It is no secret that a core focus of Wal-Mart's (NYSE:WMT) long-term growth strategy hinges on their ability to penetrate and grow in international markets around the globe. While Wal-Mart's international business garners a lot of attention, its domestic strategy is important to the short and even the long-term success of the business. While the importance of the international business is growing, the domestic business still represents more than 75% of the operating income for WMT.
Ratio of Operating Income by Business Segment (2009-12)
One word instills fear in executives that operate brick and mortar stores. That word is Amazon (NASDAQ:AMZN). Amazon's success has been a contributing factor to the lackluster performance of many brick and mortal stores. Amazon is willing to operate at margins of between 1%-4%, which is less than the 5%-6% margins WMT typically operates at. Additionally it has a lower cost structure, which allows it to undercut competitors on prices for major items such as electronics.
So what has been the response of WMT to this challenge?
- Expand into international markets
- Increase its own online presence with Walmart.com
- Reshape the footprint of its stores and adjust the way it sells
While getting points 1 and 2 are crucial to WMT's long-term strategy, point 3 is vital and often overlooked. Point 3 will be the focus of this article.
Over the last few years, WMT has embarked on converting its Discount Stores into Supercenters. Additionally it has focused its efforts on growing the footprint of its Supercenter stores, while halting the growth of its Discount Stores. This strategy has resulted in 320 less Discount Stores and 600 more Supercenters in the U.S. between the first quarter of 2010 and final quarter of 2013.
Quarterly Count of Discount Stores in U.S.
Quarterly Count of Supercenters in U.S.
Why is this strategic shift beneficial to WMT?
The main distinguishing factor between a WMT Discount Store and a Supercenter is the availability of groceries. AMZN currently is piloting its Amazon Fresh grocery delivery concept in Seattle and Los Angeles. However, WMT's footprint would allow it to corner this market in a much more efficient and cost effective manner than AMZN could. This is true both offline as well as online.
Additionally, WMT also has followed other grocery stores with a similar concept of offering fuel. This is something that would also be very difficult, but not impossible for AMZN to replicate. Both of these strategies have allowed WMT to add stores in the U.S. without diluting the amount of revenue generated per store.
The domestic portion of WMT's business is well along the path to maturity. As such, it will likely never see the kind of growth it saw in the 1980s and 1990s. However, it is refreshing to see a management team take a multi-faceted approach to growth. WMT clearly is making significant investments in the expansion of its international presence. Given actions taken by the management team, it is refreshing to see it is likely WMT will be able to make these investments without sacrificing dividend payments or shareholder buybacks