It is no secret to the supply chain community that the world’s largest global retailer Wal-Mart has always been an important influence, positive and otherwise, to significant supply chain trends and initiatives. This week, Wal-Mart released its earnings for the fiscal quarter ending July 31, 2011, and the management commentary provides many supply chain implications, so let us dive in.

First, some background and context.

In a previous commentary penned after the retailers 2011 fiscal year-end release, Supply Chain Matters noted how Wal-Mart’s senior management was finally owning-up to missteps in its U.S. merchandising operations, opening the door to other low-price competitors.  Last year, the company was forced to suddenly reverse course on a targeted high impact shopper initiative and reshuffle U.S. management. Now, Wal-Mart’s U.S. management is focused on its core of lowest-price shoppers.

However, the latest misstep involves strategy and focus of the Wal-Mart dot com e-commerce site. Last week the retailer announced that it was transferring its previous centralized e-commerce business unit to operations chiefs in developed countries, thus de-centralizing unit management into geographical businesses.  Two very senior online executives departed the company as a result of the announcement, and strategy and online commerce momentum will surely change.

Wal-Mart’s fiscal Q2 Wall Street financial headlines note:

  • Overall net sales increase of 5.5 percent for the quarter, with international sales growing by 16.2 percent. The retailer however benefitted from $2.3 billion in favorable currency exchange.
  • Operating income increased 5.7 percent from last year.
  • U.S. same store sales were basically flat, the ninth straight quarter of no growth.

Management commentary points to more supply chain related developments.  CEO Mike Duke was very upbeat in his summary comments, noting his encouragement of sales improvements in U.S. stores.  However, he did express concern that many of Wal-Mart’s U.S. consumers are still struggling with stretched household budgets and trading down in purchase activity. Examples mentioned were laundry detergent and canned goods.  He again re-iterated a laser-focus on Wal-Mart’s every- day low pricing program. The implication for suppliers is of course, continued shifts to lower cost brands, smaller package sizes and more heat from Wal-Mart buyers in contract negotiations. Duke also indicated the company’s global e-commerce initiatives would now focus on delivering a continuous shopping experience for web consumers including investments in multi-channel initiatives that integrate stores with online, and boasted that Wal-Mart will be the best positioned retailer to serve the needs of the next generation of emerging global middle class consumers.

CFO Jeff Davis reported a 10 basis point reduction in gross margins, primarily driven by fuel sales. Fuel was therefore a loss-leader. Core corporate overhead expenses increased 2.9 percent and consolidated inventory grew 11.1 percent, fairly high for Wal-Mart standards.  The bulk of inventory growth was attributed to Wal-Mart International. The retailer incurred approximately $30 million in store damage as a result of severe tornados and floods in the U.S. during the quarter, also unusual to Wal-Mart’s continuous risk management focus.  Then again, the U.S. South and Midwest have experienced unprecedented weather related events.

For our enterprise software technology readers, there was mention of   a $17million impact to gross margin because of an inventory re-valuation charge at Wal-Mart Mexico.  Doug McMillon, CEO of Wal-Mart International clarified that the Mexico unit went live with SAP during the quarter, and the effort “increased the level of precision for inventory valuation” to the tune of $17 million. We speculate that some inventory may have been off the books. Management reiterated its ongoing rollout of SAP throughout all operations with the majority of businesses already converted.

By our observation, U.S. Operation CEO Bill Simon provided the most interesting information. Beyond reaffirming the commitment to expand the assortment of merchandise, he pointed to a rollback promotional program on gasoline and diesel fuel prices in 18 states as the primary driver of increased store volume in the quarter.  Of further interest, grocery and health & wellness currently account for two-thirds of U.S. revenues. Food remains the key traffic driver to stores, but at the same time, consumers are trading down to lower price points and buying smaller pack sizes.

Mr. Simon noted that the priority for U.S. growth remains with supercenter growth, yet many industry observers have been pointing to the focus on smaller neighborhood or Wal-Mart Express format stores. The strategy seems unclear, since U.S. consumers are buying less.

Inventory in the U.S, rose by 4.8 percent with productivity gains offsetting increased inventory costs. Mr. Simon indicated that inventory is where it needs to be.  Wal-Mart just entered into an agreement with Nielson to share POS data for grocery, consumable and health & wellness categories.  According to the Nielson press release, the new agreement marks the return of Wal-Mart to the consumer goods industry information sharing model.  The majority of U.S. retailers already provide Nielson with POS data. Mr. Simon noted that this data will better equip merchants and suppliers to optimize assortment, pricing and promotion as well as collaborate on customer-driven programs. We anticipate that many CPG companies will applaud this decision even though it implies added cost to access the data.

In the area of logistics and transportation, special mention was made of Wal-Mart’s Logistics arm which  continues to drive more routing and load efficiencies, enabling the U.S. operations to mitigate two-thirds of rising diesel fuel costs. Suppliers should expect more activity in this area.

Let us therefore summarize the Wal-Mart Q2-2012 earnings event, this time, with a supply chain transformational lens:

  • Wal-Mart’s growth trajectory is currently driven more by international rather than U.S. growth.  Thus far in the fiscal year, international accounts for roughly 27 percent of total sales and will increase further. At the current rate of change, Wal-Mart may become less of a U.S. centric retailer.  The implication may well be different operating strategies and resulting end-to-end supply chain distribution and fulfillment capabilities.
  • The company’s supply chains are indeed more global and are fueling the majority of inventory growth. Increased international presence opens up more opportunities for alternative sources of global supply.  As a result of the recent acquisition of Massmart, a general merchandise retailer and basic foods wholesaler in Africa, Wal-Mart has contracted with local supplier Oceanfresh to export sustainability-sourced wild hake to U.S. stores. Look for Wal-Mart to have a much broader global supplier base.
  • In the U.S. market, Wal-Mart’s challenge to re-capture its core customers with more options and incentives. Previous missteps have had an impact, and now, U.S. consumers are stressed to the point that they are seeking all available shopping alternatives to secure value.
  • Wal-Mart has lost precious time in its E-commerce stumble.  Enhancing the brick and mortar presence and multi-channel commerce has been the thrust of many savvy retailers who must overcome the revenue conflicts for compensating in-store and online team performance.
  • The company will again turn to its supply chain and to its suppliers to garner more cost and productivity savings.  The open question is often can you “visit the well’ before recognizing that you have a water-consumption problem.

Oh yes, in case you were curious, rival Target Corporation announced a 4.6 increase in Q2-2011 total revenues and an 11.5 percent increase in earnings. Same store sales in the U.S. increased 3.9 percent, with positive profit performance,  reflecting the strongest quarterly performance in four years.

Supply chain professionals continue to march to a fundamental management and business process premise- customers and customer needs drive all supply chain activities. Wal-Mart must continue to focus on that premise.

What is your view?  How do you interpret Wal-Mart’s current directions and their implication on retail supply chains?

Bob Ferrari

©Copyright 2011 The Ferrari Consulting and Research Group LLC