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Submitted by pgoldman on May 15, 2006
Category: Miscellaneous
Words: 1414 | Pages: 6
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Critical Issue
The critical issue is to develop new sources for future company growth.
Despite the fact that the company increased dividends every year since 1974 and returning significant value to its shareholders through a stock repurchase program, they still looked to Wal-Mart for significant growth. Through the years Wal-Mart managed to keep the same growth rate for sales and net income, but the nominal sales growth has been on decline since the 70s.
The estimates show that nearly 69% of the stock price is attributed to growth options rather than assets. This puts incredible pressure on the top executives at Wal-Mart to push for continuously rapid growth rate in order to preserve the market value of the company.
Wal-Mart’s core business is of discounting general merchandise and food in the US but a glance at the US sales in Exhibit 1 shows stagnant sales of traditional discount stores in the 90s and declining number of stores. Industry expectations are at about 10% rate over the next ten years, which is not enough to sustain aggressive growth.
Wal-Mart needs new venues to grow or as CEO Lee Scott put it: “Our long-term strategy is to be where we’re not”.
In the 80s the core business was largely driven by innovations that created operational efficiencies, such as UPS scanning and point-of-sale systems. Starting in the 90s, new format grew rapidly; Supercenters followed the hypermarket format of Europe and blurred the lines between groceries and general merchandise stores. Wal-Mart added its first Supercenter in 1988 way ahead if its competitors. But in 2003 the Discount Stores still accounted for the largest number of Wal-Mart stores while 42% of the US population had access to Supercenter.
Another fast growing path in US is the warehouse clubs and the company introduced its own Sam’s club in early 80s but for Wal-Mart it hasn’t lived up to its promise and was lagging behind its rival - Costco.
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