Competitive advantage built around management toughness doesn’t last forever. As in the old Charles Atlas ads, the 97-pound weakling eventually gets tired of having sand kicked in his face, heads off to the gym and becomes just as muscled as the bully.
General Eletric (NYSE:GE) learned that. GE was early to brutal cost cutting and relentlessly pushing its products into foreign markets, but once competitors caught on and caught up, GE began to look like any other giant conglomerate, which is to say lumbering.
Wal-Mart (NYSE:WMT), too, frightened its weaker grocery competitors early on, with its beefy and efficient distribution system and what some saw as its bullying of suppliers and workers, all to keep costs super low. But the big grocery chains have adopted many of those same practices. And now in a very mature U.S. market, Wal-Mart, while it remains the biggest and the toughest, is surrounded by competitors who can stick up for themselves, none more so than Kroger (NYSE:KR).
Looking at stock prices over the past decade — as Wal-Mart pushed deeply into groceries and Kroger, the biggest traditional supermarket chain, learned to stand its ground – it looks like a standoff. Not so great for either side.
Kroger started out the weakling when it came to growth, but in recent years has beaten Wal-Mart in that category. In the just-ended third quarter, Wal-Mart’s U.S. sales were flat and its same-store sales in the U.S. fell by 1.3%. Kroger, meanwhile, posted a 2.4% increase in same-store sales, hanging onto customers by cutting prices. It hurts Kroger profits in the near-term, but its results will improve as the economy speeds up.
Wal-Mart, with a big piece of its sales coming from general merchandise, where margins can be thicker, is more profitable than Kroger. But what’s most notable is that neither company, despite huge investments in productivity, has been able to fatten its margins in the face of such tough industry competition.
As YCharts wrote in September, Wal-Mart is a modern management marvel. Its sales rise slowly (foreign growth offsetting sluggish conditions in the U.S.), but by holding costs down its profits rise a little more swiftly. And by buying back copious amounts of its stock, per-share earnings rise even more rapidly.
Wal-Mart is favoring foreign markets for expansion, while planning to hold capital spending flat in the U.S. That should help revenue growth. But foreign sales to date have been far less profitable than U.S. sales – operating income equal to 4.5% of sales overseas during the third quarter compared to 7.1% in the U.S.
Along with the huge buybacks, Wal-Mart pays a rising dividend.
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