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Wal-Mart’s Lack Of Focus

Jim Prevor’s Perishable Pundit, January 11, 2007

Interesting article in Fortune on January 9 entitled, The Unending Woes of Lee Scott, which chronicles the various problems Wal-Mart has been confronting.

Like most pieces on Wal-Mart, the article is a bit unfair, or at least beside the point. Lee Scott has sometimes said that one of the issues Wal-Mart confronts is that it becomes known for its “exceptions” as opposed to its policies. So millions of people go to work uneventfully and then some rogue manager decides to make people skip lunch without pay — and that is what makes the news.

Much of the article is about how Wall Street is losing patience and gives analysts’ advice on what to do. It is generally a bad idea to take operating advice from Wall Street. Most people on Wall Street have never operated a business, have no idea what it is like and propose things that, in a press release, will appeal to Wall Street and thus make the share price go up.

But as Warren Buffet, the world’s greatest living investor and the Chairman and CEO of Berkshire Hathaway, has explained: “In the short run, the market’s a voting machine and sometimes people vote very unintelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time.”

So doing things that will “get the stock price up” aren’t necessarily the things to do. And, as a Wal-Mart spokesperson by the name of Mona Williams asked Fortune in an e-mail, “Why would our CEO be on the ‘hot seat’ in a year where we’ve had record sales and earnings?”

Well, the stock price is down 22% since Lee Scott took over from David Glass in January 2000, which means that $90 billion of market capitalization has been lost by Wal-Mart stockholders. And the article contained a quote from one unnamed analyst who is getting close to the truth. Speaking of Lee Scott, he said this:

“It’s like he’s forgotten what the business model was all about — driving the top line by relentlessly lowering prices,” says one Wall Street analyst. “But you look at their margins, they seem to be getting away from that.”

The article explains that Wal-Mart’s gross margins have increased to 25% this year from 22% in 1999.

Allowing that to happen is a mistake. Wal-Mart’s goal should be to reduce gross margins and keep costs low enough to maintain adequate profitability with lower margins. Every point of gross margin is an umbrella for competitors to enter and compete in the market.

Wal-Mart has a lot of good things going on, it has now opened Supercenters in Canada, gotten rid of deadweight divisions in Germany and South Korea and begun its long-awaited move into California. Mexico and Latin America look good. It beat out Tesco for an important acquisition in China and has agreed to a joint venture in India.

Yet there is a problem. When we hear Lee Scott talk about Wal-Mart’s prescription drug initiative, it seems clear that he is enthusiastic about it at least as much because state legislators and politicos like it as he is because it will build sales and profits for Wal-Mart.

To some extent Wal-Mart — which for all its size was a relatively simple concept just a few years ago — now is no longer that place that tries to buy stuff inexpensively, sell stuff for a low price and keep expenses down so it can make a buck.

It is now so concerned with going upscale, going organic and being “green” that its focus gets lost.

It may be wrong to be too hard on Lee Scott. The political environment has changed and, perhaps, these “politically-oriented” responses are necessary.

If so, it is an example of the enormous costs to our society of allowing politicians to have sway over things as small as a store site location.

The Pundit’s advice to Lee Scott would be that if he feels these things are necessary, he should try to keep the people who work on them as isolated as possible from the core business.

Wal-Mart is a big company and can afford to build 20 stores that are green, feature organics and are upscale enough to impress the snootiest consumer reporter.

What it can’t afford is to break its “Always Low Prices. Always.” promise to consumers and to lose the cultural force that makes living by that promise a source of pride.

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