GB 540: Economics for Global Decision Makers

KAPLAN UNIVERSITY

Economic Indicators affecting Wal-Mart

Jennifer L. Scott GB 540: Economics for Global Decision Makers January 15, 2013

1|Page

GB 540: Economics for Global Decision Makers

Introduction Every month and each quarter, the Economics and Statistics Administration (ESA), releases a list of economic indicators that businesses can use to gauge the current state of the economy and factors pertaining to the economy (Economics & Statistics Administration, 2012). The information contained in the reports is obtained by bureaus such as The U.S. Census Bureau and The Bureau of Economic Analysis (Economics & Statistics Administration, 2012). The information included in the reports are used by companies to make decisions that will affect their day to day operations such as projecting future sales, new business developments, the direction they should move with investments, current consumer behavior regarding spending, and other business strategies. Utilizing the business statistics is helpful in determining current economic status and in forecasting what the future will look like for the business. There are three different categories in which economic indicators are classified. The three categories are pro cyclic indicators, counter cyclic indicators, and acyclic indicators. Pro cyclic indicators move in the same direction as the economy (Economy Watch, 2012). If the economy is doing well then the pro cyclic indicators are doing well also (Economy Watch, 2012). Counter cyclic indicators move in the opposite direction as the economy (Economy Watch, 2012). Counter cyclic indicators will decline when the economy is doing well and vice versa (Economy Watch, 2012). Lastly, acyclic indicators have no relation to the how the economy is performing. They respond independently to the economy and have no regular pattern; they can go the opposite direction or the same direction as the economy sporadically.

2|Page

GB 540: Economics for Global Decision Makers

Wal-Mart could benefit from using several economic indicators in making business decisions. Wal-Mart Stores , Inc. is the largest retailer, operating 3, 029 supercenter (including sizeable grocery departments), 629 discount stores, 611 Sams Clubs, and 210 Neighborhood markets in the U.S., plus 5, 651 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and U.K. No company on earth is a better indicator of how the U.S. economy is doing than Wal-Mart is as their cash registers perform around 200 million transactions a week or 10.4 billion transactions a year. When Wal-Mart makes a decision to open new stores, at a higher growth rate than the year before, as an investor it is important to pay close attention to the fact. But when you have two years of such maneuvers in a row then it is a real sign that good times are coming from the economy. Over the past two years, Wal-Mart has been ramping up for what obviously seems to be a sign of good times ahead, having a total of 11,300 stores total with a growth rate of 12%. Wal-Mart has projected sales of $47.5 billion for 2012 and that comes out to about 3.15% of the total gross domestic product of the USA. Once Wal-Mart decides to build 1, 170 new stores that means that they are going to order billions of items from manufacturers. This act alone will spur economic activity for the economy as a whole. . The economic indicators that are of particular relevance to Wal-Mart are: Gross Domestic Product (GDP) Higher Interest Rates Employment Situation Product Price Index
3|Page

GB 540: Economics for Global Decision Makers

Productivity and Cost U.S. Import and Exports Personal Income and Spending Gross Domestic Product

The gross domestic product is a quarterly report that is made available that shows the overall condition of the economy (U.S. Census Bureau, 2010). The report indicates the value of the goods and services for the quarter (U.S. Census Bureau, 2010). Wal-Mart can use this information to interpret the current state of the economy. The gross domestic product is a pro cyclic indicator which means that when the economy is strong consumer spending is strong as well so Wal-Mart could expect sales to stay the same or increase if the gross domestic product indicates a positive rating for the economy (Economy Watch, 2012). On the contrary, if the report indicates a drop in products and services, Wal-Mart could forecast and drop in sales and make adjustments accordingly. Higher Interest Rates General economic conditions, globally or in one or more of the markets that Wal-Mart serves, may adversely affect the financial performance of the company. In the United States, higher interest rates could adversely affect consumer demand for the products and services that sell through the Wal-Mart Stores segment and Sams Club segment, change the mix of products they sell to one with a lower average gross margin and result in slower inventory turnover and greater markdowns on inventory. Higher interest rates can increase the cost of sales and operating, selling, general and administrative expenses, and otherwise adversely
4|Page

GB 540: Economics for Global Decision Makers

affect the operations and operating results of the Wal-Mart Stores segment and Sams Club segment. These factors affect not only the operations, but also the operations of suppliers from whom Wal-Mart purchases goods, a factor that can result in an increase in the cost to us of the goods they sell to customers. Higher levels of unemployment, inflation, changes in tax and other laws, currency devaluations and other adverse developments in the economies of the other countries in which Wal-Mart operate may adversely affect consumer demand for merchandise in those countries, especially those in which average incomes are significantly lower than in the United States. These conditions may adversely affect gross margins, cost of sales, inventory turnover and markdowns or otherwise adversely affect operations and operating results in Wal-Marts International segment. Employment Situation

The unemployment rate is a pro cyclic indicator in that the condition of the economy directly affects it (U.S. Census Bureau, 2010). During times of economic hardship consumer spending is reduced which results in a reduction in sales for businesses. As a result, businesses must lay off workers to reduce their expenses. The unemployment rate increases which results in even less spending. To help with the unemployment deficit, Wal-Mart has announced that they will hire 100,000 veterans beginning Memorial Day 2013. Wal-Mart, the world's largest retailer and nation's largest private employer, is making a pledge to boost its sourcing from domestic suppliers and hire more than 100,000 veterans. The plans were to be announced as part of an address by Bill Simon, president and CEO of Wal-Mart's U.S. business, at an annual retail industry convention in New York.

5|Page

GB 540: Economics for Global Decision Makers

Wal-Mart also projects that it will hire more than 100,000 recently discharged veterans in the next five years. Honorably discharged veterans will have a "place to go", says Wal-Mart's Simon, according to prepared text supplied by the discounter. The hiring pledge, which will begin on Memorial Day, covers veterans within 12 months of leaving active duty. Most of the jobs will be in Wal-Mart's stores or its Sam's club locations. Some will be in the company's distribution centers. (2012) Product Price Index Wal-Mart is now pushing its grocery suppliers harder to offer consistently low prices, instead of timed promotions or "rollbacks." (Geller and Wohl 2012) That means food companies are unlikely to be able to pass through more price increases and will be forced to pull other levers, such as cost-cuts to protect margins or product innovation to drive sales.

A Recent article shows that Target Corp. is living up to the second half of its Expect more. Pay less. slogan by winning the latest round in its pricing battle with Target this month had lower prices than Wal-Mart for the first time since October, according to research conducted by Bloomberg Industries. The Minneapolis-based chain also led by its widest margin since the monthly study began two years ago. The study examined the gap in average price across a basket of 150 like items at stores within five miles of each other. The discounters are fighting for U.S. customers who are still dealing with high unemployment and slow wage growth. (Townsend and Welsh 2012)

Productivity and Cost

6|Page

GB 540: Economics for Global Decision Makers

As the largest employer in the country, Wal-Marts effect on the US economy is hard to overstate. The company sets the standard in the retail industry and in the larger service economy as well, and as service sector jobs are projected to provide most of the growth in US employment for the next several years, the downward pressure Wal-Mart exerts on the wages and incomes of American workers will create a significant drag on household purchasing power, sapping economic growth and hurting retailerseven Wal-Mart itself. Even before the recent staffing cuts, Wal-Mart associates were struggling economically, and the widespread reduction in scheduled hours has pushed many associates into serious financial stress, with as many as one-third of respondents to a recent poll reporting they recently relied on public assistance for themselves or their families. Personal Income Spending Consumer income drives the retail business considerably, as well as the U.S. economy. The more income consumers have, the better they feel about the economy, the more money they spend. Consumer spending rose 0.5 percent in the retail sector in 2011, according to a statement from the U.S. Commerce Secretary Gary Locke. Consumer income will impact how much ability the retailer has to thrive in today's competitive market. The buying habits of consumers are a quirky thing. One day they like the product, then something new comes along and the old product is abandoned. As a result, it is extremely important that retailers stay on top of their games when it comes to keeping the most trendy, reasonably priced products on their shelves. For example, after the advent of the iPad, multiple variations of the same type of product were released.

7|Page

GB 540: Economics for Global Decision Makers

Maximizing Revenue The ultimate goal of any company should be to maximize revenue. Wal-Mart can analyze the information obtained from the economic indicators listed above. The strategy they can use is to analyze the data looking for signs of economic conditions such as the strength of the economy, consumer spending, consumer behavior, household income. Understanding the economy and relevant conditions will be useful in making decisions for the business such as investment ventures, projected sales, projected workforce needs, and business development. The data from the reports can also be used to forecast future events such as sales projections and economic issues that may arise in which business decisions will need to be modified to maximize revenues and ensure continued growth. The following is an outline of ways Wal-Mart Stores Inc., can address the aforementioned economic indicators to maximize revenue: 1. Cost Cutting Cut back on internal cost and external cost Utilize greeters and overnight personnel to do stocking Focus on long term strategies for growth Increase current workers salaries to control turnover and unnecessary spending

2. Every Day Low Prices and Roll Backs Put more pressure on vendors to lower prices all while keeping margins higher

8|Page

GB 540: Economics for Global Decision Makers

Offer incentives to the vendors that are willing to spend more money in terms of promotional dollars so that Wal-Mart has price leadership in the market much better than competition

3. Short Term Strategies/Long Term Strategies Create a bench of potential employees for key holidays and etc. Spend resources on research and sales Continue to look for potential neighborhoods to build new stores Conduct a SWOT Analysis

References
9|Page

GB 540: Economics for Global Decision Makers

Economic & Statistics Administration. (2012). About economic indicators. Retrieved from www.esa.doc.gov/about Economy Watch. (2012). World economic indicators. Retrieved from http://www.economywatch.com/world_economy/world-economic-indicators/ Geller, Martinne and Wohl, Jessica. (2012) Wal-Marts price push test manufacturers prowess. Retrieved from http://www.reuters.com/article/2012/03/06/us-usa-consumer-walmartidUSTRE8250GM20120306 Townsend, Matt and Welsh, David. (2012). Target Cheaper than Wal-Mart as gap widest in two years. Retrieved from http://www.bloomberg.com/news/2012-08-23/target-cheaper-thanwal-mart-as-gap-widest-in-two-years.html U.S. Census Bureau. (2010). Economic indicators. Retrieved from http://www.census.gov/cgibin/briefroom/BriefRm USA Today. Wal-Mart Pledges to hire 100,000 Veterans. Retrieved from http://www.usatoday.com/story/news/nation/2013/01/15/wal-mart-hire-100000veterans/1835397/

10 | P a g e