Walmart

A Case Study on Wal-Mart Stores Inc.

Contributors to this Report:

Patrick Hayden, Seung Lee, Kate McMahon, Mike Pereira

Written in April 2002 - Web posted September 2002

Back to Case Study Index Page

Wal-Mart: Staying on Top of the Fortune 500

I. Background

Last year, Wal-Mart had revenues of $191 billion. Wal-Mart's 2002 sales topped $218 billion, with sales growth at 13.8 %. Its 2002 net income was $ 6.7 billion, a growth of 6 %. Wal-Mart has 1,283,000 employees, as of 2002; a growth of 11.2 % (www.fortune.com).

Wal-Mart is the largest retail store in the United States, and is larger than any other retail chain in the world. Currently Wal-Mart operates over 4,150 retail facilities globally. Also, the company is the dominant retail store in Canada, Mexico, and the United Kingdom (www.walmart.com). According to the Fortune 500 index of the wealthiest and most powerful corporations in the world, Wal-Mart holds the number one spot, ranked by its total sales. The company is ranked as the second most admired company in the world by Fortune (www.fortune.com)

Wal-Mart provides general merchandise: family apparel, health & beauty aids, household needs, electronics, toys, fabrics, crafts, lawn & garden, jewelry and shoes. Also, the company runs a pharmacy department, Tire & Lube Express, and Photo processing center as well. (www.walmart.com)

When Sam Walton created Wal-Mart in 1962, he declared that three policy goals would define his business: respect for the individual, service to customers, and striving for excellence ( www.wal-mart.com).

Wal-Mart's corporate management strategy involves selling high quality and brand name products at the lowest price (Vance, 119). In order to keep low prices, the company reduces costs by the use of advanced electronic technology and warehousing. It also negotiates deals for merchandise directly from manufacturers, eliminating the middleman (Vance, 72).

Wal-Mart's community outreach focuses on the goals of providing customer satisfaction, involving itself with local community services, and providing scholarships. Its emphasis is on children and environmental issues (www.walmart.com).

After the Second World War, the style of retailing in the US evolved into discount merchandising. It took the form of departmentalized retail business. A discount retail store such as Wal-Mart can provide lower priced goods for consumers at lower prices by accepting lower margins, while selling greater quantities of goods. The company launched its business in small-towns throughout the South and Midwest, eventually expanding into larger cities (Vance, 69).

During the 1970s, the retail industry became highly competitive, but, at the same time the economy became weak due to inflation. Sears was the leading retailer in the nation, during the 1970s, however, the recession of 1974-1975 and inflation affected Sears adversely. Sears targeted middle class families and expanded its overhead. Wal-Mart's strategy was to compete with its rivals and lower overhead expenses. Compared with Sears, which consisted of more than 6,000 distribution centers, Wal-Mart had only 2,500 comparable units.

Wal-Mart grew rapidly during the 1980s due to diversification of the company. Wal-Mart's fundamental business principles at that time were to provide "high-quality," brand name merchandise at low-prices and to locate stores in small towns (Vance, 113).

Wal-Mart centered on small-towns first, then tried to move to large cities. This happened while other retailers centered on larger urban centers. However, as the economy faced a downturn, people wanted low price stores. Furthermore, as people became mobile, they moved to small towns and suburbs and were willing to travel further to buy low price products.

During the 1980's, local chambers of commerce supported Wal-Mart because they believed that the company helps a local economy by providing good quality products at low prices (Vance, 148). Unfortunately, critics contend that the success of Wal-Mart hurts the existing local independent merchants. Despite the criticism that Wal-Mart destroys small-town competitors, the local chambers of commerce endorsed Wal-Mart (Vance, 72). In addition, the chambers of commerce account that the arrival of Wal-Mart provided jobs for people and a more diverse opportunity for local merchants by adapting to the new business environment. They said that Wal-Mart contributes to their local economy (Vance, 149).

Nonetheless, local newspapers began to scorn Wal-Mart because the company did not nurture amiable relationships with local advertisers. Once local competition was eliminated, Wal-Mart began to cut back and eliminate local advertising in favor of direct mailing of a centrally produced circular Vance, 72).

Today, Wal-Mart has 1,636 retail stores. There are 1,093 Wal-Mart Super centers, 502 Sam's Clubs, 31 Wal-Mart Neighborhood stores and 1,183 international stores ( www.walmart.com). Its core retail business can be divided into four retail divisions: Wal-Mart stores, super centers, Sam's Club warehouses and neighborhood markets. Wal-Mart stores and Super centers provide "one-stop family shopping"; combining groceries and general merchandise departments. Sam's Club is the nation's leading members-only warehouse club. Neighborhood Markets offer a convenient shopping experience for customers who need groceries, pharmaceuticals and general merchandise.

Internationally, Wal-Mart has more than 1,000 stores in nine countries. (www.walmartstore.com. Retail Division)

Sam's Club provides more discounted prices for members by eliminating the middlemen by buying directly. Founder Sam Walton believed that low-prices and deep discounting would appeal to customers most and beat competitors. (Vance, 115) Further, Sam Walton intended to implement deep discounting which was designed to provide 40- 60 % discounted prices for customers. Thus, he focused on supermarket and super drug store businesses (Vance, 113).

When Wal-Mart first arrived on the scene with their low prices, K-Mart stores was unable to discount brand-name products. Customers wanted to buy good quality brand-name products. K-Mart provides non-name brand goods cheaply, however, it could not maintain constant low prices with its name-brand