENT OPERATING OPERATING INCOME FISCAL _ INCREASEFROM INCOME, INCOME INCREASE AS A PERCENTAGE, YEAR PRIOR FISCAL YEAR (IN BILLIONS) FROM PRIOR YEAR OF SEGMENT SALES 2003 7.8% $1,028 0.00% 3.2% 2002 9.7% 41,028 9.19% 3.5% 2001 8.1% 0.942 10.8% 3.5% The SAM’S Club segment net sales amounted to 13.0% of total company net sales in fiscal 2003, which compares to 13.5% and 14.0% in fiscal 2002 and 2001, respectively. C, INTERNATIONAL SEGMENT SEGMENT SALES SEGMENT OPERATING SEGMENT OPERATING —_ OPERATING INCOME FISCAL _ INCREASE FROM INCOME INCOME INCREASE ‘AS A PERCENTAGE YEAR PRIOR FISCALYEAR (IN BILLIONS) FROM PRIOR YEAR (OF SEGMENT SALES 2003 15.0% $2,033 35.8% 5.0% 2002 10.5% 1,305 37.5% 3.7% 2001 41.2% 0.949 41.6% 3.0% Wal-Mart's International segment is comprised of wholly owned operations in Argentina, Canada, Germany, South Korea, Puerto Rico, and the United Kingdom; operations through joint ventures in China; and operations through majority-owned subsidiaries in Brazil and Mexico and through a minority investment in Japan. International sales accounted for approximately 16.7% of total company sales in fiscal 2003 compared with 16.306 in fiscal 2002 and 16.8% in fiscal 2001. D. OTHER OPERATING LOSS SEGMENT SALES SEGMENTOPERATING SEGMENTOPERATING ASA FISCAL YEAR FISCAL _ INCREASE FROM Loss LOSS INCREASE PERCENTAGE YEAR PRIOR FISCAL YEAR (IN BILLIONS) FROMPRIORYEAR _OF SEGMENT SALES 2003 8.19% ($1,290) (109.196) (8.7%) 2002 30.8% (0.617) (214.8%) (4.5%) 2001 20.3% (0.196) 34.0% (1.9%) McLane net sales to unaffiliated purchasers accounted for approximately 6.1% of total company sates in fiscal 2003 compared with 6.3% in fiscal 2002.and 5.5% in fiscal 2001. Operating losses for the segment in each of the fiscal years presented primarily resulted from corporate overhead expenses including insurance costs, corporate bonuses, various other expenses and in fiscal 2003, the unfavorable impact of a $30 million LIFO adjustment. These corporate overhead expenses are partially offset by McLane op- erating income and the favorable impact of LIFO adjustments of $67 million and $176 million in fiscal 2002 and 2001, respectively. i Source Wal Matt Ann! Rep, 2003p 6WALMART STORES, INC.—2004 International sales accounted for approximately 16.7 percent of total company sales in fiscal 2003. This is up from 16.3 percent in fiscal 2002. For fiscal 2003, Wal- Mart operated internationally in 9 countries, with 942 discount stores, 238 ‘Supercenters, 71 SAM’s Clubs and 37 Neighborhood Markets. Wal-Mart grouped its smaller discount stores, such as the one in Bennington, Vermont, into a new Hometown USA program, This strategy allows the company to give special attention to customers in smaller markets in rural America. Hometown, USA consists of the stores that are less than 50,000 square feet and that are under one regional manager, The idea is to enable these stores to develop locally and with a dif- ferent mix from the large prototypes. Although these stores represent Wal-Mart's her- itage, they had become lost in the shufile as the company opened 120,000 to 150,000 square-foot stores, Wal-Mart stores generally have 36 departments and offer a wide variety of ‘merchandise, including apparel for women, girls, men, boys, and infants. Each store also carries curtains, fabrics and notions, shoes, housewares, hardware, electronics, home supplies, sporting goods, toys, cameras and supplies, health and beauty aids, pharmaceuticals, and jewelry. Nationally advertised merchandise accounts for a majority of sales of the stores. Wal-Mart has begun marketing limited lines of mer- chandise under the brand name SAM’s American Choice. The merchandise is care- fully selected to ensure quality and must be made in the United States. Wal-Mart has also developed new apparel lines, such as the Kathie Lee career sportswear and dress. collection, Basic Equipment sportswear, and McKids children's clothing. McLane’s MecLane’s is the nation’s largest distributor of food and merchandise to convenience stores. McLane’s offers a wide variety of grocery and nongrocery products, including perishable and nonperishable items. The nongrocery products consist primarily of tobacco products, merchandise, health and beauty aids, toys, and stationery. McLane’s is a wholesale distributor that sells merchandise to a variety of retailers, including Wal-Mart stores, SAM’s Clubs, and Supercenters. On May 2, 2003, Wal-Mart announced that it had entered into an agreement with Berkshire Hathaway, Inc., for the sale of McLane Company, Inc. Lee Scott, Wal- Marts president and CEO, was quoted as saying, “This transaction is positive for both Wal-Mart and McLane? The sale will allow Wal-Mart to focus exclusively on core retail business. Following the acquisition, McLane will be a wholly owned subsidiary of Berkshire Hathaway, Inc. SAM’s Clubs SAM’s Clubs are membership-only, cash-and-carry operations. A financial service credit card program (Discover Card) is available in all clubs. In fiscal 2003, business members paid an annual membership fee of $30 for the primary membership card, with a spouse card available at no additional cost. The annual membership fee for an individual member is $35 for the primary membership card, with 2 spouse card avail- able at no additional cost. The Elite Membership Program offers additional benefits and services such as automotive extended service contracts, roadside assistance, home improvement, auto brokering, and pharmacy discounts. The annual membership fee for an Elite Member is $100. SAMs offers bulk displays of name-brand merchandise, some soft goods, and institutional-size grocery items. SAM’s Clubs usually offer over 3,500 items, which are used most often by the consumers they serve, and each store also-carries jewelry, sporting goods, toys, tires, stationery, and books. Most clubs have fresh-food depart- ments, such as bakery, meat, and produce sections. we 501502 [AIT SHAH, EVAN OFFSTEIN, AND TYRA PHIPPS 4 SAM°s is a $32 billion business that is starting to grow again. The clubs were never designed to sell merchandise categories, but rather items. Furthermore, because the number of items is limited to around 2,000 for the wholesale part of the business and between 1,000 and 1,500 for personal and individual use, itis very important for the items to be appropriate for the location. Also, the items have to come and go seasonally, so continuity by category is not appropriate, Thus, there is a problem for buyers who are item merchants and compete for space in the clubs. At the end of fiscal 2003, Wal-Mart had a total of 525 domestic SAM’s Clubs in operation. Sales for the Wal-Mart's SAM’s Clubs segment increased by 7.8 percent i fiscal 2003, compared to fiscal 2002. Supercenters Wal-Mart's Supercenters combine groceries with general merchandise, giving cus- tomers one-stop shopping. As evidenced by Exhibit 3, Wal-Mart was operating 1,258 domestic Supercenters in fiscal 2003. Supercenters constitute the company’s fastest-growing division, and manage- ment is extremely pleased with them. Currently, the limitation is distribution, and Wal-Mart is working hard to expand its food distribution capabilities. Most of the Supercenters replace Wal-Mart stores, so they have a jump-start on the general mer- chandise side of the store, while food has tended to build slowly. However, the com- pany has gained market share more quickly than planned. Wal-Mart likes to locate Supercenters near the strongest food retailers so their facilities will “either get better or berun out of town” ‘The Wal-Mart Supercenter is one of the most important retail concepts on the landscape at this time. As with the discount stores, their real competitive impact comes not in the year they open but in the third year, because they have a maturation curve that’s more like a Wal-Mart store than a food store. Also, the one-stop conve- rience aspect of the stores has such broad appeal that it is drawing a larger customer audience on a regular basis. Supercenters are continuing to get better in many cate- gories and are attracting a higher-income audience, in addition to their traditional customers. Supercenters provide mart carts and are all one-story buildings, making them handicapped accessible, Wal-Mart’s Supercenters average between 100,000 and 210,000 square feet of retail space. They usually employ between 200 and 550 associ- ates, contingent upon store size and consumer needs. The company’s broad assort- ‘ments and everyday low prices are very compelling; extensive advertising is not needed. This represents an enormous saving over the competition, Furthermore, as Supercenters move more into food distribution, they gain a major cost advantage over Super Kmart and Super Target. ‘The Supercenters are designed with wider aisles; directory signs, departmental directories, and 24-hour service. They are usually equipped with a customer service desk and scanning registers to provide more efficient checkout procedures. Neighborhood Markets Wal-Mart's Neighborhood Markets first began operations in 1998 and are generally located in markets with Wal-Mart Supercenters. The Neighborhood Markets offer customers groceries, pharmaceuticals, and general merchandise. These Markets range from 42,000 to 55,000 square feet and usually employ 80 to 100 associates. They pro- vide about 28,000 items to customers, including fresh produce, meats, and dairy items; one-hour photo processing; drive-through pharmacies; pet supplies; and household chemicals.WAL-MART STORES, INC.—2004 International {As indicated in Exhibit 3, for fiscal 2003, the company had 213 Wal-Mart stores in Canada, 472 in Mexico, and 9 in Puerto Rico, Note that Wal-Mart also operated 238 Supercenters and 71 SAMs Clubs outside the United States as fiscal 2003 ended. Mexico is home to Wal-Mart's oldest and most extensive international operations. ‘Wal-Mart de Mexico is strengthened by strong customer support, and the opening of several new stores in the near future is planned. ‘Wal-Mart has also reached a new market in South Korea. There are currently 15 Supercenters open there. Wal-Mart bought the United Kingdom’s number-three supermarket, ASDA, for £6.7 billion ($11.19 billion) and is looking to grow ASDA in the United Kingdom and to expand further in continental Europe, including France. ‘The United Kingdom market leader, Tesco, is trying to increase the scale of its opera- tions internationally and has revealed plans to have around 200 hypermarkets over- seas by 2004, with more than £10 billion in annual sales from outside the United Kingdom. Wal-Mart maintains a strategic competitive focus on global positioning. It has expanded into the international markets so that customers everywhere will associate its name with low cost, best value, greatest selection of quality merchandise, and highest standards of customer service. The fact that the International segment has grown to more than $41 billion in sales gives Wal-Mart an idea of how great the potential is. Nationally and internationally, Wal-Mart has been faced with the United Food and ‘Commercial Workers Union trying to persuade employees to become part of the union. ‘Wal-Mart has strongly opposed unions in its stores. It argues that the company is struc- tured so that employees derive the most benefit and best conditions by working directly with Wal-Mart, as opposed to through a union, Recently, employees in Canada rejected the union. China is now seeing the same pressures from the union as was seen in Canada. ‘Community involvement, responding to local needs, merchandise preferences, and buying locally are all hallmarks of the International Wal-Marts, just as they are in the United States. Distribution Centers Wal-Mart has highly automated distribution centers nationwide for both produce and merchandise, A typical Wal-Mart Discount Store has more than 70,000 stan- dard items in stock. Supercenters carry more than 20,000 additional grocery items, including perishables; as a result, such items have to be ordered frequently. Associates use handheld computers that are linked by radio-frequency network to area stores. To place orders, each store wires merchandise requests to warehouses, which in turn either ship immediately or reorder. Wal-Mart computers are linked directly to over 200 vendors, making deliveries quicker. Wal-Mart has one of the world’s largest private satellite communication systems, which enables it to control distribution, and in addition, Wal-Mart has installed point-of-sale bar code scan- ning in all of its stores. Wal-Mart owns a fleet of truck-tractors that can deliver goods to any store in 38 to 48 hours from the time the order is placed. After trucks drop off merchandise, they frequently pick up merchandise from manufacturers on the way back to the distribu- tion center. This back-haul rate averages over 60 percent and is yet another way Wal- Mart cuts costs. ‘With an information systems staff of 1,200 and system links with about 5,000 manufacturers, Wal-Mart leads the industry in information technology. This means Wal-Mart is dedicated to providing its associates with the technological tools they to 5aAMT SHAH, EVAN OFFSTEIN, AND TYRA PHIPPS need to work smarter every day. With this technology, Wal-Mart is getting better, quicker, and more accurate information to manage and control every aspect of its business wal-mart.com ‘Wal-Mart is in the retail business, which now includes Internet e-tailing. The Internet has interesting aspects and will definitely serve a growing market throughout the twenty-first century. Profits are not easily made over the Internet, and issues of cost of delivery, merchandise returns, and data security are top concerns prior to building business over the Internet. Wal-Mart moved into the Internet in 1996 with the intro- duction of Wal-Mart On-line, and then it relaunched the site on January 1, 2000, as ‘Wal-Mart.com, Wal-Mart looks at Internet retailing as another store with possibility, but without walls. Wal-Mart.com, with its headquarters located in the San Francisco Bay area, is a wholly owned subsidiary of Wal-Mart Stores, Inc, This location choice affords ‘Wal-Mart.com access to the best pool of Internet executive and technical talent. ‘The company was able to attract a top retail management talent in Jeanne Jackson as the CEO of Wal-Mart.com. This venture combines the better of two worlds, tech- nology and retailing, in order to provide customers easy access to more things Wal-Mart 24 hours a day, 7 days a week. Its distinct purpose is to provide con- sumers with a convenient and rewarding online shopping experience. Wal- Mart.com has a separate management team and board of directors. Ultimately, it might choose to go public; however, Wal-Mart Stores will retain a majority owner- ship of the venture. Operations ‘Wal-Mart's expense structure, measured as a percentage of sales, continues to be among the lowest in the industry. Although Walton watched expenses, he rewarded sales man- agers handsomely. Sales figures are available to every employee at Wal-Mart. Monthly figures for each department are ranked and made available throughout the organiza- tion. Employees who do better than average get rewarded with raises, bonuses, and a pat on the back. Poor performers are only rarely fied, although demotions are possible. All employees (called “associates”) have a stake in the financial performance of the company. Store managers earn as much as $100,000 to $150,000 per year. Even. part-time clerks qualify for profit sharing and stock-purchase plans. Millionaires among Wal-Mart's middle managers are not uncoramon. Executives frequently solicit ideas for improving the organization from employees and often put them to use, Due to Wal-Mart’ stock selling at 35 to 40 times earnings, an almost incredible price, Walton presided over a sizable fortune before his death. ‘The Walton family owns 39 percent of Wal-Mart stock. Family holdings are worth nearly $16 billion. Continuing a Walton tradition, Wal-Mart invites over 100 analysts and institutional investors to the field house at the University of Arkansas for its annual meeting in mid-June. During the day-and-a-half session, investors meet top executives as well as Wal-Mart district managers, buyers, and 200,000 hourly salespeople. Investors see a give-and-take meeting between buyers and district managers. Employee Benefits Wal-Mart management takes pride in the ongoing development of its people. ‘Training is seen as critical to outstanding performance, and new programs are often implemented in all areas of the company. The combination of grassroots meetings,WALMART STORES, INC.—2004 the open-door policy, videos, printed material, classroom and home study, year-end management meetings, and on-the-job training has enabled employees to prepare themselves for advancement and added responsibilities. Wal-Mart managers stay current with new developments and needed changes. Executives spend one week each year in hourly jobs in various stores. Walton himself once traveled at least three days per week, visiting competitors’ stores and attending the openings of new stores, leading the Wal-Mart cheer, “Give mea W, give mean A...” Wal-Mart encourages employee stock purchases. Under the Stock Purchase Plan, Wal-Mart will contribute 15 percent each year toward an associate's stock purchases, up to $1,800 per year. Wal-Mart has a 401(k) plan, to which it con- tributes on an associate's behalf, whether the associate participates or not. The con- tribution is annual and is based on the company’s performance. Associates may contribute up to 15 percent of pre-tax income toward retirement and they also have choices as to how their money is invested. Wal-Mart also has a corporate profit- sharing plan. The purposes of the profit-sharing plan are to furnish an incentive for increased efficiency, to provide progressive recognition of service, and to encourage careers with the company by Wal-Mart associates. This is a trustee-administered plan, which means that the company’s contributions are made only out of net prof- its and are held by a trustee. The company from time to time contributes 10 percent of net profits to the trust. Company contributions can be withdrawn only on termination. If employment is terminated because of retirement, death, or permanent disability, the company contribution is fully vested (meaning the entire amount is nonforfeitable). If termi- nation of employment occurs for any other reason, the amount that is nonforieitable depends on the number of years of service with the company. After completion of the third year of service with the company, 20 percent of each participant's account is nonforfeitable for each subsequent year of service. After seven years of service, a par- ticipant’s account is 100-percent vested. Policies and Legal Problems Sam Walton was admittedly old-fashioned in many respects. Wal-Mart store policies reflect many of his values. For example, store policies forbid employees to date other employees without the prior approval of the executive committee. Also, women are rarely found in management positions. However, promotions have recently been made where there are now women in senior officer positions. Walton also resisted placing women on the board of directors; however, there are two women on the board at this time. Wal-Mart is an EEO/AA employer, but until 2003 managed to get away with certain past discriminatory policies. However, women now have a class action lawsuit against Wal-Mart based on so few women being among its managers, given that a majority of its workforce is female. Also in 2003, Wal-Mart had problems relating to hiring illegal Hispanic workers to clean its stores. ‘Wal-Mart has instituted several initiatives to increase the recruitment and pro- motion of women and minorities, including: + A mentoring program encompassing more than 750 women and minority managers. + A women's leadership group, in partnership with Herman Miller and ServiceMaster, to develop opportunities for high-potential female managers. + Store internships during the summer for college students between their junior and senior years, with 70 percent being women or minorities. 2 505‘AMT SHAH, EVAN OFFSTEIN, AND TYRA PHIPPS 13 Philanthropy and Community Involvement ‘Wal-Mart's community involvement year after year is phenomenal. Education is a pri- mary beneficiary of Wal-Mart charitable giving, Some examples of its largesse follow. + Each store awards a $1,000 college scholarship to a qualifying high schoo! senior. More than $11 million in scholarships has been awarded since the program's inception. + The company has made a major commitment to the United Negro College Fund. Wal-Mart pledged $1 million to UNCE over a four-year period. + The company sponsors the Competitive Edge Scholarship Fund, which makes four-year scholarships—each worth $20,000—available to students pursuing technology-related college degrees. During 2002, Wal-Mart provided $1 million in community disaster-relief funds to local Salvation Army and American Red Cross chapters. These efforts were recog- nized in May 2002 when President Bush honored Wal-Mart with the prestigious Ron Brown Corporate Leadership Award. This award is presented to the best corporate citizens in America. It recognizes companies that have demonstrated a deep level of commitment to empower employees and communites, while also advancing in busi- ness interests. Wal-Mart's corporate citizenship extends well beyond U.S. borders and into every country in which it operates. Morketing The discount retailing business is seasonal to a certain extent. Generally, the highest volume of sales and net income occurs in the fourth fiscal quarter, and the lowest vol- uume occurs during the first fiscal quarter. Wal-Mart draws customers into the store by radio and television advertising, monthly circulars, and weekly newspaper ads, Television advertising is used to convey an image of everyday low prices and quality merchandise. Radio is used to a lesser degree to promote specific products that are usually in high demand. Newspaper advertisements and monthly cizculars are major contributors to the program, emphasizing deeply discounted items, and they are effective at luring customers into the stores. Efforts are also made to discount corporate overhead. Visitors often mistake corporate headquarters for a warehouse because of its limited decor and iack of “show.” Wal-Mart executives share hotel rooms when traveling, to reduce expenses. The company avoids spending money on consultants and marketing experts. Instead, decisions are made based on the intuitive judgments of managers and employees and on the assessment of strategies of other retail chains. Wal-Mart censors some products. The company has banned recordings and removed magazines based on certain types of lyrics and graphics; it has also stopped marketing teen rock magazines. Wal-Mart advertises a “Buy American” policy in an effort to keep production at home. Consequently, Wal-Mart buyers are constantly seeking vendors in grassroots America. In Tulsa, Oklahoma, Zebco, the fishing equip- ment company, responded to Wal-Mart's challenge by bucking the trend toward overseas fishing tackle manufacturing. Zebco created more than 200 U.S. jobs to assemble rods and to manufacture bait-and-cast reels. The company’s bait-and-cast reels are the first to be manufactured in the United States in 30 years. Competitors Kmart is one of Wal-Mart's key competitors. However, compared to Wal-Mart, the scope of Kmart’s problem becomes evident. Kmart's sales were around $31 billion in fiscal year 2002. This dollar figure is drastically lower than that of Wal-Mart’s salesWAL-MART STORES, INC.—2004 figure. Should Wal-Mart, the price leader in discounting, choose to sacrifice $0.10 to “$0.15 of its estimated earnings per share, it virtually could ensure that Kmart would not operate above the breakeven point. During 2002, Kmart closed some 600 stores in the United States, Guam, Puerto Rico, and the U.S. Virgin Islands. Following a dam- aging move into specialty retailing and numerous failed turnaround attempts, Kmart began offering groceries in it stores. However, in January 2002 Kmart filed for Chapter 11 bankruptcy protection. Supercenters are revolutionizing the discount store battlefield, just as tanks redefined trench warfare. Wal-Mart started 1995 with 68 Supercenters but increased this number to 1,496 in fiscal 2003. The goal of each new store is to shatter the profit potential of at least one older Kmart discount store. This is the dusk of the discount store era, and improvements in the merchandising and systems of Kmart’s discount stores might do little to forestall its decline. “Target has now become a fierce competitor of Wal-Mart. Target operates about 1,500 stores in three formats: Target, a discount chain with more than 1,100 stores; Mervyn's midrange department stores; and Marshall Field’s upscale department stores, Target, including SuperTarget and Target Greatland, account for more than 80 percent of Target Corporation's sales. Target has created a niche for itself by offering more upscale, fashionable merchandise than that of Wal-Mart. Costco Wholesale Corporation has also become a competitor of Wal-Mart. Costco competes with the SAM’s Club segment. It is the largest wholesale club oper- ator in the United States, just ahead of SAM’s.