The Paul Merage School of Business at UC Irvine
Financial Statement Analysis & Reporting: Earnings Quality and Asset Analysis
Company - WALMART
Kian BolooriHee Jun ChungDaejune Min
1. Qualitative Analysis for the environment and the company
(1) INDUSTRY ANALYSIS
Walmart is in the discount retailer industry. This industry started in the 1950s, grew in the 1960s, and matured in the 1970s. With exception to a moderate growth period in the 1990s, the industry had remained stagnant since the 1970s. Today, three major players in the industry are Walmart, Target and Costco. The state of the discount retail industry is best understood through the Porter’s Five Forces analysis.
* Competition: HIGH
Competition among discount retailers resembles that of an oligopoly in that Costco, Target and Walmart hold a vast majority of the market share. In past decades, competition among the firms was minimized because they each targeted a different market segment. For example, Target focused on higher end neighborhoods while Walmart focused on rural locations. However, as the firms began to grow, they had to expand beyond their original targeted segments. As such, the firms started competing in the same locations, which intensified competition. This condition remains a dominant issue in the discount retail industry.
* Barrier to New Entrants: MEDIUM-HIGH
Unlike other industries, the discount retailer industry does not require a particular set of technical knowledge for new entrants. However, the major players in the market have established strong procurement and distribution networks that prevent new entrants from easily establishing their own. As such, new entrants would find it difficult to establish procurement and distribution networks while keeping costs competitive with those of Walmart, Costco and Target.
* Bargaining Power of Buyers: LOW--MEDIUM
Buyers have different levels of power depending on their location. In rural areas, buyers have less power. There is usually one discount retailer for each rural region. As such, that retailer has a virtual monopoly in that region, which allow it to increase prices, and thus increase margins. On the other hand, buyers in suburban and urban markets can easily switch between discount retail competitors; as a result, each discount retailer must keep its prices competitive in those markets.
* Bargaining Power of Suppliers: LOW
Suppliers to discount retailers hold little to no power. When the major discount retailers initiate relationships with new suppliers, they typically request contracts for the new suppliers’ whole inventory. As a result, the suppliers become entirely reliant on the discount retailer for their business. The discount retailer then leverages this reliance by demanding lower prices on the inventory. As a result, suppliers typically have to sell their inventory at low prices that result in small profit margins for them and lower inventory costs for discount retailers.
* Threat of Substitutes: LOW
Current existing substitutes to discount retailers include supermarkets, traditional retailers, and boutique shops. However discount retailers are able to leverage their strong distribution networks to offer lower prices than many of the substitutes. As a result, discount retailers are able retain business despite the existence of substitutes.
(2) ECONOMIC CONDITIONS
The fact that there are fewer opportunities to expand in the United States has made it difficult for discount retailers to continue growing profits. In fact, discount retailers’ attempts to enter new markets have resulted in community resistance. In Watts, CA, community members successfully lobbied to prevent Walmart from opening a new store in the neighborhood. Despite these challenges, discount retailers have found new opportunities to increase profits. For one, discount retailers have started converting their stores into “supercenters.” These...
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