The Crisis of Wal-Mart - Case Study Example

The Crisis of Wal-Mart Wal-Mart has long been the household name in the American society. It has been the cynosure in the retail industry and has done exceptionally well for many a years. But the crisis of Wal-Mart is quite visible. With decline in growth and increase in the competition is making the giant think otherwise. Once, there was a time when the retailers used to fight against Wal-Mart. It was considered quite insane. However, as the corporate story of Wal-Mart was seen across America, Wal-Mart moved onto the edge. The downtown stores would close down because the fact was that the consumers swarmed to Wal-Mart and would even come from miles away. They were lured by the wide range of products at invariably low prices. But the years of this custom and practice and also to a great extent the loyalty factor have swiveled. The time has come when the family can be seen flocking the big store of Sam Walton. In an honest kind of admission, Wal-Mart had announced on June 1, 2007 that the company is curtailing the expansion plans in the US. The retailer had plans to open about 190 stores in this year and this is a decline of about 25% from what was estimated earlier. Wal-Mart had planned to open 270 stores. The company also mentioned that it had plans to open about 80 such supercenters in January 2008 alone but will actually open in the 2009 fiscal year. This announcement was not entirely unexpected as the company showed a decline of 3.5% in sales figures in the month of April for the stores that has been open for more than a year. This is estimated to be the largest decline since the year 1979. With slow growth progression and in fact a negative growth expected in the future, the company is trying to use a tried and tested method to bolster the stock. On June 1, Wal-Mart announced that its directors have approved of the share repurchase program. This will increase the buyback Wal-Mart 2 authorization to about $15 billion. The investors were naturally keen on the prospect and the shares bid up by 4% to $49.36 in the NYSE. But this was still a gleam picture, because in 2004 the share had soared up to $61.21. With less amount of capital spending, the cash will be freed up to about $1.5 billion in this year. In this way the company also plans to boost the dividend by 31% which is about $3.6 billion. As per Joseph Asaeda , the analyst of Standard & Poor, he increased the target price on the Wal-Mart shares from $53 to $56. "We view these steps as positive; believing that reallocation of assets from maturing U.S. business will lead to improved shareholder value. We expect reduced capital spending and higher free cash flow to fund an increasing dividend and an active share repurchase program," Asaeda mentioned it in the note of a client. In the recent months, Wal-Mart has practically returned to the basics and has abandoned the quest for the upmarket customers. But it must be noted that only price cut alone will not make things better, because the retailer is also facing the Down syndrome in the sales front as well. As per Castro-Wright, he is planning to take up the challenge to lure the upscale consumers to cross the basic limit and graduate to higher rate items. John E. Fleming, is the new CMO (Chief Merchandising Officer) of Wal-Mart. He had a stared in awe at the display of $14 T-shirts for women in a Supercenter. This was just about a few miles from the headquarters of Wal-Mart. The T-shirts were carrying the George label and are stylish and are of quality. This is in fact quite unlikely of the discount stores of America. What has Wal-Mart 3 vexed Fleming is the fact that the multiple sized of the T-shirts are out of stock and which is primarily about 6 of the 12 different colors available for the T-shirt. John E. Fleming is one of the powerful merchant in America, but a time bound solution is beyond his reach. In all practically Wal-Mart did not ordered enough number of T-shirts in the past year and hence the George branded T-shirts will be in short supply in most of the U.S. stores of Wal-Mart. This will deprive the company a loss of $10 million a week. This money was an absolute necessity for the company. "The issue with apparel is long lead times," mentions Fleming. He has 20 years experience in Target Corp before he joined Wal-Mart. (TGT ) before joining Wal-Mart Stores Inc. He mentioned that it will be fixed in due course of time. For the past five decades the everyday low price concept of Wal-Mart and its truly low priced products had defined its business. But it was not just the business aspect alone. The company made great progress in the world of retail by dominating the market with its unique selling style. But for the past one and a half years the policy of Wal-Mart had failed. In the year 2006 the U.S. division made a mere 1.9% gain in the same-store sales. This was the worst performance of the company. But in comparison the competitors like Target, Safeway, Costco, Walgreen’s and Best Buy had made enormous progress. They have grown by 2 to 5 folds more than Wal-Mart. Wal-Mart definitely had made impressive strides in the business of retail. In fact the revenue of Wal-Mart was higher that the economy of Sweden and Saudi Arabia. Such was its quantum. But such a success will be at a cost. The 44,000 workers of Wal-Mart in California depend on public assistance. The business practice of the company had made the taxpayers pay $86 million a year. This estimate was studied by the University of California and it also pointed out that about three- Wal-Mart 4 quarters of the employees of Wal-Mart earn less than $10 an hour. This is in contrast to the average wage of $14 an hour made by the employees of other retailers in California. Wal-Mart is aware of its image and it has in fact featured an advertisement showing the happy workers talking great about the workplace. In the middle of the year, the CEO, Lee Scott, made more effort to make the things better. The CEO proposed and an 8 point plan which will improve the employee relationship. This will ensure diversity in culture, creed, religion and sex. The company is also talking to the U.S. Justice Department in order to settle the issue of immigrant workers who have been employed by Wal-Mart. The number of stores which fall below the verge of meeting the minimum customer prospect has declined but remains "more than would be acceptable," says Scott. He is quite philosophical about the perseverance of mediocrity. He was asked that why it was difficult to fix the bad shops. He replied, "That's a very good question. It's a question I ask all the time." The market is also likely to anticipate a difficult potential for Wal-Mart. After more than two decades of massive growth, the company’s stock has been flattened and has Wal-Mart taking tough decisions to change its fundamental approach. But in all aspects the image of Wal-Mart being the America's most admired company is over. It is completely possible that even so that Wal-Mart will in due course of time will figure out how they want to sell the huge amount of blazers, laptop computers, 400-thread-count sheets, and maybe the pre-packaged sushi. But as and when the company makes $400 billion in annual revenue, it still needs to overachieve in order to get the same-store sales rise to gain 3% to 5% a year. Wal-Mart 5 Reference: 1. Wal-Mart's Midlife Crisis. Anthony Bianco. APRIL 30, 2007 www.businessweek.com/magazine/content/07_18/b4032001.htm 2. Wal-Mart's Mid-Life Crisis. STEVE MAICH. Aug 23, 2004 http://www.macleans.ca/article.jsp?content=20040823_86761_86761 3. Wal-Mart's Latest Ethics Controversy. Laura. June 13, 2007 http://blog.wakeupwalmart.com/ufcw/2007/06/walmarts_latest_2.html 4. Wal-Mart Lets Up on the Gas. Pallavi Gogoi. June 1, 2007. http://www.businessweek.com/print/investor/content/jun2007/pi20070601_037473.htm Read More