Wal-Mart Acquisition Analysis
Wal-Mart Stores, Inc, otherwise known as Wal-Mart, deals in various retail stores in different parts of the world. Of the three main segments of the company, Wal-Mart Stores segment is the largest. It made up about 67. 3% of the company sales as at the end of the fiscal year ended 2005 January, 31 (Hummer, 2006, p. 1). The membership warehouse clubs which together comprise Sam’s Club accounted for about 13% while the International segment accounted for 19. 7% of the company’s sales during the fiscal year 2005 (Hummer, 2006, p.
1). Equally important to note is that fact that the company has an unconsolidated minority interest of about 37% of a retail company in Japan; the Seiyu, Ltd (Hummer, 2006, p. 1). The company is proposing to purchase Lianhua Supermarket Holdings Co. Ltd. , China’s #1 grocery retailer. Industry Structural Characteristics Rationale – Porter’s Five Competitive Forces Wal-Mart Stores, Inc, carries out business in the retain industry as the predominantly low cost retailer (Hummer, 2006, p. 1).
The main strategy of the company is based on the pricing philosophy it embraces of offering everyday low prices (Porter, 1996, pp. 61-79). The fact that the company is a highly stocked one-stop shop enables the customers to develop the confidence that the supermarket will meet all their needs. Besides, the fact that it operates for long hours greatly conveniences the customers (Hummer, 2006, p. 1). In a nutshell the company is very highly competitive; but to investigate the sustainability of this competitive edge, it is necessary to carry out the five forces analysis.
The first competitive force is barriers to entry (BTE) (Porter, 1985). With regards to Wal-Mart Stores, Inc, barriers to entry are relatively low because setting up a retail store is relatively less capital intensive. Besides, the fixed costs are also less (Hummer, 2006, p. 1). On the contrary, when Wal-Mart starts up a store in the neighborhood, small retail businesses are usually driven out of operation. This is because Wal-Mart is capable of fixing prices lower than the long-term average costs of operation of the smaller retail businesses (Hummer, 2006, p.
1). Being the largest retail chain, its long-term average costs of operation is far less because of economies of scale (Barney & Hesterly, 2008). This means that the company can comfortably purchase Lianhua Supermarket Holdings Co. Ltd. , China’s #1 grocery retailer. The next force is supplier power and is basically non existent (Hummer, 2006, p. 1). As the largest retailer in the world, the company enjoys substantive amount of buyer power this is in a position to demand big volumes of discount from the suppliers (Porter, 1996, pp. 61-79).
In most cases, WMT’s business constitute the largest percentage of any one supplier’s businesses thereby further strengthening the company’s bargaining power for discounts from its supplier (Hummer, 2006, p. 1). Furthermore the company has its own distribution channels and a powerful inventory management system (Porter, 1985), which further strengthens its ability to purchase Lianhua Supermarket Holdings Co. Ltd. , China’s #1 grocery retailer. With regards to buyer power, it can be said that the final consumer maintains the final buyer power for the company (Porter, 1985).
The pricing philosophy used by Wal-Mart is the ‘everyday low prices’ which continually draws customers to its business (Hummer, 2006, p. 1). What this implies is that with consistent low prices, the business model of WMT appeals to every consumer at the end of the day (Porter, 1996, pp. 61-79). This implies it enjoys buyer power as a source of competitive advantage thus it can easily purchase Lianhua Supermarket Holdings Co. Ltd. , China’s #1 grocery retailer. The next competitive force is the substitutes (Kotler, 2003). Trends indicate that the main substitute for shopping at retail chains is to shop online (Hummer, 2006, p. 1).
Wal-Mart provides the online shopping option to the consumers who would not wish to visit the stores thereby still being in apposition to meet the customers at their points of need. The final competitive force is competition (Kotler, 2003). Granted, competition is stiff within the retail industry. This is indicated by several facts like the average gross margin (industry/market) of 26. 5% vs. 48. 3% while the average operating margin (industry/market) 8. 5% vs. 12. 6% among others (Yahoo Finance Inc, 2009). Wal-Mart competes on various fronts; discount, department and specialty stores among others majority of which are national chains.
Still, the company can equally compete with other retail businesses for new stores. In fact as at January 31, 2005, among all the retail departmental stores, the Wal-Mart stores segment was the best ranking (Hummer, 2006, p. 1). From all the above competitive forces, it can be deduced that Wal-Mart has a long sustainable competitive edge in an industry characterized by stiff competition (Barney & Hesterly, 2008). Therefore the company can comfortably purchase Lianhua Supermarket Holdings Co. Ltd. , China’s #1 grocery retailer.