The Wal-Mart website describes the story of a pharmacist who received a call on Sunday morning saying that one of his customers had dropped her insulin down the garbage disposal. He rushed to the store, opened the pharmacy, and filled the customer's prescription. The story says that this is just one of many ways a local Wal-Mart store might honor what is known as the Sundown Rule.
The website also says that this was Sam Walton’s translation of the proverb “never put off ‘til tomorrow what you can do today.” It's symbolic of the company’s dedication to customer service. Coupled with its policy of low prices, always, and its aggressive expansion from rural America to global operations, Wal-Mart became the darling of Wall Street and one of the most valuable companies in the world.
At the close of its 1st quarter in 2003 the price of Wal-Mart’s common stock was $56.32. With 4,380 million shares outstanding the company’s market value was $247.0 billion. This made it the second most valuable company traded on North American stock exchanges. GE was the leader with a market cap of $255 billion. By January 31, 2006 Wal*Mart's stock had fallen to $46.80 a share and its market cap was down 21% to $195 billion. Meanwhile, GE's market value jumped 44% to $367 billion. During these three years, two of Wal-Mart's competitors (K-Mart and Sears) merged.
MONEY DOWN THE DRAIN
You would think that one of the biggest, most valuable and efficient companies on the planet would come very close to maximizing earnings. You might think so, but you’d be wrong. Wal-Mart's actual earnings at the end of the second quarter of 2003 were $3.5 billion. Its theoretical maximum earnings were $4.8 billion. The shortfall in just this one quarter was $1.4 billion. Over the ten periods from the 4th quarter 2000 through the 2nd quarter 2003 the earnings shortfall totaled $10.7 billion. Money down the drain. Money that could have been used to pay dividends to shareholders. Maybe this is why the company's stock hasn't budged from that $46 price point while the Dow reached record heights. If you're curious about how to calculate maximum theoretical earnings from company financials, check out my narrated slide-show on The Rule of Maximum Earnings.
ACHILEES HEEL # 1
Wal-Mart has two Achilles heels. The first one everyone knows about: the company has been unable to adjust its merchandise mix to appeal to upscale shoppers. And it's not that the company didn't try. In fact they hired a high profile marketing wizard to do just that. Read Business Week's story of Julie Roehm's "Year at Wal-Mart." It's
a cautionary tale of what happens when a self-described change agent goes to work for a company that needs to reinvent itself but can't. In Wal-Mart's case, she says, the concept of "Everyday Low Prices" was so deeply embedded that the retailer's ambition of getting upscale shoppers to buy more was a nonstarter.
ACHILEES HEEL # 2
The second one is not well known. In fact it will come as a big surprise: Wal-Mart over spent on marketing! Not advertising and promotion, but Marketing with a big M. Read "Selling, General and Administrative" expenses. I call these enterprise marketing expenses because they include all the costs of employees. The people who influence what customers and investors think about a company.
SCALE EFFECTS IN MARKETING?
To put scale effects in perspective look at the sales revenues of these three direct competitors at the close of business in 2005. The sales revenues of Target and Costco were $52.6 and $52.9 billion respectively. Wal-Mart's sales were $313.3 billion, or almost six times greater. One of the things Wal-Mart is touted for is its scale efficiency. But Wal-Mart has no scale efficiencies in enterprise marketing.
LEVEL THE PLAYING FIELD
The best way to level the playing field is to calculate enterprise marketing expenses as a percent of gross profits -- over several years. Wal-Mart's cumulative gross profits from 2001 through 2005 were $316 billion. The company spent 72.7% or $230 billion of these profits on enterprise marketing. By comparison Target and Costco spent just 69.1% and 71.1% of their gross profits on enterprise marketing. Wal-Mart suffered from a 3.6 point competitive disadvantage compared with tiny Target and almost a 1.0 point disadvantage compared with Costco. This is particularly striking in the later case. Wal-Mart's gross profits as a percent of sales were almost double Costco's -- 24% vs. 13%!
IS THE SUN GOING DOWN?
Looks like the sun may be going down on Wal-Mart if management doesn't figure out a way to upgrade their merchandise mix. And at the same time, take their feet off the spending peddle! Want to know what costs are included in selling, general and administrative expenses? Check out my audio slide-show on Enterprise Marketing Expenses.
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