Wal-Mart Discount Stores’ Operations 1985 Case Study Analysis

 Capital isn’t scarce; vision is.

Each Wal-Mart store should reflect the values of its customers and support the vision they hold for their community.
High expectations are the key to everything.
I had to pick myself up and get on with it, do it all over again, only even better this time.
I have always been driven to buck the system, to innovate, to take things beyond where they’ve been.
Outstanding leaders go out of their way to boost the self-esteem of their personnel. If people believe in themselves, it’s amazing what they can accomplish.
There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.
We let folks know we’re interested in them and that they’re vital to us. cause they are.
We’re all working together; that’s the secret.
               — All quotes are from Sam Walton

Wal-Mart Case Study 1986

Analysis of Wal-Mart http://www.scribd.com/doc/78543427/WMT-Case-Study-1-Analysis

See: http://www.scribd.com/doc/78527294/Wmt-50-Year-Chart

Who wants to move deeper into analyzing WMT and see the HBS Case on WMT for 2003? …………or

Ready to move onto to the Coors Beer Case Study which is a lesson on what happens if a company loses its regional economies of scale advantage?

Lessons learned so far?

If you had read this case study when it was published in 1986 would you have bought WMT and held on for five or seven years?  What analysis would you need to do?

Tomorrow I will post another strategic view of Wal-Mart so you can see other perspectives.

6 responses to “Wal-Mart Discount Stores’ Operations 1985 Case Study Analysis

  1. I say we move deeper into analyzing WMT.
    I read through the case analysis and have the following questions:
    1. Any guidance on where we go to look to produce an industry map and find market share information for companies in an industry?
    2. In the case you state that WMT doesn’t have much CC. Their business model is based on a pricing structure of EDLP. Is the ability to raise prices and see no/low decline in unit volume indication of CC? What about habit and location to customers?
    3. In 1985 WMT only has 895 stores, so I can see why they would not have purchasing power advantages over their branded suppliers. Do you think this dynamic has changed at all since the store base has grown to over 8,000?
    4. You state on page 3 of the case, “WMT’s profits did not increase as it got bigger.” I was wondering what the key takeaway is from that statement. In absolute dollars the pre-tax profits increased, but as a % of sales they remained relatively consistent.

    I have a few key lessons but I’ll refrain from posting them for now.


    • OK, Boss, we will dig deeper.
      My notes were from 2005 so I may not be able to recall exactly all the details. Yes, raising prices with little drop off in unit volume (price inelasticity) is an indicator. WMT may have CC in a particular area but not with a direct competitor within 10 miles.

      3. No. but let’s see in the 2003 WMT to be posted. You may find the answer in that case posted today (later)
      4. See WMT 2003 CS to be posted.

      Thanks as always.

  2. This case study was eye-opening. I don’t think I would’ve ever even considered looking into a company at a 25 P/E and ~6 P/B unless there was some hidden tangible asset. Warren Buffett admitted to missing out on this opportunity as well.
    If I had this case study back in 1985 I would’ve wanted to see how many more small towns there were left to open up stores in and how WMT would be able to get there before its competitors. By 1985, many of WMT’s competitors caught on to the small town trend and would be able develop their own CAs in those towns. The only moat left at this point was the way WMT’s stores were located. They still had the advantage in logistics in their truck fleet and in their controlled SG&A expenses because the stores/warehouses were so close together. It would be hard to tell how WMT would expand into the larger towns and how it would maintain its current ROE. Also their everyday low prices although not a moat that can’t be reproduced added to their efficiency and took some % off their margins.
    Would it be correct to say that WMT would have to be bought according to one’s evaluation of management’s efficiency and competitors’ inefficiency (or inability to find a niche)? Why couldn’t competitors adopt WMT’s EDLP approach and shed some marketing expenses?
    I can’t wait to continue analyzing WMT. This company surpassed everyone’s expectations repeatedly. Although a 15-bagger only once, its price tripled in ’96-’00 as well.

    • Thanks for VERY intelligent insights. Buffett speaks about saying book value or P/E multiple is not as critical as competitive advantage and future free cash flows discounted back to the present at your risk adjusted capital rate. Looking at the opportunities available still to implement Wal-Mart’s strategy would be critical.
      Marginal returns on capital can decline from high rates while building intrinsic value as long as the rate is ABOVE its cost of capital. However if the market has already discounted extremely high growth at high rates then the price might decline.

      In this case (See 50 year chart) intrinsic value increased ahead of price for another 10 years or so.

      Ok, more case study analysis to come with a Harvard BS Case study on Wal-Mart in 2003.

      Then onto Coors.

  3. If you had read this case study when it was published in 1986 would you have bought WMT and held on for five or seven years? What analysis would you need to do?

    We know, based on our analysis of WMT’s numbers and understanding of structural CA, that WMT benefited from REOS with limited CC. I agree with Dave. One would need to assess the potential for WMT to continue its current strategy of expanding into the periphery (i.e. small towns with little competition) from its dominant market position. If this expansion strategy offers limited opportunities (which, based on information presented in the case, there were little opportunities to expand) one would need to understand management’s expansion plans.
    Can WMT earn economic profits by continuing this expansion strategy but competing in larger cities with more established competitors?
    If management plans to expand and become the dominant national discount retailer, it is likely that returns will be lower than in their dominant market (south-central U.S.) because WMT would be competing with other established competitors (i.e. KMART and Sears) and would need to build market share and invest in fixed costs, so it’s questionable as to whether the company could establish EOS w/ CC. How much lower would the returns be? Can the company earn more than its cost of capital? What is WMT’s cost of capital?
    Also, how would WMT replicate its economies of scale advantage in a national market? We know that EOS are dependent on fixed costs relative to the size of the overall market (in local terms) as well as market share on the demand side.
    If I was looking at WMT at 26x EPS, I would want to know what kind of returns they plan to achieve on new stores outside their dominant market position. Also, how would you go about determining the cost of capital for the company? If you were looking at WMT in 1986, would you have to take management’s word with regards to expanding nationally and the returns they plan to achieve on new stores?

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