Posted 7/2/2012 12:00 am
Updated 1 year ago
It won’t be long before Wal-Mart Stores Inc. of Bentonville generates a half-trillion dollars in revenue in a single year.
It’s close now. For its fiscal year that ended in January, Wal-Mart reported $446.95 billion in revenue, up 5.9 percent from the previous year. And for Wal-Mart’s first quarter of this year, the world’s largest retailer reported revenue of $113.02 billion, up 8.5 percent from the same quarter last year. Its profit was $15.7 billion for the fiscal year that ended in January, down 4.21 percent from a year ago. But for the first quarter, its profit was up 10.1 percent to $3.7 billion.
The future looks bright for continued sales growth for the retail chain, which has more than 4,400 stores in the Unites States and more than 5,600 locations scattered across 26 countries.
“They’ll keep growing because there’re plenty of countries to grow in,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York. “There are plenty of things to add.”
While the fuel of revenue growth is expected to come from its international division, Wal-Mart is positioning itself to boost its disappointing online sales while continuing to tackle some of the few remaining areas in the United States that it’s not in.
“I think you’ll see them going into smaller stores in the United States, at least considerably more than they have in the past,” said Ken Stone, an emeritus professor of economics at Iowa State University, who has studied Wal-Mart since the 1980s.
In June 2011, the company introduced Wal-Mart Express stores, which average about 15,000 SF and offer groceries and general merchandise. By the end of April, Wal-Mart had opened 10 Wal-Mart Express stores.
The smaller outlets give Wal-Mart “flexibility in serving customers, especially in rural and urban areas where shoppers may not have access to larger stores,” the company said on its website.
Another area of sales growth could be Wal-Mart’s Neighborhood Markets. The first of that kind of store opened in 1998. They are about a quarter of the size of an 185,000-SF Supercenter. The company has 168 Neighborhood Markets stores across the country.
“They’ve not had stellar luck with small stores up to this point,” Stone said. But the smaller stores give Wal-Mart a chance to break into some of the larger cities that it hasn’t been able to crack, such as Los Angeles and New York, he said.
Wal-Mart officials, however, have been pleased with the smaller stores, which could compete with the surge of low-price retailers known collectively as “dollar stores” that have been snatching domestic sales from Wal-Mart.
In the United States, Wal-Mart suffered through two straight years of same-store sales declines in fiscal 2010 and 2011 before a modest rebound of 0.2 percent in the fiscal year that ended in January. The trend continued upward in the first quarter of this year with same-store U.S. sales up 2.6 percent.
Same-stores sales are considered a key indicator of a retailer’s health because sales are compared with stores that have been open at least a year.
“With the development of the Neighborhood Market as a medium format and the Express [store] as a test small format, we’re seeing our customer respond to those smaller stores,” Karen Roberts, a Wal-Mart U.S. executive vice president, said in a meeting for analysts held in Bentonville in October.
In Wal-Mart’s current fiscal year, it plans to add between 80 and 100 smaller format stores, which are less than 60,000 SF, in the U.S. It plans to add between 130 and 135 larger-format stores, according to an October news release from the company.
Room to Grow
President and CEO Mike Duke said in the October analyst meeting that Wal-Mart’s biggest revenue growth would come from international sales.
“The international business continues to be a vibrant growth engine,” Duke said during the presentation in October. “And the team is growing market share in almost every market we operate.”
It is unclear how a Mexican bribery scandal will affect Wal-Mart’s growth. Shareholders filed a flurry of lawsuits shortly after an April article in The New York Times alleged that Wal-Mart de Mexico officials “had orchestrated a campaign of bribery to win market dominance.”
One lawsuit filed by a shareholder seeks to recover “the hundreds of millions of dollars of financial and reputational damages caused by” the retailer’s alleged bribes. “As a result, the Company is now subject to serious legal liability,” the lawsuit said.
Wal-Mart said in a U.S. Securities & Exchange Commission filing on May 17 that the investigation into its business practices in Mexico could spill over into other areas of the company. Wal-Mart “could be exposed to a variety of negative consequences as a result of the matters,” it said in the filing.
Still, sales from the international division have been soaring. Its sales were up 15.2 percent to $125.9 billion for its fiscal year that ended in January. And for its first quarter of this year, sales were up 15 percent to $32.1 billion, which was about half of the U.S. Wal-Mart’s division sales of $66.3 billion.
Wal-Mart’s overseas growth strategy is the same that made it a retail powerhouse in the first place: a focus on low prices. So engrained is the “Everyday Low Prices” mantra that it has been reduced to an internal acronym: EDLP.
“We will be an EDLP operator over time around the world,” Doug McMillon, Wal-Mart’s CEO of International Operations, said in the October meeting for analysts.
One of the markets for growth will be China. Between 2010 and 2020, China is projected to add 189 million middle-income households.
Between January 2010 and January 2012, Wal-Mart opened more than 90 stores in China, giving it 370 at the end of April. It planned to hire 160,000 Chinese workers in the next couple of years.
“The growth is explosive, and what’s happening in China is that, much like in the United States many, many years ago, Mr. Sam brought products to rural America that customers in those markets did not have access to and brought them at prices they could afford,” Eduardo Castro-Wright, Wal-Mart Store’s vice chairman, said in the October meeting.
In addition to its low-price strategy, Wal-Mart plans to grow through acquisitions and opening stores.
Wal-Mart said in an October news release that it plans to spend between $4.5 billion and $5 billion this fiscal year, an increase of 11.8 percent over the previous year, to acquire companies for its international division.
Not including the acquisitions, Wal-Mart plans to add between 26 million SF and 28 million SF to its international division.
At the end of April, Wal-Mart had 1.04 billion SF; of that, 330.8 million SF were in its international division.
Wal-Mart also plans to grow through online sales in other countries. “We have a great opportunity to take [online sales] … and build business faster than those markets would’ve been able to build on their own,” McMillon said in October.
Wal-Mart also will attempt to improve its online sales in the United States.
For more than a decade, Wal-Mart online sales have sputtered. Although Wal-Mart doesn’t reveal its online sales in U.S. Securities & Exchange Commission filings, Internet Retailer, an online retail industry website, estimated Walmart.com sales at $4.9 million in 2011, up 20 percent from a year earlier.
Amazon.com Inc. is the leader in online sales with $48.1 billion in 2011. And Amazon’s profit margin is vastly greater: Amazon earned two-thirds as much as Wal-Mart in their most recent fiscal years on barely one-tenth of the total revenue.
Wal-Mart managers even agreed the online division wasn’t stellar.
“We didn’t have the tools to be able to really compete online the way that other online retailers have been doing,” Castro-Wright, Wal-Mart Stores Inc. vice chairman, said in October.
But that is changing.
In June, Wal-Mart shareholders elected Marissa Mayer, vice president of local and maps for Google Inc. of Mountain View, Calif., to sit on its board. Her nomination fits in with Wal-Mart’s plans to become more aggressive with online sales. In 2011, Wal-Mart bought the social and mobile media company Kosmix of Mountain View, Calif., for $300 million.
Wal-Mart even created a new unit in May 2011, WalmartLabs of San Bruno, Calif., to handle social media and e-commerce initiatives for the retailer. It opened an office in India in November 2011 and planned to hire 100 developers.
And its social media strategy perked up. In October, Wal-Mart launched an aggressive social media initiative by unveiling 3,500 Facebook pages, one for almost every U.S. store.
The move generated praise from social media experts. Customers who “like” the Facebook page of their local store then receive specially targeted offers. A Facebook strategy, if successful, could add 5 percent in sales to a company, said Michael Bolton, the chief technology officer for Keyora Inc., an e-commerce software company in Oakville, Ontario.
And the timing couldn’t be better for Wal-Mart because online shopping is booming. In 2010, online sales in the U.S. reached $177 billion and accounted for 6 percent of total retail sales, according to Forrester Research Inc., a research firm in Cambridge, Mass. In 2011, online sales in the U.S. hit $202 billion. By 2016, Forrester forecasts online sales will have grown to $327 billion and represent 9 percent of total retail sales.
“Basically, Wal-Mart is moving from just being a company that operates stores and a logistics company to even more of a customer-driven company that responds to how they want to shop,” Doug McMillon said in an April 12 meeting for analysts. “What the customers want, we will deliver. And we’re going to find a way to be a low-cost provider in each of those instances so we can continue to grow our business.”