Wal-Mart Stores outlined its strategy for the coming fiscal year at its annual investment community meeting yesterday (16 October). The world’s largest retailer raised its capital expenditure forecast in the US while scaling back its international investment plans. Significantly, the company said it would close under performing stores in Brazil and China and reduce store openings in Mexico and India – possibly reflecting concerns over the growth outlook in emerging markets. Katy Askew reports.
Wal-Mart Stores has increased its capital expenditure programme in the US during the current fiscal to a projected range of US$6-6.5bn, up $500m on the group’s previous forecasts, the company revealed yesterday. The retail giant added that it expects to spend $5.8-6.3bn in the US during fiscal 2015, with its home market expected to account for more than half of total space expansion.
Go deeper with GlobalData
Wal-Mart’s domestic business is taking an increasingly aggressive stance on store openings. The group said it plans to end fiscal year 2014 with square footage growth of approximately 18m retail sq ft, compared to its original projection of approximately 15-17m sq ft. In fiscal 2015, the retailer anticipates adding 19-21m net retail sq ft.
In particular, Wal-Mart plans to carve out growth in the US by expanding outside its core big-box format and opening more smaller stores. The company will build approximately 120 to 150 small format stores next fiscal year, Wal-Mart said.
“We will accelerate growth of our Neighborhood Markets because of their strong returns, consistent comp sales performance and double-digit net sales increases,” commented Bill Simon, Wal-Mart US president and CEO.
At the same time, the company intends to continue to grow its larger format stores in the US, with plans to open around 115 supercentres in fiscal 2015, and continue to develop its still fledgling online business.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThis multi-format strategy, Simon said, will allow the world’s largest retailer to continue to grow US market share.
“The combination of our large and small store formats allow us to strengthen our market share position and give customers convenient access to shop for food and general merchandise, as well as access to our e-commerce offerings,” he explained.
William Blair & Co analyst Mark Miller suggests that Wal-Mart believes it can use smaller stores to “fill in the blanks” on the map in the US – with smaller format outlets feeding into its existing distribution network and providing a boost for its e-commerce business by expanding the number of pick-up points.
“One of the more interesting developments is the company’s decision to accelerate the growth of smaller format stores. While this has been anticipated for some time, 2014 will be the first year that the number of Neighbourhood Markets and Express store formats will outpace the growth of Supercentres,” Miller writes in a note to investors. “Returns on smaller format locations are similar to Supercenters, according to management, and by “filling in” its markets, the company hopes to leverage distribution capabilities and drive higher in-store pick up for e-commerce orders.”
However, Miller does warn that this strategy might not be entirely win-win: “The risk is that there could be a higher level of cannibalization at existing Supercentres, and we believe that it could weigh modestly on return on capital over time.”
While Wal-Mart is focused on driving market share growth in its domestic operations, the company would seem to be scaling back its international ambitions somewhat. For fiscal 2014, Wal-Mart International reduced its projected capex by $500m to a range of $4-4.5bn.
The group revealed it is planning fewer store openings in Mexico and India. The company has seen profitability come under pressure in Mexico, while it recently announced it would exit its joint venture with Bharti Enterprises in India due to issues surrounding foreign direct investment regulations in the market.
And these are not the only emerging economies in which Wal-Mart is cutting back: the company said it would close around 50 underperforming stores in the key markets of Brazil and China.
Indeed, during 2014 Wal-Mart said it now expects to add 14m net retail square feet – down from its original projection of 20-22m square feet.
Wal-Mart’s move to reduce international expenditure reflects the group’s concerns over generating an acceptable return on investment in emerging markets.
During the first-half of the year, Wal-Mart said international sales failed to meet expectations due to ongoing pressure on consumer spending. Weaker-than-expected international sales were a major factor in the firm’s decision to cut full-year forecasts.
And it seems unlikely that trading conditions in emerging markets are going to get easier in the near-term.
In its latest World Economic Outlook issued last week, the IMF lowered its global growth forecast to 2.8% in 2013, down from its previous prediction of 3.1%. The new forecast represents the slowest year of growth since 2009.
The IMF said the US is driving the global recovery – and the country’s economic prospects just got better with news that Congress has raised the debt ceiling just hours before the country would have defaulted, bringing the government shut-down to an end.
While growth in the emerging markets is still outpacing the US, these once buoyant economies have continued to slow. In particular, the IMF predicted China would “slow over the medium term as its economy transitions away from investment to consumption drivers.”
This reduction in growth forecasts has placed serious question marks over the prospects for multinational companies looking to turn a profit in developing economies. While emerging markets are still growing at a faster pace than the developed world, establishing and expanding operations requires a significant outlay of capital and – with growth and therefore sales slowing – it would seem that Wal-Mart is not confident that the returns will be worthwhile.
The focus on returns has therefore prompted Wal-Mart to take a more conservative approach in its international operations. “We are confident that with disciplined growth and greater e-commerce integration in our business, we will have in place a solid framework for long-term growth and improved returns,” Wal-Mart International president and CEO Doug McMillon told analysts.
