Wal-Mart shocked the stock market yesterday in warning that sales growth would be flat for the fiscal year ending at the end of January while predicting that profitability would drop as much as 12 percent next year. The stock market reacted by tanking the retailer’s stock by 10 percent. However, Wall Street’s insatiable short-term focus aside, the key story is the strategy investments that this global-based retailer is planning over the next 2-3 years.
It’s no secret that Wal-Mart’s revenue growth in the U.S. has stalled. Supply Chain Matters reiterated some of these challenges in our most recent posting related to Wal-Mart. The retailers brick and mortar stores suffered from prior missteps in merchandising, marginal staffing and inventory stocking strategies. Yesterday, company executives have again declared a renewed emphasis on growing the U.S., fueled by online capabilities.
The retailer was under enormous scrutiny for the wage rates being paid to retail store employees, with many employees literally qualifying for low-wage governmental aide programs. To the retailer’s credit, it raised the minimum hourly wage to $9 per hour, with plans to up that number to $10 per hour in February 2016. Yesterday, executives disclosed to analysts that this higher pay will add $1.2 billion to costs this year and $1.5 billion for the next fiscal year. While business media ran with that byline, the more pertinent byline in terms of added costs was board approval of a new $20 billion share re-purchase program over the next three years. Both investors and store employees get a reward, but in different proportions.
What is even more of interest was disclosure by executives of the renewed focus on expanding U.S. revenues and a broader online fulfillment and E-commerce strategy, one that targets more middle and upper income online consumers and one that will definitively leverage Wal-Mart’s brick and mortar stores as integral components of online fulfillment. Investment in online fulfillment capabilities will be $900 million for this fiscal year and $1.1 billion in coming fiscal year.
Wal-Mart CEO Doug McMillon described the latest initiative as building stronger digital relationships with customers along with a “seamless shopping experience at scale.” He observed that a key advantage that the retailer has over Amazon is its vast physical presence, both in stores and distribution centers. The retailer will be expanding online capabilities to grocery items, integrating existing Sam’s Club physical stores. Online consumers are expected to be able to access Wal-Mart.com seamlessly with smartphone, tablet or desktop devices and new mobile applications with more pleasing user interfaces. The retailer will further provide an added emphasis on cloud-based applications.
Further acknowledged was adding additional U.S. supply chain capabilities, more than likely focused on more sophisticated inventory management to serve multiple fulfillment channels along with the deployment of additional fulfillment centers.
With the global retailer targeting $45-$60 billion in sales growth over and a 20-30 percent cumulative annual growth rate for online purchases over the next three years, there’s a lot of work remaining. Consumers can expect more aggressive online marketing, promotional and pricing strategies as Wal-Mart continue to compete with Amazon, Target, and other dominant retailers.
In its most recent earnings briefing, Target CEO Brain Cornell addressed his five strategic priorities for that retailer, many of which have supply chain and online fulfillment connotations. The first is to become a leader in digital, including direct from store capabilities. Such strategies included balancing inventory across the network and leveraging resources at store level.
Wal-Mart and Target provide different contrasts but yet reflect the common challenges impacting today’s retail industry. Retail supply chains are undergoing significant and groundbreaking change, far different than the last decade. Unlike a few years back, retailers with brick and mortar presence are becoming more focused in the need to integrate online and physical as a seamless fulfillment experience for consumers. Online and in-store marketing, merchandising, supply chain customer fulfillment and supplier management are all interrelated and must be addressed in a singular umbrella strategy and supporting action plans.
We should not be surprised to soon hear that Amazon will have its own collection of enhanced physical and digital consumer fulfillment capabilities.