Kathryn Renwick, Alicia Brunker, Laura Schneider, Kelly Kregel, Ji Ho Ha Financial Retail Strategy Analysis Walmart Benchmark Over Time Profit Margin Management Gross Margin Percentage Operating Expenses Percentage Operating Profit Margin Percentage Net Profit Margin Percentage 3Asset Management Inventory Turnover* Asset Turnover Return on Assets (ROA) ROA (Net Profit Margin * Asset Turnover) ROA (Operating Profit Margin * Asset Turnover) Retailer Benchmark Comparison Profit Margin Management Gross Margin Percentage Operating Expenses Percentage Operating Profit Margin Percentage Net Profit Margin Percentage Asset Management Inventory Turnover * Asset Turnover Return on Assets (ROA) ROA (Net Profit Margin * Asset Turnover) ROA (Operating Profit Margin * Asset Turnover)
2012
2011
2010
25% 19.1% 5.9%
25.3% 19.3% 6.1%
25.5% 19.6% 5.9%
3.5% 8.2 2.3 8.1
3.9% 8.6 2.3 9.1
3.5% 9.3 2.4 8.4
13.7
14.1
14.1
Walmart 2012
Costco 2012
Target 2012
25% 19% 5.9%
12.4% 9.6% 2.8%
31.5% 23.9% 7.6%
3.5% 8.2 2.3 8.1
1.7% 12.2 3.7 6.3
4.2% 6.0 1.5 6.3
13.7
10.2
11.4
Walmart • Target Market: Walmart’s targeted demographic includes families and individuals with modest incomes who are interested in the value of the products offered and less interested in product brands. • Retail Mix: • Pricing: Everyday Low Pricing; scale of operations, cost efficiencies due to bargaining power and effective supply-chain management. • Merchandise Assortment: Walmart has wide breadth but shallow depth within the product categories. Walmart shoppers can buy just about anything at the retailer some items including: toys, electronics, groceries, and office supplies. Customer Service: Low level of customer service; shoppers are more interested
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in the value of the products they are getting than the customer service. Shoppers service themselves, and if they need extra assistance the individual has to seek out a sales associate. Store Design/Display- Large store layout with a simple, inexpensive design and display. Supercenters average nearly 182,000 square feet, and neighborhood markets average around 38,000 square feet. Customer’s are invited to search for their needed items on basic shelving, cardboard displays, and through wide aisles. Location: Walmart has many locations for convenience and also online an online presence. At the end of fiscal year 2012, Walmart had over 4,500 stores and clubs in the U.S., and more than 10,150 units worldwide. Most of Walmart’s store locations are in small, rural towns, off the beaten pathway. Communication Mix: commercials and print ads. Sustainable Competitive Advantage: Cost leadership strategy; provides goods to consumers at low prices due to its efficient supply-chain management.
Costco • Target Market: Costco has two distinct target markets. One being low-income customers who need to shop for the lowest prices. Costco also targets a loyal, upscale clientele that enjoys finding bargains and unique merchandise. • Retail Strategy • Customer Service: Costco has limited customer service at their retail stores. Customers who come to the store to shop serve themselves and are required to find items on their own, unless they choose to find an employee • Merchandise Assortment: Costco carries only 4,000 SKUS with a greater variety of goods than a traditional supermarket, but a shallow assortment within each product category. Costco also carries a wide and deep assortment of wines at their retail locations. In addition to the retailer’s grocery items available for purchase, they also carry a variety of “treasure” products with limited availability including TVs, diamond rings, or designer handbags. • Location: Costco has over 500 store locations, most of which are located in the US. Most of Costco’s locations are located “off-the-beaten” path within rural and suburban areas. • Communication Mix: Costco does not have a lot of communication with consumers; most of the communication they do implement is geared towards their members. The company does not dedicate a lot of its budget to advertising or promotional efforts. • Pricing: Costco offers low prices to their customers. The retailer marks up products no more than 14%, giving its customers true value no matter what product category the item is in. • Store Design and Display: Costco’s store design is extremely simple, and therefore inexpensive. The store locations are very large warehouses, over 155,000 square feet with concrete floors and cheap fixtures to present their product categories. Costco features their products on industrial shelves and within cardboard boxes where customers are invited to search through. • Sustainable Competitive Advantage: Costco has a sustainable competitive advantage based on their relationship with suppliers, unique merchandise, CRM,
and distribution and information systems. Costco has good relationships with their suppliers; the retailer is able to negotiate good prices and receives the best price from national suppliers. Costco also has unique, private label merchandise due to their collaborations with vendors that they have good relationships with. Kirkland Signature is one of Costco’s most popular private label brands, which offers a diverse selection of wines, champagnes, bakery items, etc. Additionally, Costco evaluates its suppliers closely to make sure they are meeting the “Costco standard,” and can deliver consistent, quality merchandise to their customers. Target • Target Market: Target’s target market varies. One market is people looking for chic, trendy clothing at a discount and who value better quality than Walmart for a slightly higher, but still discounted, price. Customers have the median age of 40, median household income of approximately $64K. Also approximately 43% have children at home and about 57% have completed college • Retail Strategy • Customer Service: They have a medium level of customer service. The guest call buttons throughout the store where you can call employees for service proves this. They also have employees in electronics at all times and know more about products. • Merchandise assortment: Target offers around 80,000 SKUs. They have a wide variety but a shallow depth. You can find their merchandise assortment positioned between traditional and fashion-forward. Target also offers some exclusive private label brand as well as many national brands. • Location: Stores are located across the country. They used to be located in more rural areas, but have moved into more downtown, city areas including Brooklyn and the Bronx in New York City. • Pricing: Target is a discount store. They offer price comparisons on over 25,000 items, so customers will know how much they’re saving. Further, to help you save even more; they accept manufacturer’s coupons. One manufacturer item and one target coupon per item. During the holidays (November 1- December 24) they price match for their customers. • Store design /display: Unlike Walmart and Costco, Target does not have a Warehouse theme. They have visually pleasing interior and exterior, and an easily accessible layout making their customer’s shopping experience enjoyable. Target stores use bright lightening & LED lighting to save energy. They also conveniently lower shelf height so people can easily see the products • Communication mix: Their communication mix consists of sale ads, commercials, customer credit card (receive 5% off of purchases with the use of the credit card), and coupons tailored to each individual’s purchasing habits. Target has high brand awareness within its customer base and the general public. • Sustainable competitive advantage. Target offers online, in-store, and mobile apps creating an unbeatable convenience. They can shop wherever, whenever they want to shop. • Good relationship with suppliers: They have developed relationships with minorities across the country. They also tap into the female market using women owned suppliers across the country.
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Good Relationship with employees: Target is on DiversityInc’s “Top 50 Companies for Diversity”. They have also made the Fortune 500 list for the past five years. It is also considered one of the most ethical companies. Unique Merchandise: Target has exclusive private labels within their clothing, grocery, and home departments. Target pairs up with high profile fashion designers to make an exclusive line for their apparel department. Some of these designers include: Missoni and Jason Wu.
Walmart Profit Margin Management Walmart has remained fairly consistent over the past three years in terms of their financial report. In 2010, Walmart reported their gross margin percentage as 25.5%, and in years since, it has only slightly decreased, as it was 25.3% in 2011 and is 25% currently in 2012. This decrease, though slight, could be the result of Walmart’s cost of goods sold increasing due to the recession. The vendors may have priced their goods higher in order to keep making profits in the poor economy, which is why Walmart would’ve had to pay more, thus resulting in a slightly lower gross margin. Similar to their gross margin percentage, Walmart’s operating expenses percentage has also only slightly decreased, as in 2010 it was 19.6% and dropped down to 19.3% in 2011. In 2012, it is 19.1%, which could be because Walmart is trying to lower their operating expenses in order to save money. The operating profit margin percentage has varied over the years. In 2010, it was 5.9%. In 2011, it increased in 6.1% and then dropped down again in 2012 to 5.9%. This report was also influenced by the poor economy as prices of goods fluctuated and thus impacted Walmart’s gross margin. Because operating profit margin is calculated by subtracting extraordinary recurring expenses from gross margin, Walmart’s operating profit margin is influenced by gross margin. Like operating profit margin, Walmart’s net profit margin percentage is the same in 2012 as it was in 2010, which is 3.5%. In 2011, it increased to 3.9%. This change in net profit margin percentages occurred due to either, or both, a change in operating profit and/or a change in interest and taxes. If interest and taxes increased, that would explain why the net profit margin percentage fell from 3.9% to 3.5% from 2011 to 2012. Overall, there were no major decreases in any of the percentages that determine profit margin management and despite the economic recession; Walmart is still prevailing in managing and sustaining profit margin. Asset Management From 2010, inventory turn has been decreasing for Walmart. In 2010 their inventory turnover rate was 9.3, but decreased in 2011 to 8.6, and then decreased further to 8.2 in 2012. This consistent decrease in inventory turnover is happening because, as a result of the poor economy, Walmart is unable to turn its inventory into cash as quickly as in previous years. Because people are more hesitant to purchase goods because of the economic state, Walmart is not able to sell its inventory as quickly. In terms of asset turnover, Walmart has remained consistent, as it was 2.4 in 2010 and only dropped by .1 points in 2011 to 2.3 where it remains today in 2012. This means that Walmart’s assets are slightly less able to generate revenue than in 2010. Overall, Walmart is currently successful in their asset management as their decreases have not been significant and they are still in close range to their percentages in previous years.
Return on Assets Walmart’s return on assets, calculated in relation to their net profit margin, has fluctuated from 2010 to 2012. In 2010, Walmart’s return on assets was 8.4%, increased in 2011 to 9.1%, and then decreased again to 8.1%. The decrease could be alluded to a decrease in net profit margin or in asset turnover. Walmart’s return on assets, calculated in terms of their operating profit margin, also decreased from 2010. In 2010, Walmart’s return on assets was 14.1% and remained 14.1% in 2011, as well. However, in 2012, Walmart’s return on assets is 13.7%, which is a decrease from previous years. This decrease could be caused by the decrease in asset turnover. The decrease in return on assets could also be from a lower operating profit margin percentage. Walmart’s fluctuations on their return on assets demonstrate how the profit margin management percentages and the asset management percentages influence their return on assets. If Walmart had higher turnover rates and higher profit margins, they would see increases rather than decreases in their return on assets. However, because shopping habits reflect the economic state of the country, it is sometimes more difficult to control whether turnover and profit margins increase. Overall, though Walmart shows signs of the economic impact, the company is successful in remaining profitable with asset turnover and profit margin management. Based on profit margin management, Target is the best retailer. Net profit margin describes how much of every dollar Target gets to keep. Their gross margin profit was 31.5% and their net profit margin was 4.3%. These numbers are the result of their merchandise selection, store displays, as well as their pricing strategies. Because Target offers exclusive merchandise in a well-designed store, they have the ability to price their products higher. Consumers are willing to shop at target for the designer clothes and better customer service. Asset Management is comprised of Inventory turnover and asset turnover. Compared to Target and Walmart, Costco has the highest inventory and asset turnover for 2012. Accounts receivable are the monies owed to the retailer by customers that have bought merchandise on credit. Because Costco does not have a proprietary store credit card, this number is much lower for Costco than it is for Target, who does have a proprietary store credit card. Merchandise inventory is also a component of assets. Costco has a limited number of SKUs. Its merchandise inventory is much lower than Walmart and Target’s merchandise inventories, both of which possess a much higher number of SKUS, so Costco does not need to invest as much in this asset. Total fixed assets also are factored into total assets. Fixed assets are those that take over a year to convert to cash. Because Costco has an asset turnover of 12.2, this means that Costco is able to generate the most amount of sales with the fewest amount of assets. Return on assets highlights the efficiency in utilizing the assets to convert them into profits. It measures the company’s ability to generate profit before leverage with it’s own assets. 2012 Walmart’s ROA (Net Profit Margin * Asset Turnover) was 8.1% and ROA (Operating Profit Margin * Asset Turnover) was 13.7%. Among these retailers: Costco, Target, and Walmart, Walmart had highest ROA in both measures. Walmart’s ROA was the best because of low price along with their convenient location. It is located in both rural and suburban areas. This expands their market substantially. Their wide breadth is appealing to all consumers.
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