Facing mounting legal problems and having reported its first quarterly earnings miss in seven years, retail colossus Wal-Mart has looked almost vulnerable in recent weeks. But anyone predicting the retail giant is on the decline had better think again, industry analysts say, as its recent overseas expansion is expected to pay off handsomely.
Wal-Mart's third-quarter earnings miss was, to a great extent, a reality check for Wall Street. The dismal news took the wind out of a too-rosy earnings outlook for U.S. retailers this holiday season, which is still expected to be more profitable than last year, but perhaps not as impressive as some retail-industry observers had hoped.
But the profit news raised the question among analysts of whether Wal-Mart — which expects to do more than $240 billion in sales in its current fiscal year and is the world’s biggest retailer in terms of revenue — can keep on growing at the same blistering pace. News of a expected foray into online music sales and reports of legal troubles have also raised red flags for observers.
Wal-Mart’s stock price, which is up some 10 percent so far this year, has been stuck below the $60 level since it jumped sharply from the mid-$40 range in early March. But despite its enormous size, the retailer has to continue to grow at a strong pace in order to satisfy shareholders.
Bullish prospects overseas
One sure-fire way to maintain strong growth is to keep conquering new markets overseas, analysts said.
Wal-Mart has already made successful incursions into retail markets outside the U.S., most notably in the United Kingdom, Mexico and Canada. In 2002, the firm topped the list of international retailers ranked by sales outside their domestic market, but its international sales represent just 3 percent of the global retail pie, which amounts to $7.3 trillion.
At the same time, Wal-Mart is busy blanketing the U.S. with its Supercenters, vast stores that combine mass merchandise and grocery sales. It is opening around 200 a year, adding to the more than 3,000 already in existence. Within about five years, Wal-Mart could very well control about a third of the nation’s food store industry sales, analysts said.
But even the vast U.S. retail market is likely to one day become saturated. That point isn’t likely to arrive for at least another five years, but before it does, the firm would to well to focus on its overseas ventures according to Mary Brett Whitfield, head of research at Retail Forward, a market research firm based in Columbus, Ohio.
“Soon there will be fewer opportunities for Wal-Mart to open stores in the United States; they may experiment with new ventures, like drug stores, but any other avenue they pursue in will not give them the same bang for their buck as overseas,” noted Whitfield.
The vast global retail marketplace means that Wal-Mart’s international division could easily drive Wal-Mart’s aggressive growth plans indefinitely, Whitfield added.
“They’re only in a handful of countries overseas,” said Whitfield. “They still haven’t really penetrated Western Europe, in China they only have 29 stores and I expect them to cement what they are already doing all through Asia.”
Fumbled international forays
To date, Wal-Mart’s overseas ventures to date have been hit and miss, with successes mostly coming in countries where the firm has found a local partner to work with, or has acquired an existing company with a significant retail foothold according to Dave Brennan, a professor of marketing at the University of St. Thomas in St. Paul, Minn.
Wal-Mart has spent years using its muscle to squeeze billions of dollars in cost efficiencies out of the U.S. retail supply chain, passing the cost savings to its customers as bargain prices. They will need to bring that same pricing power to bear on international markets if they are to replicate their successes internationally, Brennan said.
Wal-Mart “has not done well in places where they don’t have economies of scale; where they can’t squeeze the competition and suppliers to gain competitive advantage,” Brennan said. In Germany, for example, Wal-Mart’s venture hasn’t been a success because the company didn’t have the same bulk as in Mexico and the United Kingdom, where Wal-Mart has linked up with local retailers Cifra and Asda, respectively.
Retail Forward’s Whitfield is more optimistic. She reckons Wal-Mart’s greatest strength is the company’s ability to take risks and learn from its mistakes. And she adds that the firm’s tight profit margins will have serious consequences for its overseas competitors.
“They had some hits and misses, but they’ve learned from them,” Whitfield said. “If they get this right, they’ll disrupt retailing outside the United States and other retailers will have to re-think their business and retool to compete with them.”
Discrimination, immigration woes
But despite its overseas ambitions, Wal-Mart still has battles to fight at home.
In late October, federal officers arrested hundred of Wal-Mart workers across the country on illegal immigration charges and charged the firm had knowingly violated immigration laws. The arrested workers recently filed a lawsuit accusing Wal-Mart of conspiring with contractors in a criminal enterprise that violated their civil rights and wage protections. The company also faces what is expected to be the biggest-ever sex discrimination case in California, covering as many as 1.5 million current and former women employees.
In another legal clash, independent gas-station owners have accused Wal-Mart of forcing smaller gas stations out of business with their aggressive cost-cutting.
Aram Rubinson, a Banc of America Securities equity analyst, raised a red flag in a recent research report, noting that the company now faces some 60 pending lawsuits, arrests of allegedly illegal employees and attempts by unions to make inroads at the firm.
“It is clear that others are trying to steer Wal-Mart’s destiny,” Rubinson wrote. “This is not a new phenomenon, but it continues to nag at us as a risk that often goes unacknowledged in the marketplace. Wal-Mart is a paragon for other retailers and should thrive so long as it can steer its own ship.”
Brennan thinks Wal-Mart may run the risk of becoming a victim of its own spectacular success.
Just as a government probe hurt software giant Microsoft, too much success in its domestic market may harm Wal-Mart, said Brennan. Companies that become dominant in major industries often come under scrutiny because of their supremacy, he said. (MSNBC is a Microsoft-NBC joint venture.)
“When you’re the largest company in your field, you tend to be a lightning rod for an industry and Wal-Mart has a tendency to push the envelope as far as it can and that may get them into trouble,” Brennan noted.
“If they continue to grow their Supercenters and acquire a very large market share in this country, the Federal Trade Commission will probably take a look at them,” he said.
Reuters contributed to this story.