Wednesday, March 12, 2008

Why Wal Mart is bucking the trend?

Even as the US economy is lurching to a recession and big box retailers are feeling the heat, Wal Mart stock recently rose to its highest level for some time. Daniel Gross has four possible explanations as to why Wal Mart is bucking the general trend.

1. Wal-Mart sells necessities, not discretionary items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don't drastically reduce their spending on staple groceries, light bulbs, or diapers.
2. Wal-Mart's cheapo reputation is especially useful as the economy weakens and people tighten their purses. As credit tightens, Americans have stopped trading up and started trading down. That helps Wal Mart, whose brand identity is all about saving people money. Gross describes Wal Mart as a "penny pincher's paradise".
3. Unlike many retailers, Wal-Mart expects its profits will rise modestly in 2008. And the economic-stimulus package President Bush signed earlier this month seems to have been designed to help Wal-Mart. It funnels cash to individuals making less than $75,000 or to families making less than $150,000, many of whom might shop at Wal-Mart.
4. Wal Mart is becoming increasingly international and has belatedly joined the global consumption boom which continues unabated. In 2003, international sales were just 16.7 percent of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, international sales rose 17.5 percent and constituted 24.2 percent of overall sales in the year ending January 2008. In the most recent quarter, international sales rose 18.8 percent from the year before and for the first time accounted for more than 25 percent of total revenues. The growth in rapidly expanding international operations is adding more dollars to Wal-Mart's top line than the slower growth of the massive U.S. base.

Thus Wal Mart profits from both the good and the bad times. During the good times, its aggressive volumes make up huge toplines that in turn gets translated into impressive bottomline numbers. Wal Mart's success with the strategy of selling basic necessities, cheap and in large numbers, is a valuable strategy in developing markets, especially large markets like India. Here the consumers are extremely price sensitive and the economy is vulnerable to cyclical slowdowns. The large numbers of consumers should ensure that such retailers can easily exploit the economies of scale.

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