Wal-Mart Post-1985 Case Study

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Wal-Mart Stores Notes from Greenwald 3/31/03 Wal-Mart Competitive Advantage

Regional Economies-of-Scale (Percentage of Sales)

Wal-Mart Other Stores GAP Pct. of Gap

Inbound Logistics 2.8 4.0 1.2 30%

Advertising 0.9 2.3 1.4 60%

Other Overhead 5.3 7.6 2.3 30%

Total 9.0 13.9 4.9 35%

Total Operating Margin 8.6 5.9 2.7

Wal-Mart makes money in monopoly stores. But WMT does not gain its advantage through purchasing power because this type of advantage should increase as size and scale increases but ROE, ROIC and ROA are decreasing as growth continues into new markets.

WMT KMT

Monopoly Location ROE 33% 12%

Price gain 6% 9%

Total gain 2% 1.1%

Gap (WMT – K-mart) 0.9%

Two possible stories:

1. Effective operation 2. Regional Economies of Scale. WMT started in Ark. And moved tangently into other regions.

Wal-Mart Stores Competitive Advantages Wal-Mart History-Post 1985

YEAR Operating Margin Return on Sales Return on Capital Return on Equity

1985 7.8% 3.9% 18.7% 25.6%

1992 6.4% 3.7% 18.2% 23.0%

1997 5.4% 2.9% 14.3% 17.8%

2002 5.5% 3.1% 14.5% 19.0%

Slower growth-fewer openings Price gap: Kmart is 1.5% higher than WMT

WMT Stores Competitive Advantage WMT vs. Target Operating Margins

Year WAL-MART TARGET

1984 8.6 5.5 (EST)

1992 6.4 5.5

1997 5.4 6.3

2001 6.0 7.8

Target’s better profitability has been at greater geographic concentration.

Wal-Mart Post-1985 Case Study

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If you compete with Wal-Mart, you can copy technology, store lay-outs, product mix, but you can NOT replicate location and grab regional share.

WMT and Target have economies of scale reinforced with some small customer captivity

DIVISIONAL MARGIN (2000-2002)

Division Operating Margins

2002 2001 2000

Basic Stores 7.4% 8.0% 8.0%

(ROA) (47.1%)

SAM’S CLUB 3.5% 3.5% 3.4%

(ROA) (26.0%)

OVERSEAS 4.1% 3.5% 3.6%

(ROA) (15.5%)

Here is evidence AGAINST WMT as a big, efficient juggernaut. Competitive advantage is relative to competition.

WALMART STORES COMPETITIVE ADVANTAGES

REGIONAL ECONOMIES OF SCALE 2002

Drug Stores Operating Margin Ret. On Capital Ret. On Equity

Walgreens 6.7% 16.3% 16.3%

CVS 6.3% 12.5% 14.0%

Rite Aid 3.0% NMF NMF

GROCERY STORES Ret. On Capital Return on Equity

Winn-Dixie 13.3% 19.2%

Kroger 13.0% 32.0%

Safeway 12.0% 26.0%

Albertson 9.5% 14.0%

OTHER GEOGRAPHIC CONCENTRATION HISTORIES

Ethan Allen Nebraska Furniture Mart Best Co.

Wal-Mart Post-1985 Case Study

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Retail the Risks K-Mart History

YEAR RETURN ON SALES RETURN ON EQUITY 1968 5.6% 17.3% 1975 6.0% 19.8% 1982 2.5% 10.9% 1988 4.6% 18.2% 1992 3.8% 13.7% 1999 Bankrupt

Retail – The Risks Big Box Stores

Price Decline

Peak-TO-2002 PETS SMART 52%

TOYS R US 78% BARNES & NOBLE 57%

BORDERS 63% HOME DEPOT 70% CIRCUIT CITY 91%

BED BATH AND BEYOND

15%

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