Background of Wal-Mart and the Discount Mass-Retail Industry - Case Study Example

Background of Wal-Mart and the Discount Mass-Retail Industry Founded in the 1960’s Wal-Mart has experienced most of its rapid growth since the early 1990’s. The retail industry is vast; apart from Wal-Mart, the case study mentions other big US retailers such as Target, Costco, Home Depot, Best Buy, and Circuit City, and in the UK names like Tesco and Dixons could be added to the list. The trend in retail seems to be toward consolidation, offering customers “one-stop shopping”. One of Wal-Mart’s best features from a customer point of view is the concentration of most everything a customer could be seeking in one store: groceries, clothing, household items, entertainment items, and services such as pharmacies, auto repair, and banking. Target stores are apparently organised in much the same fashion, and traditionally-focused stores such as Tesco are moving in that direction. Even more specialised stores such as Home Depot, which sells home-improvement and building products, and Best Buy, which specialises in consumer electronics, offer what could be described as the maximum possible product mix within their particular segments. The reason that the retail industry is so large is because it primarily serves customers’ needs rather than wants. People need to buy food and clothing and have their autos repaired; what they buy and how much they wish to spend are matters of discretion, certainly, but they really have no choice to simply forego spending entirely in these areas. Convenience, having the opportunity to purchase the greatest variety of products with the least amount of effort, seems to be a major driver of the retail business. Shopping malls were successful against individual retailers because many different goods could be concentrated in a small area; major mass-retailers like Wal-Mart are another level of convenience because everything is concentrated in a single store. But there also seems to be an upper limit to how much generalisation consumers find desirable. Quality may be perceived as lower for products coming from a mass-retailer than a more specialised one, and indeed Wal-Mart is sometimes criticised for sacrificing quality for price. This presents an opportunity for smaller retailers to make inroads in different niches of the retail market, particularly if they are able to present more specialised customer service expertise and personal attention to customers as a better value than the low price focus of mass-retailers. Even Wal-Mart has recognised some opportunity in this area, expanding its store format mix to include some smaller neighbourhood stores instead of relying exclusively on very large mega-stores. SWOT Analysis of Wal-Mart Strengths Opportunities Very strong brand recognition. Large product selection. Reputation for low prices. Large number of stores. Efficient supply chain. Strong buying power. Well-developed HRM program. Solid financial state (consistent returns). Many regions available for expansion. Merger opportunities with other retailers in new areas. New store formats give opportunities to expand market segments. Economic slowdown means customers are reducing expenses, making Wal-Mart’s bargains more attractive. Economic slowdown also gives Wal-Mart added buying power with suppliers. Economic slowdown also potentially reduces competition; some competitors may go out of business. Weaknesses Threats Size of organisation and diversity of products increases management complexity. Large product mix limits focus and flexibility in any one segment (e.g., foods, clothing, house wares, etc.) Large number of stores distributed among relatively small number of countries. High-profile labour disputes have hurt company’s reputation. Purchasing tactics have been criticised as unfair. Wal-Mart affected by bad publicity over poorly-made & unsafe Chinese products. Low prices sometimes perceived as meaning low quality. Margins are relatively small, which reduces pricing flexibility. Customers reducing expenses may also reduce their spending at Wal-Mart. New markets can carry a political risk (e.g., the unionisation of Chinese employees). Since Wal-Mart is number one, all competitors are targeting Wal-Mart’s market share. Expansion into services such as pharmacies and banking carry the likelihood of increased regulation. Threat of increasing unionisation – “nightmare” and “Teamsters’ Union” probably mean the same thing in Wal-Mart’s dictionary. Expanding supplier base in emerging markets can reduce Wal-Mart’s purchasing power edge. Porter’s Five Forces Analysis of Wal-Mart Bargaining Power of Customers The bargaining power of Wal-Mart’s customers is quite high. Customer loyalty to Wal-Mart seems to be based mostly on price. Wal-Mart’s advertising mantra is “Low Prices Everyday”, so despite whatever other benefits the store may offer customers, Wal-Mart has already established price as the priority; with competitors very near in most areas where a Wal-Mart store can be found, customers can easily make another choice, even for just a few items. Bargaining Power of Suppliers Wal-Mart’s suppliers have very little bargaining power at present, but with growth in economies in emerging markets, such as China and India, a growing number of suppliers as well as a growing number of competitors to Wal-Mart may improve suppliers’ bargaining power. The reason suppliers’ bargaining power is low with respect to Wal-Mart now is because of the very large volume Wal-Mart is able to purchase. Suppliers sell their products to Wal-Mart at the price Wal-Mart tells them to, because there are no other customers that can match the volume of Wal-Mart. Threat of New Entrants Despite the high costs and complexities of building a chain of large retail stores, the threat of new entrants to the market is actually quite high. One direction from which these new entrants could come is from mergers of existing retailers into larger ones, particularly as economic conditions put pressure on individual businesses. Wal-Mart’s business model, while successful, is not terribly complicated and is easy to duplicate. In addition, the consumer backlash that Wal-Mart occasionally suffers gives other retailers an opportunity to offer consumers a good alternative. Threat of Substitutes The threat of substitutes for Wal-Mart is quite high, on two different levels. The threat of a substitute for Wal-Mart as an entity is the same as the threat of new entrants. The threat of substitutes for Wal-Mart’s individual products is also quite high, because of the perception of lower quality. Target stores in the US, for example, have been successful in establishing a market share by presenting themselves as a higher-quality alternative to Wal-Mart. Rivalry among Competitors All Wal-Mart’s competitors face these same forces, and almost all have an additional handicap with respect to the bargaining power of their suppliers, which is much stronger. These conditions make the retail environment an altogether hostile one, and rivalry among competitors is extremely high. The advantages that any one competitor can gain over the others are very small, and it is difficult to dislodge a competitor from its market position once established. Thus competing retailers cannot simply market themselves based on their own merits, but are almost compelled to compare themselves to other retailers and present themselves as a superior choice for customers. Definition of the Problem Wal-Mart’s survival is dependent on the ability of the company to continue to grow. Expansion opportunities are available for Wal-Mart outside its traditional North American market, but significant obstacles are also present. Wal-Mart faces very high threats from its competition in new markets, competitors that are often ahead of Wal-Mart in understanding and acclimating to different local cultures. In addition, Wal-Mart’s leading position intensifies the competition it faces, and this would be particularly acute in foreign markets where the company might be seen as an outsider who is harmful to the local business economy. Did Asia and Europe really offer Wal-Mart the opportunity for world retail dominance? It would probably be fair to say that Asia and Europe did offer Wal-Mart a good opportunity to greatly expand its dominance of the retail industry, but that the company – at least initially – handled their growth in these areas rather poorly. Wal-Mart seems to have behaved like the Ugly American of retail in these markets and failed to truly understand these new customer bases, assuming that the same model that worked so well in North America would be appealing everywhere. The examples given in the case study of problems Wal-Mart encountered with employees in China and Germany are significant; if the company is so out of tune with local culture that its own employees are unenthusiastic about the way Wal-Mart does business, there is little reason to believe it understands local customers any better. It seems that so far at least, Wal-Mart has been more successful in Europe than in Asia. The Asian market, however, is generally thought to be the best area for growth in many businesses, including retail. Nothing is mentioned in the case study, for example, of India, which could be a very good market for Wal-Mart. The conclusion to be drawn is that Wal-Mart missed – or perhaps simply has not yet taken advantage of – many opportunities for expansion outside North America. Another factor which, in hindsight, does not present Wal-Mart’s initial moves into Europe and Asia in a good light is the comparatively bad economic situation now versus that in the late 1990’s and early 2000’s after the Asian financial crisis had passed. While Wal-Mart is a very healthy company financially and probably cannot be prevented from expanding, at least for economic reasons, it seems clear now that the period four or five or even eight or ten years ago was a much better window of opportunity for expansion than it is now, or is likely to be in the near future. So again, the most obvious answer to the question is that Europe and Asia did provide Wal-Mart good opportunities for market dominance, which the company failed to fully appreciate. Keys to continuing growth The concept of smaller, more exclusive stores seems to be a good one. This diversifies Wal-Mart’s store mix and allows it to reduce the ‘upscale’ competitive advantage of retailers like Target. It also allows Wal-Mart to expand in areas, such as dense urban areas, which might otherwise be unsuitable for a larger store. Smaller stores may also serve Wal-Mart’s overseas expansion plans. The investment required would not be so great, and the small format may be a better way to introduce the Wal-Mart brand into new areas. In terms of overseas expansion, partnering with established retailers, such as Wal-Mart’s arrangements with ASDA and Aldi in the UK and Germany, seems to be the better alternative. Current economic conditions, which have left many retailers in very poor circumstances, could provide opportunities for Wal-Mart to merge with or acquire existing well-known brands. Regardless of the methods of Wal-Mart’s entry into foreign markets, the company must improve its market research and understanding of local consumers. The examples of the problems Wal-Mart encountered in places like China and Indonesia describe the objective Wal-Mart should be trying to achieve with its stores in new markets: providing something new and attractive to consumers, yet not something so unfamiliar that they are uncomfortable with it. Wal-Mart should not simply concentrate on expansion into new markets. The level of competition in its existing markets, especially in North America, indicates that there is room for growth in these areas. Given Wal-Mart’s supply-chain strength and the current economic downturn, one area in which the company could keep customers coming back is by focusing on commodities, in particular groceries and clothing. Further diversification into other services may also be advantageous, provided that Wal-Mart does not stray from the model that has proven success for them in the past. For example, Wal-Mart’s entry into the grocery market was done quickly and on a large scale, which gave them a clear market advantage, at least for a significant period of time, over any competitors. Another key to Wal-Mart’s continued growth could also be considered a present limiting factor. Wal-Mart’s brand perception has suffered from a number of issues that have cast the company in a bad light, particularly the labour and product issues noted in the SWOT analysis. If one casually browses the Internet looking for commentary about Wal-Mart, it is easy to form the impression that, in the US at least, the company is considered something of a joke, a place for unsophisticated shoppers and low-quality goods. While the company does have a good record of community involvement and corporate responsibility, the negative publicity from the comparatively few bad situations it has become involved in seems to outweigh the positive aspects. Wal-Mart must improve its brand image, and try to reduce the association between ‘Wal-Mart’ and ‘low class.’ As noted above, Wal-Mart’s initiative to open some smaller, more specialised stores may be very helpful in raising the status of the Wal-Mart brand. Potential limits to Wal-Mart’s growth There are several potential limits to Wal-Mart’s growth. One is in the sheer size of the company; the organisation may grow so large as to become unmanageable. Government regulation also presents limits in a couple different respects. First, Wal-Mart’s diversification into other services such as pharmacies, banking centres, in-store medical, dental, or optometry services, and even seemingly mundane services such as auto repair and beauty salons are subject to different regulation than a straightforward retail business. These increase costs and management requirements. Second, Wal-Mart’s entry into overseas markets are likely subject to local laws regarding business ownership, hiring of employees, importing and exporting, and the like. These are not necessarily obstacles that cannot be overcome, but the potential return must be assessed against the increased costs they would require, and in some cases expansion would not be profitable. The current economic downturn is also an obvious limit to Wal-Mart’s growth, although it may be only a temporary one. Consumer spending power is greatly reduced, and customers seem to be more cautious in their spending even for necessary items. Investment resources for growth have also been reduced. While Wal-Mart still appears to be a very strong company, the current conditions have increased its risks, and some expansion initiatives may not be sound. Another factor, which is also related to the economic crisis, is the growing resistance to Wal-Mart’s firm anti-union position. Chinese employees already have forced the company to accept unions in that country, and there have been high-profile disputes in the US and Canada. While large-scale unionisation may not be the future of Wal-Mart, its workforce is clearly exercising more bargaining power in recent years. This raises the possibility of greatly increased employee costs for the company, and that is one area that could significantly reduce Wal-Mart’s resources for expansion. Building on Wal-Mart’s global reach for the future Wal-Mart has an extensive global presence; even though its stores are presently limited to a relatively small number of countries, they are located on four continents. Wal-Mart’s supplier network, which includes many suppliers from developing economies, extends to many additional parts of the world. This gives Wal-Mart a vast infrastructure of established business relationships, facilities, and means of moving goods which the company can use as a basis for further expansion. In order to assess whether Wal-Mart has the resources to pursue expansion initiatives, an examination of its financial statements will provide the answer. One noteworthy factor in Wal-Mart’s financial status is its current ratio, which is 0.9. This indicates that the company’s assets are slightly less than its liabilities, something that is usually considered an unfavourable sign. But on the other hand, because of the low margins and rapid movement of inventory in the mass-retail sector, having a current margin that close to 1.0 can be considered a sign of efficient financial management. If the ratio was much lower, it would signify that Wal-Mart does not manage debt well, but if it were much higher, it might signify that the company has too many non-working assets. The current ratio also does not tell the complete story, since it is a measure of only current assets and liabilities. Wal-Mart’s net in property, plants, and equipment and assets from continuing operations is enormously positive; the company is in very good financial health and has more than enough resources to pursue any expansion it chooses. Another factor in Wal-Mart’s favour is its experience in growth, particularly outside North America. As the case study explained, this has not always been a positive experience, but that may in fact serve the company better in the future than if everything had gone smoothly. The pitfalls encountered in places like Germany and China should be important lessons to Wal-Mart in how to better assess the cultures and markets it wishes to enter, and to avoid the same mistakes in the future. A good effort in overseas markets can support Wal-Mart’s business in its core North American market as well. Consumers are becoming more socially and environmentally conscious and corporate responsibility – such as supporting fair trade, fair employment practises, and cultural sensitivity – is a strong selling point. Most importantly, Wal-Mart must remember to remain flexible; the same process that led the company to conclude that the enormous mega-store format was not the only answer should be applied at all times to every part of the business, particularly when business takes them out of the part of the world where Wal-Mart is already well-known. Read More