Walmart Harvard Case Analysis

Case 3: Wal-Mart Stores Discount Operations

Based on the information in the case, prepare an analysis of Wal-Mart’s costs relative to a more typical discount retailer. Specifically, construct a table comparing Wal-Mart’s cost structure with the industry average (as shown by the data in Exhibit 3), and list your assumptions. Why does Wal-Mart have superior profitability?

Pint:

Based on financial analysis, there are 2 factors that enable Wal-Mart to drive it profitability above industry average: 1) Operation efficiency 2) Volume-driven revenue. From 1976-1985, Wal-Mart grew its revenue by 12% while its operating expense only increased by 10%- this enabled the firm to achieved 1.1% operating margin higher than industry average.  

Operation Efficiency

1. Wal-Mart deployed a computerized inventory tracking system and electronic scanning of product code leading to the improvement in productivity. Due to such initiatives salaries and wage expenses declined from 11.5% t0 10.1% by 1985. It also addressed the issue of increased phone bill charges which have raised to $10M. Financial figure shows Wal-Mart’s operating expense was 5% lower than industry average.

Volume-driven revenue:

1. Wal-Mart strategically expanded to the densely-populated area and the new area with no competitors exist. As a result, Wal-Mart’s sales growth exceed competitors by 27% on average while its sales per store grow by 12% per annum from 1976-1985. The size of the store also increased substantially after 1980 while the selling space is larger than that of the competitors due to reduced back-room storage requirement. The 2% increase in ROA showed that Wal-Mart was able to generate sales from assets effectively.  

1. Merchandising Mix: Wal-Mart focused on hard goods which is able to generate more sales per square foot, more traffic and fewer markdowns to the store. It also offered much more options (70,000SKU) than its competitors. The diversification of discount store to Sam’s Wholesale Clubs in 1985 further emphasized its focus on sales volume which generated the increase in net sales by 32% from prior year. Wal-Mart also prevent the cannibalization between discount stores and Sam’s club by placing different merchandising mix in Sam’s club.

1. Marketing: Wal-Mart “everyday low price” strategy coupled with its “no question asked” return policy led to an even higher total revenue as it could attract the price-sensitive customers to spend more in stores.      

...