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4 steps to get Wal-Mart back on track
It's under fire from labor groups. Sales are lagging. The world's biggest retailer needs new ways to spur growth, and its stock.
NEW YORK (CNNMoney.com) - Wal-Mart's image isn't the only thing that needs some polishing. Investors would much rather have Wal-Mart's stock start to show some signs of life again and its sales and profits pick up pace. As the world's largest retailer with a cool $315 billion in annual sales, there's little doubt that Wal-Mart (Research) is among the best in its class.
But Wall Street loves growth, and as Wal-Mart's gotten bigger that's become harder to come by. What's more, some Wal-Mart watchers say investors are becoming increasingly frustrated that the company's spending an inordinate amount of time trying to diffuse its public relations crises and not giving enough attention to improving weak spots in its business. Wal-Mart's stock, which rocketed in the 1990s, has been stuck in rut in recent years, far from its all-time high of $69 a share. Its stock was the sixth worst performer of the 30 shares in the Dow Jones industrial average last year. Moreover, in its latest fiscal year a key measure of sales at stores open at least a year known as same-store sales rose just 3.4 percent last year, versus 3.3 percent the prior year, while same-store sales at archrival Target (Research) jumped 5.6 percent last year. And the retailer's efforts to get shoppers to buy pricier clothing and electronic gear haven't really taken off, industry experts say, keeping profit margins under pressure. It's hard to sell people fancy stuff when they come to you for cheap underwear, peanut butter and detergent. So what can Wal-Mart do to put the luster back in its business and shine once again on Wall Street? Develop a meaningful Internet strategy for one. Here are some other recommendations from industry experts. Bolster labor relations
As the nation's biggest private employer with 1.3 million workers, Wal-Mart has become an easy target for union-backed groups critical of its pay and benefits. That means that Wal-Mart needs to make a dedicated and even more visible push to better its relationship with workers, and with communities where it does business. (Wal-Mart did announce plans Tuesday to open new stores in blighted areas: Full story). But Burt Flickinger, managing director with retail consulting firm Strategic Resources Group, said the labor issue is not just a prickly PR problem that won't go away. Citing his firm's own research, Flickinger said Wal-Mart has one of the highest worker turnover rates in the industry, and it's cutting hours for full-time workers in a bid to cut costs -- which can help the bottom line but can also cut the other way, since high turnover and lower staffing can mean lost sales, especially on weekends. "For busy parents who stock up on baby food and other items, if they can't easily find it in Wal-Mart, they don't have time to go back. They'll just go to the competition," said Flickinger, noting that Saturday and Sunday account for about 40 percent of Wal-Mart sales each week. "It's critical for Wal-Mart stores to be fully stocked and have experienced staff on weekends," he said. Wal-Mart spokesman Marty Heirs acknowledged the high turnover and said Wal-Mart was taking steps to address it. "Most retailers have very high turnover rates but we would like to keep our associates," Heirs said. "We're already doing a few things like reducing the waiting time for employees to qualify for health coverage. We're also increasing wage scales to compete with associates in markets where the wages are higher." International expansion
Like many other companies, Wal-Mart's hot to expand in faster-growing overseas markets as its home market gets more crowded. But Wal-Mart's facing big challenges in two of the world's hottest growth markets -- India and China. According to Flickinger, the Chinese government estimates that 60,000 to 70,000 new food, discount and general merchandise stores opened in China over the last dozen years. While most are locally owned some are international chains. By comparison, Wal-Mart, which entered China in 1996, has only 51 stores there, with plans to open about 20 more this year. In India, the country's complex market regulations have thus far precluded Wal-Mart from entering the market altogether. The retailer has also suffered setbacks in Japan, Brazil and Britain. "These international market opportunities are critical for them," said Morningstar analyst Joseph Beaulieu. And while it's still early for Wal-Mart in India and China and some other markets, "it's important for them to learn about the consumers and local cultures in order to avoid missteps down the road," he said. Clearly, it's not been easy for the discounter to establish that same kind of dominance in China that it enjoys in the United States, with nearly 4,000 stores. Several European supermarket operators such as French retailer Carrefour as well as a handful of Chinese supermarket chains are expanding much more rapidly in China. Merchandise management
Another way for Wal-Mart to squeeze more profits from its vast operations is better inventory control and global sourcing, experts said. Even though Wal-Mart is strong in this area, it's made stronger inventory management a priority, according to Heirs. That could trim costs further, and free up funds to bolster marketing and merchandising. Morningstar's Beaulieu said Wal-Mart should also buy merchandise directly in places like China, rather than going through third parties, which adds costs. That could be risky in the short run since the retailer is still learning about the Chinese market. "So this is more of a longer term strategy for Wal-Mart," Beaulieu said. Wal-Mart already has good margins for a discount retailer but any slim gains on top of these levels will really boost profits, Beaulieu added. Wal-Mart's net profit margin of about 3.5 percent is broadly in line with the rest of the retail industry. Todd Jones, an analyst with investment firm PNC Advisors that holds Wal-Mart stock in its $50 billion portfolio, agreed that better expense controls is crucial. "When Wal-Mart's earnings come out, you see that their profits are hurt by higher operating expense. It's encouraging to see (them) getting more focused on expense control." Attract new customers
Last but not least, Wal-Mart's got to think outside of its "big-box" if its wants to win new customers and rejuvenate growth, said Love Goel, CEO of Growth Ventures, an investment firm focused on retailers. For instance, it might make sense for Wal-Mart to launch a new brand for higher-income shoppers, he said. That way it won't run the risk of alienating its core shoppers who love its low prices. And more affluent consumers who typically don't like shopping at discount stores won't be embarrassed by the Wal-Mart name, Goel said And unlike Target or J.C. Penney (Research), Wal-Mart hasn't done nearly enough to market its wares via catalog or the Internet, Goel said. For instance, Target has 10 times the inventory online than in it stores because it partners with vendors to sell their products directly on its Web site. "Why can't Wal-Mart do this? Wal-Mart certainly has the infrastructure in place. They get 100 million customers a week in stores. Why not capture sales from these same customers in some other way," Goel said. --------------------------------------- 4 big brands. 4 big blunders. Click here for more. What's new in dining trends. Full story. Retailing's "endangered species" list. Get more.
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