Full Steam Ahead, Even If it Means Wal-Mart vs. Wal-Mart

Discussion
Apr 14, 2006
Rick Moss

By Rick Moss

“Growth, growth, growth” continues to be Wal-Mart’s mantra for success, even when expansion results in eating into its own sales, according to a Wall Street Journal piece by Kris Hudson. In fact, cannibalization is all factored into the strategy, to the disapproval of many on Wall Street.

Tom Schoewe, the company’s CFO, summed the company growth philosophy this way at last June’s annual meeting: “We would much prefer to increase growth rather than increase already very high — way higher than acceptable — returns. And, in fact, if those returns were to come down a bit and we could grow faster, that would be just fine by me and…for our investors.”

Many analysts are questioning Wal-Mart’s relentless expansion strategy that calls for adding another 8 percent to existing square footage globally this year. That’s pretty much on pace with its aggressive pace in years past. Nationwide in the U.S., since the only retail space left is in markets where it’s already operating — or in higher cost areas like California and the Northeast — expansion is resulting in cannibalization of one percentage point from same-store sales growth. But Wal-Mart execs look at overall gains and say they are content.

In a given market with two Wal-Marts, each store might be expected to generate $100 million a year. While the introduction of a third could siphon away $20 million from each existing unit, the three-store result would still gross $40 million more for the market, and that’s the kind of logic that fuels Wal-Mart’s engine.

However, analysts tend to look seriously at ROI and their disappointment is reflected in Wal-Mart’s cooling stock price. Early in the decade, the chain’s growth in operating cash flow exceeded capital spending. But from 2003 to 2005, growth in operating cash flow ($1.6 billion) fell far short of increases in capital spending ($4.3 billion).

Home Depot, to use an analogous situation, has conscientiously slowed its pace of expansion in recent years, having reached a point during the 2002 – 2003 period when it was seeing four percentage point cannibalization in same-store sales due to the opening of nearly 200 new stores per year. After taking a dive in 2002, the company’s stock has bounced back considerably, doubling its share price in the last 3 years.

Wal-Mart’s financials tell the story. Its net income has risen 68 percent in the last five years, but compared to Target, that is enjoying 5.6 percent same-store sales growth, Wal-Mart saw that figure drop to 3.4 percent in the year ended Jan. 31st from a hot 9 percent late in the last decade. And it’s apparent how Wall Street regards the strategy, as Wal-Mart’s stock is currently down nearly 30 percent from its five-year high in early 2002.

Moderator’s Comment: At what point will Wal-Mart ease back on the throttle with its expansion plans? Will they be forced to bow to pressure from Wall
Street to improve same-store sales growth?


Mr. Schoewe’s turn of phrase…”way higher than acceptable returns” pretty much says it all. It’s hard to argue with a 68 percent increase in net income,
even if the sacred same-store sales numbers are fading a bit. But it’s also hard to shake the runaway train metaphor. The growth gene is so dominant in Wal-Mart’s DNA, one has
to wonder if corporate is capable of making the transition to a mature company with (dare I say it) “plateauing” growth. Wal-Mart’s already broken the rules of retailing so many
times that no one can be certain it is governed by one as simple as “a market can only support so many of the same stores.” Perhaps they’ll surprise us and defy the laws of business
evolution as well.
– Rick Moss – Moderator

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14 Comments on "Full Steam Ahead, Even If it Means Wal-Mart vs. Wal-Mart"


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W. Frank Dell II
Guest
14 years 10 months ago

Wal-Mart will stop building supercenters when 1) there are no available sites that meet a minimum criteria, 2) cannibalization exceeds a rational return on investment, 3) comparative store increases fall below inflation. Wal-Mart cannot afford to be like the convenience store industry where the best year is always the first one. After they reach this point, they will be expanding their neighborhood market format. To continue their growth rate will require a greater international division. Otherwise, expect the stock to drop and executives to ask for real money instead of stock certificates.

Race Cowgill
Guest
Race Cowgill
14 years 10 months ago
It seems that the question we are really facing here is: how much can WM grow and how much control does WM really have over that? I do not believe that any business completely controls its own destiny. Every business organization is supported (or not) by its environment — its customers and market, of course, as well as the competitive environment, regulatory environment, and overall economic environment. Wal-Mart must fit all of these environments if it is to survive and thrive. It seems illogical to me to assert that WM can continue its current growth rate indefinitely, because the environment that has allowed that rate is changing, WM is changing, and there is a limit to WM’s market. (Even if WM’s market is one day “all consumers,” its market will eventually only grow as the population grows or doesn’t grow.) Every large business that we have studied that is currently dead (not merged or acquired) had a time in its history when it seemed to be, and considered itself to be, unstoppable. We have wonderful… Read more »
Eliott Olson
Guest
Eliott Olson
14 years 10 months ago

The laws of finance can be unkind to those who break the law. We do not know if the investment options open to Wal-Mart will yield better returns than their existing plan. We do not know if the new stores lose money. Therefore, we do not know if they are breaking the law. Time will tell.

Ron Margulis
Guest
14 years 10 months ago

The second question is easier to answer than the first – Wal-Mart will not bow to pressure from Wall Street for any reason. The Walton family still owns a huge chunk of the company’s stock and as long as they maintain it, management will set its own course.

As for expansion, I see a massive foreign acquisition, and a dedication of resources to other international endeavors, in the coming months. Not that there will be a reduction in cap ex in the US, but management seems to understand that the potential return overseas could be higher than here at home.

Ryan Mathews
Guest
14 years 10 months ago

While I generally agree with Ron, I’d like two modifications. First, true the Walton family still calls the shots but do they want to spend their time putting out an endless series of hostile shareholder fires? And, as far as international expansion goes, it may be easier in, say, China than it will be in Germany, for example. So, the road is a little bumpier than it may seem. That said, Ron’s generally on target.

Mark Lilien
Guest
14 years 10 months ago
Every chain retailer suffers cannibalization. It’s worthwhile as long as the return on investment exceeds the hurdle rate. It’s sometimes worthwhile to keep out a competitor. It seems as if there are 3 Wal-Marts: (1) the public relations Wal-Mart (2) the domestic Wal-Mart and (3) the foreign Wal-Mart. It’s likely that the return on investment for the foreign Wal-Mart will beat the return on investment for expansion of the domestic Wal-Mart. So there will be some new investment domestically, but the great growth potential is foreign. It’s likely that Wall Street and the Walton family are aligned in their goals for Wal-Mart. Does anyone believe that the family wants a lower return on investment? Does anyone believe that the family is satisfied with the stock price? Many great American companies get a lion’s share of their profit outside the USA. Look at the non-American profit share of Coca-Cola, McDonald’s, Ford, or any movie company. BTW, the public relations Wal-Mart is sometimes entertaining, but I don’t know where those Wal-Marts are located.
Warren Thayer
Guest
14 years 10 months ago

I can’t see Wal-Mart continuing to grow domestically at its present pace more than another two to five years. It’ll reach the point of diminished returns where Wal-Mart itself will decide to slow down, rather than Wall Street controlling it. (Although analysts, whether they are right or very wrong, can influence what a company does by helping or hurting stock prices with their pronouncements.) I agree with Wal-Mart’s thinking, overall, from a long-term competitive and market share standpoint, but this is a delicate balance. How many times have we seen overstored companies reach a tipping point and go into a horrible tailspin? And yes, I expect more from them on the international front. They’re already more deeply into China than many people realize, and I expect more partnerships there. That has its own perils, too. When they’ve reached their maximum prudent saturation in the U.S., it’ll be interesting to see how they operate, and if they can retain their edge.

David Livingston
Guest
14 years 10 months ago
Wal-Mart would never bow to Wall Street. That is one reason why they do so well. They do not sacrifice the company just to please shareholders. And that is what drives its other publicly held competitors nuts. I see no end to Wal-Mart’s expansion plans. I have identified hundreds of areas where they can open more stores. With Winn-Dixie, Albertsons, Food Lion, Safeway, Ahold, A&P, and other marginal retailers struggling to maintain at least an average sales per sq. ft. level, many of the stores these chains will be closing could easily end up being Wal-Mart Neighborhood Markets. Small rural markets that have a chain department store such as Pamida or Alco along with two supermarkets have to be on Wal-Mart’s radar. Wal-Mart could easily come in and open a supercenter to replace the department store and at least one supermarket. There are multitudes of opportunities such as this that still exist all over the United States. And the good news for Wal-Mart is that many of these markets have little overlap with their current… Read more »
Mark Hunter
Guest
Mark Hunter
14 years 10 months ago
This is a similar situation McDonald’s went through about 10 – 15 years ago. They too implemented a plan to saturate a market, willing to concede store comp sales to gain a larger overall market share. Problem is, unless management sees the end coming, they will keep pushing the strategy until the ROI is completely gone. This was a contributing factor to the ills faced by McDonald’s when they carried this strategy for too long. Wal-Mart must begin to realize that their growth in the US needs to start coming from alternate formats while at the same time realizing their significant growth opportunities lie outside the US. We can look at Coke as an example of a domestic franchise that derives far more of its profit from global operations than they do domestically. In the long-run, Wal-Mart may wind up looking like a real estate holding company…again something that McDonald’s has had to deal with due to their domestic growth strategy. Again, Wal-Mart can learn from McDonald’s as “McD” has done an incredible job of… Read more »
Gene Hoffman
Guest
Gene Hoffman
14 years 10 months ago
Like Gertrude Stein’s “a rose is a rose is a rose,” Wal-Mart is Wal-Mart is Wal-Mart. WM has its own target and does its own thing in its own way. Their growth playbook would seem to say, “Seek and Ye Shall Conquer Most of the World’s Consumers” even if you have to cannibalize some of your family en route. It’s true that many retailers eat some of their own sales. Speculating that Wal-Mart will ease up on its growth throttle because Wall Street focuses on same store criteria conjures up a vision of a band of hungry cannibals passing on an available tasty lunch just because their cook fell into the pot. While it is possible, of course, that a part of the destiny of Wal-Mart is to stop chewing on its own bones, eventually, just as savage tribes have left off eating each other when they came in contact with the more civilized, it is yet to be confirmed that Wal-Mart believes it will ever come in contact with any other retailer it considers… Read more »
Carol Spieckerman
Guest
14 years 10 months ago
I think “same stores” is the operative term here . . . yet not in the traditional retail-speak usage. Wal-Mart is creating unique store environments and assortments as of late in its quest for increased “relevance” (Wal-Mart’s current mantra). The relevance quest is behind the Plano prototype and other mini-me versions scattered about the country, including the truly differentiated superstores right here in Northwest Arkansas, stores that I now shop based on my knowledge of each store’s character . . . Rogers Pleasant Crossing (the NWA version of Plano) gets my home decor and workout gear business; Bentonville gets my office supply business (across the street from my office); another Rogers store has grocery items that I like and it’s on the way home; and the store just over the Missouri line is ten minutes away and sells wine . . . none are more than thirty minutes away. In other words, Wal-Mart arguably is not opening the “same stores” these days . . . each one taps into a different customer and, yes, reduced… Read more »
michael magnotto
Guest
michael magnotto
14 years 10 months ago

Wal-Mart will continue to grow at a very fast pace in foreign markets. I do believe that the challenges they will face will be political in nature. People in third world countries will eventually want more out of life, thus creating a new world middle class. China and other countries will have to go through all of the growing pains that occurred during the industrial age in America. It will not be an easy road. The political climate of these countries will be the road map of growth that Wal-Mart will travel down.

Ben Ball
Guest
14 years 10 months ago

I’d say Carol Spieckerman has absorbed the strategy completely. The key to this whole thing is that Wal-Mart is well on the way to enough tailored formats to manage at least two stores in most markets and three in many. Can anyone say “Wal-Wine”?

Jerry Tutunjian
Guest
Jerry Tutunjian
14 years 10 months ago

There’s an old proverb which says it’s dangerous to get off the tiger’s back. Wal-Mart, in a sense, is on the tiger’s back. It has to maintain its momentum and not only maintain its stupendous sales figures but keep on taking a larger share of the slice. Once it slows down the “we told you so” crowd, the Cassandras and Wall Street will start raising questions about the future of the company.

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