20 years ago, when I was in High School, a professor explained the franchisee model of doing business using the examples of McDonald's and Wal-Mart. Years later, I read Sam Walton's autobiography, which I now consider the Bible of small American entrepreneurs. Now, having shopped in Wal-Mart stores across the USA and elsewhere, I can see how important, even if controversial, this company is in today's retailer's world.
With the stock trading at a 5-year high, the largest retailer in the US and the world, Wal-Mart (NYSE:WMT) is having a good run at the New York Stock Exchange. Let us have a look at the highlights behind its success and the steps it is taking to keep the momentum going.
Wal-Mart has divided its business into three operating segments. The first segment of the company is Wal-Mart US. This segment includes revenues earned from its operation in the US, Puerto Rico and online sales from the website. This is the largest and the most important segment for Wal-Mart, as 60% of the company's sales are from within the US. Approximately 90% of the US population stays within 15 minutes from a Wal-Mart store. The company approximately controls about 33% market share in the US. Comparable stores sales growth for Wal-Mart has been more than that of its competitors Costco (NASDAQ:COST) and Target (NYSE:TGT). The second segment of the company is the Wal-Mart International segment. This consists of the company's operations outside the United States. The third segment of the company consists of revenues earned from Sam's Club. This segment earns revenues from membership to Sam's Club and also sale of products, most of them in large quantities. This segment accounts for approximately 12% of the company's revenues.
Importance of Wal-Mart US Segment
The US segment has 3,868 stores while the international segment has 5651 stores, and Sam's Club has 611 stores. However, in terms of total retail square feet, the US segment had 627 million square feet, while for the international segment it was 329 million square feet. An average US store is approximately 2 to 2.5 times bigger than an international store, and that is the biggest difference between the two segments.
However, despite this, revenue earned per square foot was higher for the US stores than for international stores. This shows how important the US segment is for the company's revenues. The international stores have been used more prudently when it comes to space as compared to the US stores. The main reason for this is that internationally, especially in emerging markets, the real estate prices are high. Also, smaller stores help connect with customers better, as the help-your-self model of the US consumer industry does not fit with many international cultures. In the US market, it seems that Wal-Mart is reaching saturation point for opening new stores. If the new stores are not opened strategically, the stores may end up generating revenues by attracting customers from other Wal-Mart stores. The company will do well to strategically re-organize the current stores before thinking on expanding on a large scale any further within the US.
Core competitors of Wal-Mart, especially within the US are Costco and Target. Target directly competes with Wal-Mart while Costco directly competes with Sam's Club. Interestingly, Wal-Mart's revenue is more than double the combined revenue of Costco and Target. The same story goes for Wal-Mart's market capitalization. Wal-Mart, because of its sheer size, has a great advantage over its rivals when it comes to negotiating with suppliers to sell goods at low prices and can get better payment terms. Because of these reasons, the company's gross margin and operating margin are better than most of its competitors. Only Target has been able to match, but not beat, Wal-Mart's margins in the industry. One of the main reasons behind this is that both companies have slightly different types of customers. Wal-Mart focuses on customers with comparatively lower incomes. Target caters with individuals with slightly higher incomes. For example, for its women's fashion department, Target has tied up with Prabal Gurung. Using branded products, Target has been able to improve its margin slightly more than its competitors.
Amazon (NASDAQ:AMZN) is a company which has been giving stiff competition to all retailers across the board. As more and more consumers have started shopping online, retailers such as Best Buy (NYSE:BBY) and Wal-Mart have been getting hit. However, Wal-Mart identified Amazon's threat early and has already taken mitigating steps. First of all, recognizing direct competition, it stopped selling Amazon's Kindle in the Wal-Mart stores. It has also started 'Site to Store' option for its customers. This allows customers to buy things online, and collect them from the store. In fact, for a small premium, they may be able to collect it on the same day.
Wal-Mart has come out with a smartphone application which allows quick self-checkout for the customers. This option is already available in more than 200 stores across 14 markets. The customers can scan the barcodes of the items bought by them on their phone, and on a standard self-checkout station, choose the pay via mobile option. This feature will significantly enhance customer experience and cut down long waiting queues at the checkout. Such quick shopping options definitely do rival the services offered by Amazon, as it provides the ease of quick shopping along with the fact that you can physically inspect items that you want to purchase. An option that Amazon cannot provide.
Wal-Mart was always known to have strong fundamentals of a retail company, offering its customers cheap products. However, now we can see that it is also not shying away from adapting the new techniques to thwart competition from online retailers such as Amazon. To add to this, Wal-Mart is also a company that has been giving consistent dividends to its investors. The dividends have grown 13.5% from fiscal year 2008 through fiscal year 2011. Such strong fundamentals are reflected in the current stock price of the company, and as an investor, I would hold onto this stock for the foreseeable future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.