The Stocks of Warren Buffett - Wal-Mart Part II
The peculiar finding was that the “conflicted” shopper, the customer who had reservations about Wal-Mart’s corporate practices, actually shopped 3 times as much as the self described “enthusiast.” The authors did not speculate on what it means, but it does imply just how powerful price is to the consumer. Wal-Mart has tried to market itself as “environmentally-friendly” to change the poor perception people have about the company. But if this study is any indication then that marketing may be in vain as customers seem to be willing to subordinate their values for a good deal.
Wal-Mart should not rest easy as their price leadership is definitely being challenged today. Wal-Mart has prices which are on average 20% higher than Amazon.com. The other discount retailers are higher yet. This should come as a very big concern to any Wal-Mart shareholder. The loyalty to the company is paper thin and nearly all dependent on price. One temporary advantage Wal-Mart may have is that their customer may very well lack an internet connection. 22% of the U.S. population or about 77 million people lack any internet and thus no connectivity to Amazon.com. Eventually that figure will diminish and if Wal-Mart is not able to grow its online business, its revenues will likely decline as broadband connectivity increases.
Wal-Mart has diversified into the grocery business and this particular segment does not lend itself well to e-commerce, but it hasn’t stopped Amazon.com from trying make a business out of it. At the same time Wal-Mart’s online offering is still competitive with Amazon in various categories. Certain goods such as Hanes underwear or Dove body wash are actually cheaper even when tax is included on the Wal-Mart website (Amazon charges no taxes). For example Wal-Mart does not charge shipping on its Dove body wash, but Amazon.com charges $3 unless you’re a “Prime” member which brings the total higher than Wal-Mart's.
More recent incursions into Wal-Mart’s store business are the dollar stores. I visited a Dollar Tree store in Modesto, CA this past week and compared some prices to the adjacent Wal-Mart. I immediately realized my research experiment would not work as most of the goods the Dollar Tree carries are unbranded.
There aren’t any Coca-Colas, Kraft products or many name brand cleaning materials. Instead the store is primarily stocked with private label goods, which sell for much less. So a comparison of these goods to the branded ones in Wal-Mart would certainly be unfair. With that said, the private label goods are being sold. This may likely just be the result of the recession and the constraints consumers are facing with their contracting budgets. But it could also turn out to be a more permanent shift to these types of goods. People shop on price and if these off brand goods are close enough to the real thing and offered at a large enough discount, then why go back to the branded goods?
Wal-Mart’s stock recently took a tumble as its U.S. sales continue to drop, but international operations have driven overall sales up 4% and profits up 10%. This quote from the Q4 conference call best conveys their international success: "Almost 70% of the additional square footage came in two important emerging markets: Mexico and China. International net sales exceeded $109 billion this year, an increase of more than 12%. Every market contributed a sales increase in fiscal 2011 compared to the prior year. For the full year, International grew operating income faster than sales." What happens in the U.S. will be an important element for Wal-Mart, but Wal-Mart is clearly winning customers abroad. With this kind of success it is very difficult to reconcile the stock trading at a very humble 11.67 price to earnings.
Previous article on Wal-Mart
Disclosure: Long WMT