No, they don't. I work for Wal-Mart (in a store) and the messages coming from the executives and management are that gas prices will hurt. Whats happening is people are making less trips to the store but buying more at once. Avg. ticket is going up, but overall traffic is going down. People are buying groceries 2 to 1 over general merchandise, which is why you see the push to supercenters. Gas is helping Sam's though, and you see a big push to get gas stations at all Sam's. Comp sales at Sam's are WAY up due to gas. WM is even trying out company-owned gas stations at WM stores. (right now all gas stations at Sam's are WM owned/operated, but WM Stores gas stations are leased to murphy usa) Also, gas prices are really really pushing WM from the other end. Walmart owns and operates the largest private truck fleet in the country, and that is only for General Merchandise. They still contract out grocery delivery and a large percentage of direct store delivery is through UPS/Fedex which is of course raising rates. Bottom line, rising gas prices are a bad thing for Walmart.
Look, rising gas prices hurt every company except those in the oil and gas business. None of the above bothers me in relation to Wal-Mart. When I think of Wal-Mart, I think of what the company is doing in relation to its competitors.
When rising gas prices start making consumers more budget conscious, what are they going to do? Manufacture soap at home? Buy it at Walgreen's? Or buy it at Wal-Mart?
When SG&A costs (i.e. operating expenses) rise, who wins in the retailing business? The company that wins is the company with the lowest operating expenses per dollar of sales. If you are the low cost operator, you win.
Using the soap question above, if Kroger sells soap for the same price as Wal-Mart, it’s not pretty to say this, but Kroger will lose. Their cost structure is nowhere near as low as Wal-Mart’s. In price competition, the low cost operator wins.
To my mind what this means is that higher costs drive the higher cost operators out of the business faster on an absolute basis.
Are rising gas prices bad for all retailers? Yes.
Are rising gas prices bad for Wal-Mart in relation to their competitors? No.
Profits w/ higher energy prices =
+ Sales to Existing Customers
+ Sales to New Customers
- Costs
There are three ways profits are affected by rising energy prices:
1) "Higher Cost Effect" - Rising energy prices increase supply and operating costs, lowering profits.
2) "Lower Disposable Income Effect" - Rising gas prices require existing customers to spend more on gas, leaving fewer dollars for purchases at Wal-Mart. This has a real effect, and in its public statements, Wal-Mart fears it. Assume existing WM customers are already spending their entire paychecks at Wal-Mart, with higher has prices, even if consumers choose to buy all their gas at a Wal-Mart station, Wal-Mart will have lower profits, since the margins on gas are so much lower than on the other products they would have purchased.
3) "Smart shopper substitution effect" - Rising gas prices force existing and new consumers to switch away from higher-priced merchants to Wal-Mart. In reality, few consumers spend their entire paychecks at Wal-Mart, and the question is whether a lower disposable income after energy costs will change shopping habits. It will, but I'm not certain about the magnitude of this effect. It all depends on the relative prices between Wal-Mart and competing stores. After all, higher energy costs should drive up prices all around, and stores that can subdue price increases should see greater impact from the "smart-shopping effect". It's not about lower total operating expenses -- which Wal-Mart does dominate --, it's about the marginal impact of higher energy costs.
Does Wal-Mart handle energy price increases better than competitors? I don't know. If WM is more exposed to such increases, their relative cost advantage could narrow. Again, I don't know.
Overall, the question is whether 3 is larger than 1 and 2 combined. This is an empirical question that cannot be answered by simply looking at any data at our disposal...
In 1980, oil prices hit approx $80 in today's dollars. In FY 1980, Wal-Mart had its "billion dollar year" passing a billion dollars in sales for the first time in its history. In the FY 1981 Annual Report, Wal-Mart had the following to say: "A good measure of a company's strength is how well it performs in a difficult economic environment. High inflation, record interest rates, widespread unemployment, credit controls and declining discretionary income have characterized this past year. Despite these negatives, Wal-Mart has continued to grow."
That text is over 25 years old.
Now from page 137 of Sam Walton's autobiography (about analyst reports of Wal-Mart's 'imminent' problems): "But they failed to see that in a big economic downturn, when everybody is suffering, Wal-Mart's fundamental strengths would keep us going strong. And we would look great compared to everybody else." ... "If we fail to live up to somebody's hypothetical projection for what we should be doing, I don't care. It may knock our stock back a little, but we're in it for the long run. We couldn't care less about what is forecast or what the market says we ought to do. If we listened very seriously to that sort of stuff, we never would have gone into small-town discounting in the first place."
I understand the concern here about today's gasoline prices. I try to remember that in the long run it just doesn't matter. The near term fear of high gasoline prices is just one of those factors that makes Wal-Mart's stock a bargain today.
I agree that Wal-Mart can probably adjust better to higher energy prices than competitors over a half-decade to decade horizon. But will higher energy prices slow its growth? WM's growth seems to depend heavily on converting existing stores to Supercenters. What do higher gas and electricity prices imply for the ROI of a conversion?
But let's switch to a general futurist discussion.
I think that the long-term (two to three decade) horizon will show the average Americans earning an ever-higher real income, but not seeing how they are better off, because it is built into the way the live, work, and shop. The quality of the stuff people buy, from clothes to healthcare, will continue to increase.
Wal-Mart will have the challenge of keeping its low-price inventory, but also must provide a more upscale experience. Wal-Mart will stay (relative to its competitors) near the bottom in terms of service and shopping experience, but the expectations of the bargain shopper will have risen, so that people will expect greater service and comfort along with prices.
1) I have no doubt that Wal-Mart's margins will shrink a bit during a period of higher energy prices. And yes, that lowers the ROIC (return on invested capital) for a Supercenter conversion, mainly because operating expenses will have risen throughout the whole system. Also I would guess there is rise in the capex for services related to the conversion.
...Let's cap the energy debate for now, though, and just watch the quarterly numbers come in.
2) The second main point you make above (in the last paragraph) is very interesting to me. I have to think about that one. If Wal-Mart ever aims for a more upscale demographic category, or wishes to broaden out of its main base more into that category, I would assume they would have to increase the capex per store where they want to do this. If you know of a store in the system (Supercenter or Discount) where this is happening, please let me know. I will go visit the store to see what's happening there. Mainly I would be interested in an existing store with a known lower end demographic customer base that Wal-Mart is trying to move up the demographic chain. I would in fact be astounded to see that. I would secondarily be interested in a store that is new that was clearly built with greater than average capex. Don't send me there unless the upscale nature of the store is clearly evident.
Also, any articles or press releases about any moves by Wal-Mart to increase its capex per store (above the rate of CPI for example) would be interesting to me.
Regarding consumer preferences for a more upscale shopping experience, I don't know. We have the number one Supercenter in the region at 2727 Dunvale Road in Houston ..#2066. (It was running around #2 or #3 before Katrina and went to #1 after so many people moved here from Louisiana.) You go in there and it's basically a mob scene most of the time. No one is going there for an upscale shopping experience and no one really cares about an upscale shopping experience. They just want their stuff and they want lots of it and they want it cheap.
We also have what I believe is the number one Discount Store in the region. Wal-Mart Store #2718 at 9555 South Post Oak Road. I'm told they do almost as much business in there as a Supercenter. It's also a zoo most of the time and again no one is thinking about a more upscale shopping experience.
Regarding the upscale shopping experience idea.. I can't help but think about Wal-Mart's primary business model: sell it cheaper than the next guy, and do it by keeping your costs lower than the next guy.
Rose Blumkin (the great Mrs. B) who started the Nebraska Furniture Mart in Omaha used to say something along the lines of "If you have the lowest prices, customers will find you at the bottom of a lake."
I think the low cost, low price idea is the primary driver, the primary concept, behind all of Wal-Mart's activities. As long as customers are pounding their way through the door, if it costs less to sell at the bottom of a lake, why spend the money to sell in a nicer looking store?
if wm has all of these profits going on then why can't they give their associates better than a 10 percent discount. all the other companies give their associates 20 to 25 percent discount. mr sam's motto was always listen to your associates because that is where all your best ideas come from. gas prices will not hurt wm because they are a billion dollar company as of now.
No, they don't. I work for Wal-Mart (in a store) and the messages coming from the executives and management are that gas prices will hurt. Whats happening is people are making less trips to the store but buying more at once. Avg. ticket is going up, but overall traffic is going down. People are buying groceries 2 to 1 over general merchandise, which is why you see the push to supercenters. Gas is helping Sam's though, and you see a big push to get gas stations at all Sam's. Comp sales at Sam's are WAY up due to gas. WM is even trying out company-owned gas stations at WM stores. (right now all gas stations at Sam's are WM owned/operated, but WM Stores gas stations are leased to murphy usa) Also, gas prices are really really pushing WM from the other end. Walmart owns and operates the largest private truck fleet in the country, and that is only for General Merchandise. They still contract out grocery delivery and a large percentage of direct store delivery is through UPS/Fedex which is of course raising rates. Bottom line, rising gas prices are a bad thing for Walmart.
Posted by: Anonymous | October 10, 2005 10:53 PM
Look, rising gas prices hurt every company except those in the oil and gas business. None of the above bothers me in relation to Wal-Mart. When I think of Wal-Mart, I think of what the company is doing in relation to its competitors.
When rising gas prices start making consumers more budget conscious, what are they going to do? Manufacture soap at home? Buy it at Walgreen's? Or buy it at Wal-Mart?
When SG&A costs (i.e. operating expenses) rise, who wins in the retailing business? The company that wins is the company with the lowest operating expenses per dollar of sales. If you are the low cost operator, you win.
Using the soap question above, if Kroger sells soap for the same price as Wal-Mart, it’s not pretty to say this, but Kroger will lose. Their cost structure is nowhere near as low as Wal-Mart’s. In price competition, the low cost operator wins.
To my mind what this means is that higher costs drive the higher cost operators out of the business faster on an absolute basis.
Are rising gas prices bad for all retailers? Yes.
Are rising gas prices bad for Wal-Mart in relation to their competitors? No.
Best,
Bobby
Posted by: Bobby | October 11, 2005 4:03 PM
Here's an equation:
Let's expand it:
Profits w/ higher energy prices = + Sales to Existing Customers + Sales to New Customers - CostsThere are three ways profits are affected by rising energy prices:
1) "Higher Cost Effect" - Rising energy prices increase supply and operating costs, lowering profits.
2) "Lower Disposable Income Effect" - Rising gas prices require existing customers to spend more on gas, leaving fewer dollars for purchases at Wal-Mart. This has a real effect, and in its public statements, Wal-Mart fears it. Assume existing WM customers are already spending their entire paychecks at Wal-Mart, with higher has prices, even if consumers choose to buy all their gas at a Wal-Mart station, Wal-Mart will have lower profits, since the margins on gas are so much lower than on the other products they would have purchased.
3) "Smart shopper substitution effect" - Rising gas prices force existing and new consumers to switch away from higher-priced merchants to Wal-Mart. In reality, few consumers spend their entire paychecks at Wal-Mart, and the question is whether a lower disposable income after energy costs will change shopping habits. It will, but I'm not certain about the magnitude of this effect. It all depends on the relative prices between Wal-Mart and competing stores. After all, higher energy costs should drive up prices all around, and stores that can subdue price increases should see greater impact from the "smart-shopping effect". It's not about lower total operating expenses -- which Wal-Mart does dominate --, it's about the marginal impact of higher energy costs.
Does Wal-Mart handle energy price increases better than competitors? I don't know. If WM is more exposed to such increases, their relative cost advantage could narrow. Again, I don't know.
Overall, the question is whether 3 is larger than 1 and 2 combined. This is an empirical question that cannot be answered by simply looking at any data at our disposal...
Posted by: Kevin Brancato | October 12, 2005 9:50 AM
In 1980, oil prices hit approx $80 in today's dollars. In FY 1980, Wal-Mart had its "billion dollar year" passing a billion dollars in sales for the first time in its history. In the FY 1981 Annual Report, Wal-Mart had the following to say: "A good measure of a company's strength is how well it performs in a difficult economic environment. High inflation, record interest rates, widespread unemployment, credit controls and declining discretionary income have characterized this past year. Despite these negatives, Wal-Mart has continued to grow."
That text is over 25 years old.
Now from page 137 of Sam Walton's autobiography (about analyst reports of Wal-Mart's 'imminent' problems): "But they failed to see that in a big economic downturn, when everybody is suffering, Wal-Mart's fundamental strengths would keep us going strong. And we would look great compared to everybody else." ... "If we fail to live up to somebody's hypothetical projection for what we should be doing, I don't care. It may knock our stock back a little, but we're in it for the long run. We couldn't care less about what is forecast or what the market says we ought to do. If we listened very seriously to that sort of stuff, we never would have gone into small-town discounting in the first place."
I understand the concern here about today's gasoline prices. I try to remember that in the long run it just doesn't matter. The near term fear of high gasoline prices is just one of those factors that makes Wal-Mart's stock a bargain today.
Posted by: Bobby | October 12, 2005 9:27 PM
I agree that Wal-Mart can probably adjust better to higher energy prices than competitors over a half-decade to decade horizon. But will higher energy prices slow its growth? WM's growth seems to depend heavily on converting existing stores to Supercenters. What do higher gas and electricity prices imply for the ROI of a conversion?
But let's switch to a general futurist discussion.
I think that the long-term (two to three decade) horizon will show the average Americans earning an ever-higher real income, but not seeing how they are better off, because it is built into the way the live, work, and shop. The quality of the stuff people buy, from clothes to healthcare, will continue to increase.
Wal-Mart will have the challenge of keeping its low-price inventory, but also must provide a more upscale experience. Wal-Mart will stay (relative to its competitors) near the bottom in terms of service and shopping experience, but the expectations of the bargain shopper will have risen, so that people will expect greater service and comfort along with prices.
Posted by: Kevin Brancato | October 14, 2005 9:44 AM
1) I have no doubt that Wal-Mart's margins will shrink a bit during a period of higher energy prices. And yes, that lowers the ROIC (return on invested capital) for a Supercenter conversion, mainly because operating expenses will have risen throughout the whole system. Also I would guess there is rise in the capex for services related to the conversion.
...Let's cap the energy debate for now, though, and just watch the quarterly numbers come in.
2) The second main point you make above (in the last paragraph) is very interesting to me. I have to think about that one. If Wal-Mart ever aims for a more upscale demographic category, or wishes to broaden out of its main base more into that category, I would assume they would have to increase the capex per store where they want to do this. If you know of a store in the system (Supercenter or Discount) where this is happening, please let me know. I will go visit the store to see what's happening there. Mainly I would be interested in an existing store with a known lower end demographic customer base that Wal-Mart is trying to move up the demographic chain. I would in fact be astounded to see that. I would secondarily be interested in a store that is new that was clearly built with greater than average capex. Don't send me there unless the upscale nature of the store is clearly evident.
Also, any articles or press releases about any moves by Wal-Mart to increase its capex per store (above the rate of CPI for example) would be interesting to me.
Regarding consumer preferences for a more upscale shopping experience, I don't know. We have the number one Supercenter in the region at 2727 Dunvale Road in Houston ..#2066. (It was running around #2 or #3 before Katrina and went to #1 after so many people moved here from Louisiana.) You go in there and it's basically a mob scene most of the time. No one is going there for an upscale shopping experience and no one really cares about an upscale shopping experience. They just want their stuff and they want lots of it and they want it cheap.
We also have what I believe is the number one Discount Store in the region. Wal-Mart Store #2718 at 9555 South Post Oak Road. I'm told they do almost as much business in there as a Supercenter. It's also a zoo most of the time and again no one is thinking about a more upscale shopping experience.
Regarding the upscale shopping experience idea.. I can't help but think about Wal-Mart's primary business model: sell it cheaper than the next guy, and do it by keeping your costs lower than the next guy.
Rose Blumkin (the great Mrs. B) who started the Nebraska Furniture Mart in Omaha used to say something along the lines of "If you have the lowest prices, customers will find you at the bottom of a lake."
I think the low cost, low price idea is the primary driver, the primary concept, behind all of Wal-Mart's activities. As long as customers are pounding their way through the door, if it costs less to sell at the bottom of a lake, why spend the money to sell in a nicer looking store?
Best,
Bobby
Posted by: Bobby | October 15, 2005 6:30 PM
if wm has all of these profits going on then why can't they give their associates better than a 10 percent discount. all the other companies give their associates 20 to 25 percent discount. mr sam's motto was always listen to your associates because that is where all your best ideas come from. gas prices will not hurt wm because they are a billion dollar company as of now.
Posted by: smittekins | November 12, 2005 4:59 PM