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Wal-Mart, how big can it grow?

Wal-Mart is the world’s largest store of its kind. The next biggest is French-based Carrefour but that has only half the amount of annual sales. Even though it is so large, their goal is to become bigger. They have done so by international expansion but also by being aggressive in opening domestic stores. Just in the Phoenix area alone they have 20 superstores. They thrive on suburbs and being just outside of town. They currently represent 8% of retail sales in the United States and feel it is reasonable to aspire to a 30% share. Wal-Mart has a very flat corporate hierarchy and is mostly decentralized.

They make their profit on volume, low labor costs (no unions allowed) and, as Sam Walton the founder’s theory goes, they buy at the lowest possible prices and pass the savings onto the consumer. This philosophy had made expansion into some key union states (notably California, New Jersey and Illinois) extremely difficult with local communities emphatically voting their building petitions down and staging protests outside worksites. The key states for growth, alternatively, have been Oklahoma, Arizona, Mississippi, Missouri, and Arkansas.

Based on their current rates of growth, consultancy groups differ on how long the aggressive growth can last but they agree certainly business looks good through 2008, even up until 2010 which would grow the company to approximately $450 billion. Internationally, hard labor laws, culture clashes and price controls with their purchase of two existing chain stores in Germany led to failure to stick in that large European market. The German market already contained chain stores (Aldi and Lidl) who were family owned, German, and had accustomed its client base to low prices and slim margins on retail products.

However, the opposite took place when Wal-Mart purchased a British company, ASDA, in 1999. The two company’s corporate cultures were more in line and the transition was more seamless yielding a more successful venture. At the same time, one of its competitors, Sainsburys, faced substantial challenges which helped pave the way for increased sales. But what about the argument that Wal-Mart has a slash and burn reputation with regards to its competition? Many residents in Wal-Mart constituencies claim that Wal-Mart wipes out other local stores when it enters.

However, Target, Costco and other similarly-styled stores have thrived. The theory is that it is a survival of the fittest and that Wal-Mart just helps weed out the weaker competitors resulting in a stronger, more competitive market. Some manufacturers have determined that they cannot beat them, so they join them. For example, Levi Strauss created a specific line of jeans to be sold at Wal-Mart due to drooping sales of its higher priced lines in non-discount style department stores.

The biggest challenges facing Wal-Mart in the future include keeping prices low and continuing to lower existing prices. With some states more welcoming than others, Wal-Mart risks reaching a certain saturation point at which there are no more populations to be served, meaning that everyone lives within an easy driving distance to the closest Wal-Mart. On the human resources side the obstacles to overcome are both high staff turnover and good staff retention which both can lead to higher labor costs.

There are also increasing litigious actions against Wal-Mart which result in costly legal fees and fines (at any given moment there are approximately 8000 legal cases pending against Wal-Mart). While founder Sam Walton’s basic strategy is to keep the corporate structure flat, each of these factors threatens to diminish or even destroy the historic corporate culture it has of a truly entrepreneurial spirit by introducing layers of corporate bureaucracy. Yet, with all the shortcomings, Wal-Mart continues to grow and shows few signs of failing to do so.

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