Wal-Mart's Business Model 'Crumbling,' Stock in Trouble
(Photo courtesy Walmart.com)
Saturday, 17 Oct 2015 11:48 AM
Once the undisputed heavyweight champion of the retail industry, Wal-Mart Stores Inc. now faces a struggle to survive as its “entire business model is crumbling,” Business Insider points out.
Wal-Mart is under pressure from investors to trim costs after forecasting this week that earnings will decrease 6 percent to 12 percent next year. Sales aren’t growing fast enough to offset the billions of dollars that Wal-Mart is spending on higher wages for its workers and improvements to its website. The outlook sent the shares on their worst one-day decline since 1988.
Wal-Mart faces tough competition on multiple fronts, from the relentless expansion of online leader Amazon.com Inc to dollar stores and supermarkets fighting for a piece of its grocery business. Its international operations are also under pressure with a stronger dollar eating into sales,Reuters reported.
“The deterioration of Walton's pioneering business model has been playing out for some time in Wal-Mart's numbers,” the Street.com points out, bluntly declaring that Wal-Mart’s “entire business model is being smashed to pieces.”
The chain may look to shutter some of its massive U.S. stores and exit poor-performing markets overseas to help revive growth after the retailer warned of an unprecedented decline in earnings next year.
Wal-Mart is under pressure from investors to trim costs after forecasting this week that earnings will decrease 6 percent to 12 percent next year. Sales aren’t growing fast enough to offset the billions of dollars that Wal-Mart is spending on higher wages for its workers and improvements to its website. The outlook sent the shares on their worst one-day decline since 1988.
Wal-Mart faces tough competition on multiple fronts, from the relentless expansion of online leader Amazon.com Inc to dollar stores and supermarkets fighting for a piece of its grocery business. Its international operations are also under pressure with a stronger dollar eating into sales,Reuters reported.
“The deterioration of Walton's pioneering business model has been playing out for some time in Wal-Mart's numbers,” the Street.com points out, bluntly declaring that Wal-Mart’s “entire business model is being smashed to pieces.”
The chain may look to shutter some of its massive U.S. stores and exit poor-performing markets overseas to help revive growth after the retailer warned of an unprecedented decline in earnings next year.
Chief Executive Officer Doug McMillon told investors this week that he is reviewing the company’s portfolio across the globe and will “close stores that should be closed.” The retailer has already been selling off businesses that aren’t core to its operations, such as a restaurant chain in Mexico and a property company in Chile.
"No doubt, our business has become both large and broad — it’s more important now than ever that we evaluate our portfolio," he said. "We won’t let the breadth of our business distract us from our most important priorities."
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With the bulk of its business in the U.S. and growth there slowing, Wal-Mart’s roughly 4,600 stores would be a likely area for cuts, analysts said. In particular, the company might target the one-third of stores that aren’t meeting its standards of being "clean, fast and friendly," Leon Nicholas, an analyst at Kantar Retail, told Bloomberg.
"I’d speculate that they may shut down some of their stores to reduce their operating costs," Nicholas said. "It doesn’t mean it will happen, but that certainly would be a way to take costs out."
As consumers look for faster, more convenient ways to shop, Wal-Mart’s supercenters — hulking buildings that sell everything from fresh food to sporting equipment — are falling out of fashion, said Craig Johnson, president of Customer Growth Partners. While supercenters shouldn’t go away, the numbers could be reduced, he said. Wal-Mart’s focus should instead be on its smaller-format Neighborhood Markets and e-commerce business, Johnson said.
"The younger women who are moms now — the supercenter concept isn’t as relevant to them as it was to their mothers," he said. "Who has time to navigate a 200,000-square-foot Wal- Mart?"
Wal-Mart is the largest private employer in the U.S. — with some 1.3 million employees — and losing stores could be a blow to some local economies. One of its supercenters can employ about 500 people.
For now, the Bentonville, Arkansas-based company is still adding new stores, though at a slower rate. It said on Wednesday it plans to open 50 to 60 supercenters next year, which includes relocations and expansions, compared with 115 in 2014.
Wal-Mart also may get out of some overseas markets that have failed to gain traction, Charles Grom, an analyst at Sterne Agee & Leach Inc., said in a note to clients. The retailer hasn’t shied away from exiting markets in the past. It sold its German and South Korean units in 2006 after years of disappointing results. In all, Wal-Mart has operations in 28 countries.
Wal-Mart also might consider spinning off its warehouse-style Sam’s Club stores, something investors have been encouraging the company to consider for years, analysts said. Sam’s Club has been dragging on Wal-Mart’s earnings, and some investors think the company could perform better as a stand-alone business. Earlier this year, Sam’s Club posted its worst first-quarter sales in years. While the chain improved in the most recent quarter, investors aren’t convinced the company can get back on track in the face of stiff competition from Costco Wholesale Corp.
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