Wal*Mart's Impact

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Sean Hinton

Since its founding in 1962, Wal-Mart has completely revolutionized the retail industry. Its emphasis on low prices and efficiency has spread throughout the industry, spawning a surge in price competition and consolidation among food retailers. Customers benefit significantly from the lower prices Wal-Mart offers; in fact, the economic consulting firm Global Insight estimates that Wal-Mart had saved consumers a cumulative total of $263 billion by 2004.^[1] Wal-Mart's impact is not all positive, however, especially for other retailers and the companies that supply Wal-Mart's products. Smaller retailers are sometimes unable to compete with Wal-Mart's pricing power and varied offerings, forcing them to consolidate or go under all together. As for suppliers, Wal-Mart's growing significance to manufacturers' bottom line gives it a great deal of leverage to negotiate lower prices. While a business relationship with Wal-Mart can boost sales volume and revenues, the quest for the absolute lowest prices for consumers can put pressure on profit margins.

Who's subject to Wal-Mart's impact?

Retailers

• Koninklijke Ahold, N.V. (AHO), Kroger Company (KR), SuperValu (SVU), Safeway (SWY), Weis Markets (WMK), and other smaller grocery retail chains are under constant pressure from Wal-Mart to maintain low prices. These firms have been successful so far, but continued expansion or further price cutting on Wal-Mart's part could negatively impact them.
• Walgreen Company (WAG), Rite Aid (RAD), and CVS (CVS), as well as other pharmacies, could be negatively impacted by Wal-Mart's move into the pharmacy market. Wal-Mart's $4 generic prescriptions program is an example of its desire to capture a larger share of the prescription drug market. Additionally, its Sam's Club subsidiary offers prescriptions at very little or no profit, presumably to get people in the store and encourage them to shop around.
• Sears Holdings (SHLD), Target (TGT), and other variety retail chains all face competition from Wal-Mart. Target is aimed at a slightly more affluent demographic, but there is still a great deal of overlap between the two retailers. Sears Holdings is the parent company of K-Mart and Sears, Roebuck, and Co., which span both the discount and department store segments.
• Zale (ZLC) and similar specialty niche retailers face increased competition from Wal-Mart's economies of scale.

Suppliers

• Del Monte Foods Company (DLM), Clorox Company (CLX), and Revlon (REV) all receive more than 20% of their total sales revenue from Wal-Mart Stores (WMT). While it's difficult to document, Wal-Mart's significance to these companies gives it the ability to demand lower prices, which can hurt suppliers' profit margins.
• Newell Rubbermaid (NWL), while it earns a smaller percentage of its revenue from Wal-Mart, still depends on the retailer for 12-13% of its total sales.^[2]

Transporation/Trucking

• YRC Worldwide (YRCW) sources 6% of its business from Wal-Mart, for whom the company transports retail goods from manufacturer to store
• J.B. Hunt Transport Services (JBHT) counts on Wal-Mart for 14% of its revenues.

Retail Partnerships

• Murphy Oil (MUR) operates over 950 of its retail gasoline stations in front of Wal-Mart Supercenters throughout the south and midwest.

References

1. ↑ http://www.globalinsight.com/About/PressRelease/PressRelease2439.htm
2. ↑ NWL 3/31/2008 10-Q page 16