There are only a few stores that you can count on being open almost every day of the year and 24 hours a day. Wal-Mart (NYSE:WMT) is one of those stores you can count on. Whether it is having the lowest price on toilet paper or having motor oil and lipstick under the same roof, it has you covered. With 4,017 locations in the United States alone, the world's largest private employer has redefined the retail business. Volume is the key to its success and it has been able to negotiate rock-bottom prices and drive sales to a whole new level with its simple business model. With its success, there has been criticism on the way that it has achieved success.
Is Wal-Mart Good for Small Towns?
It sounds like a great deal for a small town. Wal-Mart will bring more jobs and lower prices to help communities that are in trouble. The reality is that these everyday low prices are starting to have a major impact on small businesses in these communities. The large purchasing power and price negotiation leverage that it wields allows it to undercut prices that hardly any small business can compete with. A study done by Ken Stone and Georgeanne Artz called "Impact of The Wal-Mart Phenomenon on Rural Communities" [pdf] compared small towns in Iowa with and without Wal-Marts to see if there was a significant impact on the economy. The study looked at 34 small towns in Iowa with a population of 5,000 to 40,000 that had Wal-Marts for at least 10 years compared with 15 small towns that did not have Wal-Marts to see what the difference was. The results showed that a Wal-Mart moving into a small town did not automatically spell out death for small businesses. The small businesses that were positioned to do well against Wal-Mart were stores that served some type niche of market or had a specialty. A good example of this is the hardware stores that had the expertise and wide selection that many people in small towns value and seek out.
One of the most surprising findings of the study is that small towns without Wal-Marts have still done pretty well for themselves. They were able to attract enough businesses to provide everyday necessities for the small towns so that they would not have to leave town to get what they needed. The study found that the breaking point for small towns was approximately 5,000 people. If the town had more than 5,000 people, overall the town fared better with a Wal-Mart. If the town had less than 5,000 people, the town was much worse off. The result in the study showed a loss of $2.46 billion in retail sales from 1983 to 1996 in the towns with a population of 5,000 or less. Wal-Mart may not impact stores that have a niche market, but as a general trend, small businesses will suffer if Wal-Mart moves into a small town.
Does Wal-Mart in China Sell Eel?
The answer to this question is yes and much more. Wal-Mart has done a fantastic job of adapting to the needs of the international market. Walking into Wal-Mart in China is much different than the average Wal-Mart in the United States. Live Eels, Crocodiles, and frogs are sold and sometimes slaughtered on the spot. Wal-Mart currently operates in China with five different types of stores including the traditional Supercenters and Sam's Clubs with the addition of two neighborhood markets, five compact hypermarkets, and 29 Trust-Mart hypermarkets. These new types of retail locations are specially designed to better serve the Chinese market. Wal-Mart not only operates 393 retail locations in China, but in 27 countries around the world with 6,155 total international locations. Wal-Mart's international strategy is continuing to grow as well. In January of 2013, Wal-Mart in Canada announced plans to build 37 new supercenters in Canada to bring the total location count to 388 by January of 2014. This $450 million investment by Wal-Mart is estimated to bring 7,000 new jobs to Canada. Wal-Mart has identified the international sector as a key area where it wants to drive growth. In 2011, its goal was to grow international square footage by 23-24 million square feet, compared to its goal to expand U.S. square footage by 11 million square feet excluding acquisitions of other local brands internationally. Wal-Mart is on track to have even a larger world footprint and will continue to grow revenue not only in the United States but abroad as well.
What Does the Expansion of Wal-Mart Mean for Shareholders?
Even though Wal-Mart is an aggressive company when it comes to growth and driving volume, it has still been able to do it in a way that doesn't compromise its net income. The 10-year average for revenue growth was 7.35% and the 10-year average for earnings per share was $10.74. Wal-Mart has achieved this while keeping its debt-to-equity ratio below 0.66 in the past 10 years. The financial crisis had little impact on Wal-Mart and may have even helped it boost sales being the lost-cost leader. With the expansion of Wal-Mart, as long as it is done in a way that does not oversaturate the market or leverage an enormous amount of debt, there will be long-term profits for shareholders. One threat that Wal-Mart may face in the future could be that the low-cost leader will lose sales because of the environment that it creates, and the fact that sometimes people will pay a little bit more to avoid it. This environment is one where the stores are not kept clean enough, there are questionable employment practices, people have to wait too long in line, or simply that Wal-Mart is further away from them than their local grocery store. This is certainly not the case in every Wal-Mart, but Wal-Mart must work hard to make sure that not only are its prices attractive, but also the environment in which they are presented is attractive.
Even with this threat, there will always be people who will be attracted to Wal-Mart whether it is getting that last minute gift at 2am, or knowing that it is a one-stop shop, Wal-Mart will always have a foothold in the retail marketplace.
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Business relationship disclosure: This article was written by an analyst at Catalyst Investments.