MBA+520-+Walmart+Target

Comparative Performance Analysis of Wal-Mart, Kmart, and Target in 2003

Let’s start off by examining the key financial metrics (Fig. 1) for the 3 firms in question. From an overall ROE perspective, Wal-Mart and Target appear to be healthy and on par with each other, while Kmart is grossly underperforming. As all 3 firms compete in same industry, we must examine how differences in strategy and execution may be determining financial performance.

Net profit margin (NPM) for Wal-Mart and Target is in line with that of the industry as a whole (Fig. 2). Hence we turn to gross margin (GM) where Target has a substantial lead over Wal-Mart. This is a direct result of difference in strategy – while Wal-Mart aggressively guards its position as the low cost retailer, Target focuses on more differentiated (and thus higher WTP) products. At the same time target minimizes costs by relying extensively on internal production. Although Wal-Mart also sells in-house products (such as American Choice against P&G’s Tide), it does so to further reduce COGS and pass the savings on to customers, thereby sacrificing potential gains from higher WTP. Further, food items (with inherently low margins) constitute a greater share of Wal-Mart’s revenues than those of Target’s. Therefore, Target emerges the winner on gross margin. However, Target’s success at selling high WTP products is considerably offset by proportionately higher SG&A required to do so, whereas Wal-Mart is less subject to this overhead (see Fig. 1, SG&A/Revenue and SG&A/COGS). Consequently, Wal-Mart is able to considerably bridge the profitability gap with Target from 11 pp in gross margin to 2 pp in operating profit margin.

Next we examine asset turnover. Among many factors, evidence from the case strongly points to information management (Fig. 3) as the key reason for Wal-Mart’s overall profitability. Through extensive technological investment and continual focus, Wal-Mart has been able to deploy the most sophisticated inventory management system in the industry and link its supply and demand chain almost in real time. It is this commanding edge in asset turnover that ultimately catapults Wal-Mart from 2 nd  place (7.86% in NPM*Financial Leverage vs. 11.42% for Target) to leader in overall ROE.

Thus, by constantly answering the key questions – who are our customers (rural, lower income for Wal-Mart vs. urban, higher income for Target), what are their needs (EDLP for Wal-Mart vs. “cheap chic” for Target), and how do we compete (supply chain management for Wal-Mart vs. innovative products for Target), both firms are able to coexist and grow. In contrast, Kmart positions itself as low-cost but cannot contain COGS, and is therefore unable to compete with Wal-Mart. Further, it is spending an unjustifiable (more than GM) amount on SG&A, probably in an effort to increase market share, but without a clear idea of who the target customers might be. Its strategy of straddling by inadequately competing on both price and differentiation is thus rendered ineffective.

In closing, it is interesting to note how Wal-Mart and Target have responded to changing environmental and economic circumstances since 2003. Wal-Mart has been forced to improve its public image and become less rigid in deploying its domestic model abroad, while Target has become more committed to inventory management and rapid response, and been forced to expand into unfamiliar areas such as food sales.

Appendix
 * Financial Metric || Wal-Mart || Target  || Kmart  ||
 * Revenue (Million $) || 246,525 || 43,917  || 30,762  ||
 * Return on Equity (%) || 20.44 || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">17.52  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">(629.28)  ||
 * * <span style="background-color: transparent; color: #000000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;"><span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Net Profit Margin (%) || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">3.26  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">3.77  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">(7.06)  ||
 * * <span style="background-color: transparent; color: #000000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;"><span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Asset Turnover || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">2.6  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">1.54  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">2.74  ||
 * * <span style="background-color: transparent; color: #000000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;"><span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Financial Leverage || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">2.41  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">3.03  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">32.57  ||
 * <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Gross Margin (%) || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">22.18 || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">33.37  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">14.64  ||
 * <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">SG&A/Revenue (%) || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">16.65 || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">25.94  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">21.27  ||
 * <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">SG&A/COGS (%) || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">21.39 || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">38.94  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">24.92  ||
 * <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">EBIT/Revenue (%) || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">5.53 || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">7.43  || <span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">(6.63)  ||

<span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 12pt; text-decoration: none; vertical-align: baseline;">Fig. 1: Key Financial Metrics



<span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 12pt; text-decoration: none; vertical-align: baseline;">Fig. 2: Department and Discount Retail Industry Summary, 2004

<span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Source: <span style="background-color: transparent; color: #0000ff; font-family: 'Times New Roman'; font-size: 11pt; vertical-align: baseline;">[|__http://complabs.nevada.edu/~canioj/mba709/groupproject.pdf__]



<span style="background-color: transparent; color: #000000; font-family: 'Times New Roman'; font-size: 12pt; text-decoration: none; vertical-align: baseline;">Fig.3: Importance of Inventory Management

By extensive deployment of EDI, satellite-based communications, other IT improvements, and strict enforcement of supplier compatibility with the systems, Wal-Mart has minimized deviation from the economic equilibrium shown in the figure.

Source: <span style="background-color: transparent; color: #0000ff; font-family: 'Times New Roman'; font-size: 12pt; vertical-align: baseline;">[|__http://2.bp.blogspot.com/_URsX9Or788Y/ShTjmy4EoNI/AAAAAAAAABY/pO0emChV9x0/s1600-h/eoq.gif__]