Wal-Mart Case Study Analysis

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PEST ANALYSIS

Political & Economical• Country was not happy with the slow

economy in ‘76 and elected Carter to replace Ford, but country was even more unhappy with Carter’s handling of economy and replaced him with Reagan in 1980.

• Reagan inherited a weak economy, with unemployment at 7.8%. This became a recession and unemployment peaked tat 10.8%. The recession especially affected farming and therefore the price of food increased.

• Reagan signed the economic recovery act of 1981. Dramatically reducing income taxes, this was followed by a huge increase in tax revenue and economic expansion.

Economical• The economy strengthened during 1980-1985 from its state in 1974-1979. • Coming out of a recession in ’75, unemployment had peaked at 9%, GDP had declined 3.4%,

the oil embargo had caused inflation, the budget deficit grew, and foreign competition made inroads importing cheaper goods.

• Real economic growth increased to an average of 3.2% from 2.8%. Median income grew at an average of $4k from 1980-1985 after remaining the same from 1974-1979. This was followed by a rise in median income, falling unemployment, lower interest rates, and lower inflation.

Technological

• Centralized Purchasing– In-store terminals used to wire merchandise

requests to a central computer.– Central computer transmit requests to

distribution center, or if stock levels were too low, reorder the merchandise

Technological

• Deliveries–Wal-Mart’s central computer was linked directly

to its 3000 vendors to expedite delivery.–Merchandise delivered distribution center then to

store within 48 hours

Technological

• SKU Management– 1971 installed a inventory tracking system.– 1985 each store had a computer that tracked

sales and performed accounting functions.• Full inventory of all stores were kept in central

computer at headquarters and updated weekly.

Technological

• SKU Management (1986)– $20 M satellite network was to be set up to ease

real-time communication between all store and headquarters.

• Industry observers considered this to be superior to competitors

Technological

• UPC Codes• Improve Productivity by switching to electronic

scanning of UPC’s at point of sale• Speed Checkout, bypass paperwork, simplify inventory

management and reorders.• 1 store cost up to $500k• 25 stores by 1983• 91 stores by 1984• 235 stores by 1985• 200 more stores in 1986 plus every new store

Technological

• Merchandise Mix– 1985: Wal-Mart used computer-aided design to

develop a program that created a merchandise mix for each store, based on more than 100 factors• Climate, customers’ recreational preferences, ethic

mix, etc.

Socio-Cultural• Increasingly better

informed consumers since WWII.

• TV had intensified advertising by manufacturers.

• Government standards also bolstered consumers’ self-confidence.

• Wanted cheaper, self-service retailers (ie. discount chains).

• Discounters’ sales grew to $68B in 1985.

Socio-Cultural

• GDP– Real gross national

income per capital rose from $20k to $25k.

– Share of GDP going to the bottom 99th, 95th, 90th percentiles decreasing steadily.

– SOME MORE INFO

Wal-Mart Demographic

• Between 1970 – 1985 Wal-Mart operated 859 stores (mostly in middle America)

• 5 distribution locations.• Populations between 5,000 and 25,000.• 1/3 of Wal-Mart stores located in metropolitan areas.• Made smaller stores for towns with populations between

1,000 and 5,000 in 1985.

Strengths• Charge gross margins 10-

15% lower than department stores

• Better inventory tracking: in-store terminal -> central computer -> distribution center -> vendor

• Better stocking with hub and spoke distribution network: many trucks, many deliveries, increased efficiency

• “Everyday Low Prices”

Strengths• Terms of sale: low credit transactions and “no questions asked”

return policy• No unionized employees: “We care about our people”. Best place

to work• Employee incentives: profit sharing, stock purchases, bonus if

exceed corporate targets, shrinkage• Better communication: 12 regional vice presidents lived in

Bentonville, traveled to stores on Monday, gather feedback Thursday, merchandising meeting on Friday, directions on Saturday, implement on Sunday

Strengths• Warehouse clubs imply

prices 20% lower than other discounters and supermarkets

• Broader national presence• Sam’s Club more viable in

smaller areas because of company’s discounting experience

Opportunities• Timing: Consumers better informed,

TV advertising, gov’t standards boosted confidence. Ready to try cheaper products.

• Towns with lower populations, without a major discounter

• Build own warehouses: buy volume, low prices, storage

• Increasing populations in the Sunbelt and non-metropolitan areas.

• Lease stores: low cost, renew lease, make specifications, 1.8% of sales (high sales/sq.ft. and acquisition in 1980’s of 120 Kuhn’s Big-K and Woolco stores)

Opportunities• Store improvement programs to

move slightly upscale• Hard goods generated more

sales/sq.ft., more traffic, fewer markdowns (28% of sales vs. 22% of industry)

• License shoes, pharmaceuticals, and jewelry departments

• $20 million satellite in 1986 to ease real-time communications and cap telephone costs

• Switch to electronic scanning of UPC at POS to improve productivity

Opportunities

• Computer aided design program to suggest merchandise mix based on 100+ factors

• Diversification: Sam’s Wholesale Clubs (high volume, fast inventory turnover)

• Memberships: first warehouse to introduce concept gains major competitive advantage

Threats• Regional entry by discount

stores threatened Ben Franklin

• Cost of goods sold = 3/4 of revenues

• Cost of inbound logistics = (reduced to 2% of sales)

• 13 promotions a year: customers deferred purchases at higher everyday prices in anticipation of sales

Strategic Planning FrameworkBest Strategic Decisions…• Creating warehouses and centralized inventory control• Diversification into Sam’s Club blocked threats• Employee incentives• Diversified vendors• Frugality, everyday low prices• Many stores with few distribution systems• First to rural populations• Great technology at the time, UPC barcode scanning and the

satellite