The size and scope of Wal-Mart means that its annual meetings with analysts take place across two days. This week, the investment community heard the latest thoughts from the world’s largest retailer and what they heard, particularly with regard to the US, would not have made happy reading for Wal-Mart’s rivals. Dean Best reports.
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Wal-Mart is used to grabbing people’s attention.
The world’s largest retailer signs up the likes of actor Ben Stiller and teen idol Miley Cyrus for its annual AGM, which beats the average shareholder convention in the star-dust stakes. (The Marks and Spencer shareholder meeting in July, for instance, attracted the rank and file of Middle England – one of whom knitted the whole way through the event).
And Wal-Mart chose its two-day meeting with the analyst community this week to throw down the guantlet to its US and international rivals.
The company outlined its plans at home and abroad for at least the next 12 months, with CEO Mike Duke insisting Wal-Mart would expand faster than its competitors for the next “several years”.
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By GlobalData“There is no retail competitor – here in the United States or anywhere in the world – that can deliver the kind of growth that Wal-Mart can over the next several years,” Duke said.
In the US, after 12 months in which the gloomy economic conditions has proved a challenging landscape for all grocers, including Wal-Mart, the retailer plans to ramp up its capital investment into its store network.
The company wants to speed up its “Project Impact” programme, which has seen the business “remodel” its stores in the US.
Outside the US, Wal-Mart is also targeting expansion and revealed it sees its international square footage growing faster than its domestic market.
China and Brazil were frequently named as two markets on which Wal-Mart will focus – and two markets where the US retailer goes head-to-head with Carrefour, the French retailer, which is tackling a set of well-documented problems at present.
However, the more intriguing developments will come from Wal-Mart’s domestic business.
In August, Wal-Mart booked a fall in quarterly same-store sales as consumers cut discretionary spending and food prices fell sharply. At the time, the company preferred to focus on “positive traffic” and a “strong” underlying business.
This week, Wal-Mart launched a salvo on price ahead of the ultra-competitive holiday season in a bid to keep those traffic numbers growing. The company said it would cut prices on “thousands of items” each week.
A swathe of price cuts usually begs the question of what will happen to margins but Citi analyst Deborah Weinswig said “better inventory management” and a “leaner expense structure” should protect profits. Weinswig also claimed that Wal-Mart’s moves on price would be “a negative” to rivals like Safeway Inc., who she rates as ‘sell’.
Over at JP Morgan, Wal-Mart’s price cuts are seen, in some ways, to be a response to similar recent moves from the likes of Target Corp., Safeway, Kroger and Costco.
“It’s clear that some of the price investments we’ve seen from Target, Kroger, Costco, and Safeway over the past six to nine months have led to some unease at Wal-Mart,” said analyst Charles Grom.
Nevertheless, Grom added: “Importantly, Wal-Mart suggested to us that the strategy is an offensive move that should result in increased traffic and spend from customers.”
The retailer, famed for huge stores that are spread over the size of three American football pitches, is also looking at downsizing and focusing on developing a smaller “supercenter” format.
Wal-Mart’s executives also gave hints that it wanted to move into more urban areas in the US. To make such a move profitable would be tough, given Wal-Mart’s position as a value retailer and the relatively high cost of real estate in urban communities.
Weinswig at Citi said Wal-Mart would use its smaller, 120,000 sq. ft. prototype as its “primary supercenter format”.
Weinswig said: “This smaller-store format will allow the company to better penetrate urban areas and also reach new customer demographics – such as higher income and Hispanic customers.”
Wal-Mart expects its group revenues to rise by 1-2% in its current fiscal 2010 year, below earlier guidance of 5-7%, due to the strength of the US dollar and food deflation.
Operating income is projected to rise by 4.5% in the current fiscal year. “A really, really strong performance – proud of that,” CFO Tom Schoewe said to analysts.
However, the company was keen to make clear that is looking beyond the February publication of Wal-Mart’s figures for this current fiscal year.
Wrapping up the two-day investment meeting, Duke told his audience that the global recession had injected “permanent change” into the way consumers shop.
Price will play an ever-more important role in what consumers buy, the Wal-Mart chief said and he insisted the company was handily placed to benefit.
“We’re well positioned now and we’ll be well positioned when we come out of this because of the way customers will be viewing us. We’ll be keeping these customers that we have been picking up during this period of time,” Duke said.
An ominous thought for Wal-Mart’s rivals.
More to come…
