Under the Spotlight Wall St: Walmart Inc. (WMT)
With its gigantic stores and low prices, Walmart built an empire and eventually became the world’s biggest retailer. Going beyond brick and mortar, can it thrive in the age of e-commerce? Let’s put it Under the Spotlight.
When it comes to shopping, Walmart ($WMT) reigns undisputedly. With over 10,000 stores in 20 countries, the retail giant has become a household name. The company is the biggest private employer in the world, and has been serving customers for more than five decades. Founded in 1962 by Sam Walton, the company has grown from a small store in Bentonville, Arkansas, to a global behemoth.
Sam Walton always had a vision of creating a discount store and he believed the business would rapidly grow by attracting a large customer base. After all, offering lower priced products than at other retailers remains a key strategy to interest consumers. To realise his dream, Sam developed a unique supply chain system that would become the cornerstone of the Walmart brand. He established direct relationships with manufacturers, cut out the middleman, and passed on the savings to customers.
The model proved to be successful and by the end of the 1960s, Walmart had opened 18 stores across multiple states in the southern U.S. The company continued to grow in the 1970s, and saw the launch of Sam’s Club in the 1980s. The creation of a wholesale membership-only store enabled the prices of its goods to reach unprecedented lows and further expanded the customer base, even bringing in restaurants and catering businesses. The membership fees for Sam’s Club helped diversify revenues. They range between US$50 and US$100 and amounted to US$2.6b of revenues during FY2023 alone.
Through the 1990s, the company continued to expand, especially internationally to countries like Mexico, China, Germany, Argentina and Brazil. However, the retailer didn’t achieve the same success across all of these markets. For instance, they found German customers were less price-sensitive than their American counterparts, rather being more focused on the quality and freshness of their goods. This means Walmart’s policy of low prices didn’t resonate with the locals and the German stores would eventually be closed down. To this day, the company hasn’t managed to find a strong foothold on the European market.
That wasn’t the only place where the retailing giant was met with resistance. In the late 2000s, Walmart was trying to enter the Indian market by partnering with a local chain. However, the Indian government opposed the move and argued that Walmart's entry into the market would hurt local retailers. Walmart faced ongoing regulatory hurdles and ultimately abandoned this venture for five years. They eventually returned in 2018 by buying a majority stake in e-commerce platform Flipkart, which was their largest acquisition ever of US$16b.
Walmart has always looked to technology to streamline operations and reduce costs. In the 1980s, it was one of the first retailers to use electronic scanning systems. These allowed it to track inventory and sales data in real-time. In the 1990s, large investments in data analytics facilitated the creation of a massive data warehouse to collect and analyse data from its stores. This move enabled Walmart to optimise inventory levels and improve supply chain efficiency, which helped it keep both its expenses and retail prices low.
As supply chain management remains a key factor behind the company’s success, it’s one area where Walmart spares no expense. They have internalised several steps of the process. The retailing giant has its own trucking fleet, with more than 7,000 drivers. They also own a private satellite network, to ensure that communications and inventory tracking are always on point. While the modernisation of Walmart’s logistics was extremely successful, these achievements have not translated across to its e-commerce endeavours.
Only 1.40% of the retailer’s FY23 total revenue of US$611b came from online sales. The number of physical stores worldwide peaked at 11,718 in 2018 and have been declining ever since. Customer behaviour trends reveal that shifting their shopping habits online might be a tough challenge. For example, bananas are the supermarket’s best-selling items, followed by other fruits, vegetables, baked goods and meats. Carrying out last-mile deliveries at scale for items with short shelf lives presents additional difficulties in terms of logistics and maintaining profit margins.
In FY2023, Walmart was the highest grossing company in the world and it could be tempting to believe the giant’s reached their limits of growth. However, revenues grew 6.7% over the year, and the management forecasts another 2.5% - 3.0% improvement for FY24, which would keep its ROI around 12.7%. The board expects to face some headwinds ahead, such as a higher tax rate and increased interest expenses due to rising rates negatively impacting the earnings per share (EPS) with a US$0.10 to US$0.20 reduction.
Considering all factors, Walmart’s leadership has commented that earnings could grow between 38% and 41%. Only time will tell whether their slogan of “Always low prices. Always.” applies only to its goods and not to its shares.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.