Executive Summary

Wal-Mart has held the power as the leading retailer with a reputation of crushing its competition under its unmatchable low prices for decades. Once, when Wal-Mart came to a city, local businesses would close their doors and disappear soon after, unable to compete against the big box store. However, with the rise of the internet and e-commerce, this unshakable retail giant now struggles to stay relevant. In this new age of social media and instant gratification, Wal-Mart scrambles to cut dead weight, revamp its technology, seem like a morally conscience corporation, and stay true to its mission of providing customers with everyday low prices.

Introduction

Wal-Mart Incorporated is a publicly traded retail corporation on the New York Stock Exchange, under the symbol WMT. Wal-Mart offers discounted prices on common household items and necessities at supercenters, discount stores, and neighborhood markets. Founded by Sam Walton, in 1950 in Bentonville, Arkansas and now operates in 28 countries, with 11,700 stores. Wal-Mart Inc. sells items such as groceries, appliances, home goods, furniture, clothing, etc. Along with these goods, they also offer photo lab, pharmacy, financial, automotive repair and maintenance, and wireless phone services to their approximately 270 million weekly customers.

The cornerstone of Wal-Mart’s business model is to make everyday low prices available to its’ customers by working directly working with manufacturers. Eliminating markups and providing affordable products for purchase allows Wal-Mart to lure in cost conscience and price savvy shoppers. Their clientele is predominately low-income shoppers that make less than $50,000 annually and are more likely to have children at home. Wal-Mart can afford to offer such low prices for its products due to the sheer volume it sells, making it an optimal example of economies of scale. By maintaining low operating costs Wal-Mart can manage slim margins and not only remain profitable by the large quantities sold, but it also gives the corporation a high level of bargaining power with suppliers. While Wal-Mart’s focus on providing customers high value at a lower/lowest cost alternative, it also tries to remain a strong competitive retailer, conscience of its employees and customer satisfaction.

Determinants of Demand

Though Wal-Mart does have a smaller proportion of consumers whom have higher incomes, the theory that Wal-Mart products are also inversely affected by the income of its consumers is prevalent. Some researchers argue that Wal-Mart provides more affordable substitute goods to that of other higher end retail stores, meaning that as income increases, demand decreases. It is proposed that this was especially clear, during the Great Recession from 2008 to 2012, when consumer’s purchasing power declined significantly, even though Wal-Mart somehow remained profitable. In the study “Everyday low price – a blessing in disguise for Wal-Mart during recession”, Dr. Ravindra P. Saxena and Arpana Sharma (2011) stated the following:

In 2008, while the recession was at its worst point, Wal-Mart was one of the most popular stocks on Wall Street. In recession, when most of the retailers are struggling for their survival; Wal-Mart is registering its growth year by year. It seems Wal-Mart is immune from economic pressures and appears to be benefiting from this recession. Wal-Mart’s advantage during the recession is not only its low prices, but also the good value which they offer to their customers by proving their saying ‘save money, live better’.

As the recession was beginning in 2008, Adjunct Professor, Dr. Emek Basker of the University of Missouri used Wal-Mart’s quarterly revenue data from 1997 – 2006 to find elasticity of demand. She concluded at Wal-Mart’s price elasticity of demand -3 with an income elasticity of demand approximately -0.72. Meaning that should “personal incomes fall by 2%, it would cause revenues at each of Wal-Mart’s stores to increase, on average, by 1.44%”. However, more convincing opposing data was presented from University of South Dakota economy professor, Dr. Mandie Weinandt in 2016. Weinandt discusses that by extending the data range from 1997 – 2010, to include data from within the U.S. recession, Wal-Mart is not as “recession proof’ as Basker describes. She calculates a positive income elasticity equal to 0.919 and concludes that Wal-Mart’s products are a normal goods. Meaning that should income increase by 2% revenue will also increase by 1.84%. “Wal-Mart’s strategy is very beneficial in recessionary times as they experience relatively less negative effect on revenues. The downside of this is Wal-Mart’s revenues will not benefit as much from economic booms”. In the end, main determinant of demand for Wal-Mart products is price.

Consumer Preference

Wal-Mart has built its reputation on having low prices; at its peak, competitors in the form of small local businesses or other large retailers found it difficult to compete for consumer attention. With Wal-Mart’s low prices and equal if not greater value, consumers were much more easily lured to spend at their stores. Wal-Mart were and still are a power house contender, with a spot as one of shoppers most top of mind retailers. However, with the increased availability of retail e-commerce, shoppers now not only have Wal-Mart to choose from as their cost-savvy retailer choice, but also Amazon. Due to the wide array of items and services that Wal-Mart offers, the company is in constant competition with other retailers that sell perfect substitutions for their products. There are four stages in the purchasing process, need recognition, pre-purchase activities, purchase decision and post-purchase activities. The first two stages involve looking for more information about the product, while the purchasing decision step concerns the consumers buying behavior.

With free and easy access to the internet, shoppers can easily compare prices to find the best retailer to purchase from. They no longer assume that Wal-Mart sells the item that they intend to buy, for the cheapest price. Shoppers can now easily scan a barcode and compare and contrast price from their phones. However, despite these comparisons, Wal-Mart uses different methods to increase value in the minds of consumers, one of them is done by bundling. Though Wal-Mart may not offer buy one get one free (BOGOF) sales, they do take manufacturing coupons and occasionally lower the price of complementary products to increase the demand for both. Another method to pursue is by altering the formatting of the price displayed to consumers; Wal-Mart displays the current price discounted price of the item as well as the item’s higher original price. This formatting positively affects the consumes willingness to buy and reminds them of the benefits of shopping at Wal-Mart. Creating an added sense of value for the customer is an effective strategy to increase sales, however, it’s not always successful to impede consumers from shopping elsewhere.

Production Operations & Costs

Ensuring each Wal-Mart store can manage the weekly 270 million customers, Wal-Mart employs 2.2 million associates around the world, 1.5 million in the U.S. In addition to employees, Wal-Mart uses several different technologies to track inventory, sales, returns, and distribution conducted by customers and staff. The $16 billion spent in automation and online and mobile accessibility brought on by this technologies work to improve employee and shopper experiences. “The Wal-Mart brand is at the center of a new ecosystem which integrates shopping, services, health and wellness, and first party and marketplace e-comm,” Oliver Chen, a financial analyst wrote to Wal-Mart investors. “WMT is seizing the moment to transform through innovation and utilization of unique store, grocery and people assets. We believe new guidance appears achievable and beatable”. Offsetting this cost, Wal-Mart holds many of its operations offshore, with manufacturing locations extend past the U.S. and into several other countries to include China, India, Bangladesh, Cambodia, Chile, Mexico, and Peru.

As a company, Wal-Mart is “laser-focused on improving productivity throughout the organization and leveraging expenses”. Though they are not where they want to be, they are dedicated to “improving processes and increasingly using technology and automation to be more productive”. Wal-Mart’s variable cost amount to $373.4 billion and include labor and employee benefits, transportation, energy, utility costs, etc. Its fixed cost of $105.31 billion includes the leasing of Wal-Mart property, advertising costs, insurance, etc. Were Wal-Mart’s fixed costs high, in the short run it would not change any production decisions, it would only affect long run production decisions. Additionally, though Wal-Mart’s variable costs are high, due to operating as an economies of scale, the average variable cost would fall significantly due to the level of quantities sold. As long as Wal-Mart’s average variable cost curve stays below the point where the marginal revenue curve intersects with the marginal cost curve, the point where Wal-Mart’s profits are maximized or on that point, then in the short run Wal-Mart should continue producing.

While Wal-Mart demonstrates great economies of scale, they also show economies of scope. Instead of specializing in a single product or service, Wal-Mart uses this cost advantage to sell a wide variety of items. In this situation, it is cheaper to produce more than one good or service through the same organization than separately. Also, with the addition of a learning curve, a graphical representation of the affect that learning has on productivity, average total cost would decrease. Through learning by doing, the average cost of producing goods for a firm operating in economies of scale would decrease while output increased. The more units produced by a worker the less time the worker would need to produce the same unit, adding to Wal-Mart’s efficiency.

Firm Ownership & Governance

Though top managers and countless employees have worked to make Wal-Mart Inc. not only successful but also successful, not all aspects of Wal-Mart of can be morally or ethically endorsable. Many times, throughout its run, shareholders have benefitted from its status as a publicly traded corporation. Were Wal-Mart privately owned by a sole proprietor or in partnership by someone from the Walton family, they would have been responsible for the hundreds of lawsuits made against Wal-Mart.

In October of 2018, Wal-Mart agreed to pay $65 million during a class action suit against 100,000 current employees, for not providing them with chairs to sit in. 18 days later, it was also reported that Wal-Mart settled a $160 million lawsuit in which Wal-Mart ‘made false and misleading statements in Securities and Exchange Commission filings about allegations of bribery’ to a pension fund. As a corporation, there is limited liability for shareholders, as Wal-Mart is its own entity. Meaning that the burden to pay the necessary legal fees and settlements falls on the corporation. The costs of being a publicly traded company can include the cost of labor to generate financials data, audit fees, accounting oversight committees, to ensure that the company follows the Securities Exchange Act of 1934. With that comes the loss of autonomy and control of making certain decisions, as an owner of the organization. With pressure from stakeholders to concentrate on short-term results, the company may suffer by ignoring long-term success and profitability. With too many opinions in the mix, it is a calculated risk that Wal-Mart remains public.

Market Structure

Wal-Mart’s significant market power and limited competition between other firms such as Target and Costco give it an oligopoly market structure. In this structure few firms compete against each other to vie for the attention of consumers. Wal-Mart’s business model is difficult even for the most experienced firm to compete against. As an emerging or existing firm, it would be difficult to join in this competition due to several barriers of entry. In an oligopoly market structure, dominant firms use tactics such as price-cutting to compete with smaller or less established firms. This drives smaller firms out of the market and eliminates any motivation to compete. While this structure does generate high profits for Wal-Mart, managers also have to keep a constant eye on the prices of other firms to ensure that their prices remain competitive. Depending on the actions of the other firms, Wal-Mart may have to increase or decrease output, price, advertising, etc. All of these affected decisions made by Wal-Mart can affect profit, costs, and position within the market.

In this market, Wal-Mart is doing comparatively well against its competitors in term of profit. While it is almost three times higher at $9.86 billion in 2018, Wal-Mart’s accounting profit has been steadily decreasing since 2014, where it was as high as from $15.9 billion. When comparing its profitability ratios however, Wal-Mart comes up lacking. Its return on assets (ROA) in 2018 are 4.89, return on equity (ROE) is 12.67, and revenue per employee is 217,540. Target’s ROA however is 7.55, ROE 25.47, and revenue per employee 204,975; Costco’s ROA 8.14, ROE 26.66, revenue per employee 579,449. When taking in to consideration these ratios, Wal-Mart’s competitors are currently more efficient at using its assets and equity to drive sales.

Pricing Strategies

Staying competitive against other big box stores and online retailers is necessary for Wal-Mart’s continued profitable success. In an effort to reduce shipping costs, Wal-Mart uses a price discrimination strategy to raise the price of products online higher than the price should consumers purchase the item or pick up the item in store. “While passing along the shipping savings to the consumer is great in theory, offering multiple prices on the site is confusing,’ wrote Jackie Breen, director of marketing at Deck Commerce. ‘On Wal-Mart.com, consumers now have three different prices to consider: ‘Buy Online’ price, ‘Buy Online Pick Up in Store (with a discount)’ price or ‘Buy in Store’ price’. This strategy works to put a price tag on convenience and while that may work for some consumers, it may also negatively affect sales. “The potential downside surfaces should consumers adopt the perception of Wal-Mart’s online pricing being higher than Amazon and higher in general,’ said Jeff Hall, president of Second to None. ‘For those products for which convenience outweighs price, Wal-Mart may unintentionally drive away online sales”.

This strategy was further reinforced with the added service of curbside pickup, where customers can choose and pay for items on the Wal-Mart website. They set a time in which they are able to pick up the items, and Wal-Mart associates place them in the customer’s vehicle. Though doubts for the price discrimination strategy are high, it does seem to have some positive effect on Wal-Mart’s sales. However, while online sales for 2017 were above amazons in the first three quarters, the decrease in the fourth quarter shows a possible lack of sustainability.

Risk Management

Along with the constant threat of losing customers to its competitors, Wal-Mart faces several inherent risks. To combat these risks, John Lewis former Vice President of Wal-Mart, created a five-step enterprise risk management plan (ERM). The first step process includes identifying the risk, by using the probability and the organizational impact of a risk. In this step, there are seven internal and external risk categories: legal/regulatory, political and business environments, financial, strategic, operational, and integrity. Step two involves risk mitigation, in which the three to five of the most important risks are identified and quantified. Then employees most likely impacted by these risks are brought in to form project teams. In step three, these teams begin planning different projects and implementing their plans. The fourth step involves measuring group performances and the impact their actions had on the risk. Lastly, step five is used to evaluate whether or not the projects lowered expense or increased sales. After implementing this process, hired a consultant to improve the process. He did this by ensuring that this risk evaluation is completed on three different levels, corporate risk, global/international risk and risk on the functional level.

In the current world of social media and cancel culture, reputation and integrity are important risks that must be managed. A firm can lose intrinsic value with just one negative post and considering the daily interactions Wal-Mart employees have with customers, it is important to ensure employee and customer hotlines are monitored, complaints are addressed, and policies on acceptable employee behavior are properly communicated. While reputation is affected by social media it can also be determined by lawsuits, international labor practices, and employee accommodations.

An increase in wages does not always equate to an increase in work outputs by employees. With the new added benefits to working at Wal-Mart, the company has been troubled by both types of asymmetric information: adverse selection and moral hazard. Due to the 5% monthly turnover rate, Wal-Mart is constantly hiring employees to fill the spots of employees they could not retain. While the added benefits and higher pay help to attract potential candidates, they are not always the best potential candidates. As experienced and knowledgeable employees leave, so begin the added costs of replacement and training that employee. With a notoriously bad reputation for having bad customer service, Wal-Mart struggles to find employees that match their mission and be able to retain those that do.

In terms of cost effectiveness, Wal-Mart may just be paying for its employee moral hazards and absenteeism. Employees that are rude to customers and do not meet productivity requirements necessary for the salary that they are being paid. With this increase Wal-Mart has changed employee policy to restrict paid time off and sick leave and begun to further release unnecessary or unexemplary employees from their jobs. To address the adverse selection of hiring workers that do not live up to the expectations placed on them, Wal-Mart has redesigned their employment hiring selection criteria. This along with the increased movement towards automation is all done to decrease moral hazard, adverse selection, and reduce the costs.