It's the American retail superpower to rule all superpowers - but could Wal-Mart (WMT) be in trouble? The seemingly unstoppable multinational corporation, which is the world's largest private employer, has always been considered a 'safe' investment, providing healthy returns in times of both economic boom and economic bust. But we could soon see the company's stock market value make a steady decline, if market rumors are anything to go by.
Although Wal-Mart is a big name when it comes to national superstores, the company doesn't have such a dynamic presence online. Over the past decade, many customers have switched from buying goods in-store to purchasing over the web, where prices are typically lower and selection is more varied. The only rational drawback of making purchases over the Internet (providing you are familiar with the products) is the addition of delivery costs. However, a vast majority of online retailers have now scrapped these costs on deliveries of a certain value, making online shopping even more lucrative. With efficiency on the rise as well, people are even going online to buy their weekly groceries.
Wal-Mart does, of course, allow customers to order on the web. But this doesn't seem to be enough. In my opinion, this is due to a lack of information on the part of customers: a hefty proportion of the public simply doesn't associate Wal-Mart with online shopping, and therefore use other Internet retailers such as Amazon (AMZN) and eBay (EBAY). These retailers typically offer more selection than Wal-Mart.
Take Amazon. Its recent acquisition of Zappos is only one example of how it has taken initiative to expand its range. It also allows customers to purchase used items, which can in many cases significantly reduce prices. eBay, on the other hand, traditionally provides a marketplace in which sellers can buy and sell used products. The great success of the website has led to expansion beyond this basic idea. For example, eBay shops, in which small businesses can sell their products online, have now developed. Amazon and eBay have become significant competitors for Wal-Mart. 50% of Wal-Mart customers now shop on Amazon, compared to just 25% only five years ago.
Can Wal-Mart do anything to remain in its current spot as the world's number one retailer? I'm not so sure - unless it can boost its online image, Internet retailers could fast become the new retail superpowers. That said, not everyone is switching to shopping online. Wal-Mart's current strategy is to keep a firm grasp on the brick market, which is admittedly still vast.
But there is stiff competition in this area too. Wal-Mart's biggest discount superstore rival is Costco (COST), the second-largest wholesaler in the US behind Wal-Mart. Although Costco enjoys a smaller market share than Wal-Mart, it has a strong brand image. The store doesn't, for instance, offer the same levels of product consistency as Wal-Mart. Many customers like this aspect, as they never know exactly what to expect in terms of offers and deals, encouraging more regular store visits. It has to be said, this argument isn't wholly convincing - I think those of us with more hectic lifestyles would prefer to know for sure what products will be available so we can grab what we need. The true selling point when it comes to Costco is the guarantee of value for money. Products are never sold in the store for more than 15% of their purchasing cost, a figure which rises to 25% in Wal-Mart stores. No-one likes to be ripped off, and if consumers can put up with the warehouse feel and slight inconsistency of shelf stock at Costco, it would be the rational choice over Wal-Mart.
In the UK, Wal-Mart store Asda plays second fiddle to supermarket giant Tesco PLC which boasts 30.2% of the market share (compared to Asda's 17.9% share). The two stores, along with Sainsburys and Morrisons (all together branded the 'big four' UK supermarkets) are currently engaged in fierce price wars. Asda's 'Price Guarantee' scheme allows customers to purchase goods at the same price as they can be found at in the other big four supermarkets (if Asda's given price is higher than this). This effective advertisement method means customers know they are getting value for money when shopping at Asda, and it seems to have limited the success of the Tesco Big Price Drop campaign.
As the 'big four' compete in price competition which is becoming, in my opinion, quite ludicrous, they could be ignoring approaching threats to their oligopoly structure. Smaller chain stores such as Aldi and Lidl, which tend to offer groceries and other supermarket goods at very low prices, are growing at a swift pace. Aldi has seen sales rise by 28.5% over the past year. Wal-Mart needs to watch out for this new type of competition if it wishes to retain its strong retail position in the UK.
Wal-Mart is currently trading at around $61 dollars per share. For the moment, I don't think investors need to worry - as the world's largest retailer, it won't be going anywhere for quite a while. But is the stock the lucrative investment it once was? With the rapid speed at which consumers are switching from buying in-store to online, I think not. Additionally, Wal-Mart could benefit from building a friendlier, more personal image that doesn't scream 'supermarket superpower'.
In the fast-paced economic climate of the 21st century, even the largest players in the market aren't safe. Wal-Mart should be wary of taking its dominating position for granted, before the carpet is swept out from under its feet. I don't think you should sell shares right now, as I believe the stock should remain stable at the moment. But investors will need to watch out over the next decade if Wal-Mart doesn't successfully expand its online enterprise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.