Wal-Mart Stores in 2003 (Abridged Version) PDF

For the exclusive use of J. Lee, 2024. 9-709-423...

For the exclusive use of J. Lee, 2024. 9-709-423 REV: OCTOBER 30, 2009 PANKAJ GHEMAWAT STEPHEN P. BRADLEY KEN A. MARK Waal-Martt Storess in 20003 (Abrridged Version V n) In 2003, Wal-MMart was the world’s w largest company, with w $245 billiion in revenuees and $8 billion in net in ncome, and th he world’s laargest privatee employer with w 1.4 milliion employeees. Twenty million m shopppers visited itts stores each h day and 82% % of U.S. hou useholds had d made at least one purchaase at Wal-MMart during the previouss year.1 In 20003, Fortune ranked Wal-M Mart Americca’s most adm mired company. Amidst this fanfare, Wal-Mart’s W CEO, H. Lee Sccott, Jr., had a measured reesponse: I think Sam m [Walton, Waal-Mart’s legeendary found der] would bee disappointeed to think th hat heere we are much m later, and a we haveen’t figured out o a way to o judge wheether our sto ore maanagers are treating t peopple appropriaately. I think k he would be b disappointted because he wo ould probably y think our expenses e are too high and d our competiitors are still better than we w aree in certain categories, an nd why arenn’t we movin ng faster theere. But Sam had a way of criiticizing himsself and the co ompany that motivated m ou to get betteer.2 yo Scott foresaw more m years off growth in th he company’ss core U.S. bu usinesses of discounting geeneral merch handise and food. f ng is that you can put a lott more stores into a He expllained, “Whatt we’re findin markeet than you evver dreamed you could.”3 But Wal-Marrt was also loo oking at new growth areass. Disccount Reta ailing in th he United States4 Diiscount retailling began in n the mid-19950s in the United U Statess. Store operaators sold geeneral merch handise in sp parsely furnisshed and stafffed stores, ch hallenging traditional dep partment storres by offerinng lower pricces. Wal-Marrt, Kmart, and d Target—thee three largesst discount reetailers in thee U.S. in 20003—all startedd in 1962. Th hat year, disco ount retailing g generated $4.25 $ billion in i sales in thee U.S. By 1970, format salles had grown n to $28 billio on, surpassingg departmentt stores’ $20 billion. In the 1970s, many m discountt chains went bankrupt. The T U.S. ban on resale priice maintenan nce in 1975 drove d more consolidation. c.5 By 1981, discount retailiing generated d $66 billion in i sales in thee U.S., the saame amount in i real terms as in the latee 1960s; Kmarrt was the larrgest discoun nt retailer and d Wal- Mart the second laargest, althoug gh less than one-fifth o of Kmmart’s size. The T 1980s saw w Wal-Mart, Kmart, K and Target T evolvee a new formmat, the “su upercenter,” which w combiined general merchandisee and grocery items and d blurred the traditional boundaries beetween discou unt retailers and a supermaarkets. Kmarrt lost leadershhip to Wal-M Mart in 1990 an nd, in 2002, beecame the big ggest retail baankruptcy eveer. ______________________ __________________________________________________________________________________________________ Professo ors Pankaj Ghemaw wat and Stephen P.. Bradley and Research Associate Ken n A. Mark prepared d the original versiion of this case, “W Wal-Mart Stores in n 2003,” HBS No. 704-430. This abrid dged version was prepared by Senio or Lecturer Frank V. V Cespedes. This case was developed from publisheed sources. HBS ca ases are developed solely as the basiss for class discussio on. Cases are not in ntended to serve ass endorsements, so ources of primaryy data, or illustratio ons of effective or in neffective managem ment. Copyrigght © 2008, 2009 Prresident and Fellow ws of Harvard Colleege. To order copiies or request perm mission to reproducce materials, call 1-8800-545- 7685, wrrite Harvard Businness School Publishhing, Boston, MA 02163, or go to ww ww.hbsp.harvard.eedu/educators. Th his publication may y not be digitized d, photocopied, or otherwise reproduuced, posted, or tran nsmitted, without the t permission of Harvard H Business School. S This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) Wal-Mart History Sam Walton was born in Oklahoma in 1918. His energy and drive were evident early on in his athletic attainments, student leadership, and entrepreneurial ventures.6 After college, Walton became a management trainee with J. C. Penney, a department store. He would eventually imitate some Penney policies, including calling employees “associates” to foster a sense of partnership, letting store managers buy small stakes in the stores that they ran, and supplementing store-level management with extensive visits from headquarters. In 1945, Walton opened his first store, a small variety format franchised from the Ben Franklin chain.7 Prodded by a manufacturer’s representative, Walton developed a low-price/high-volume orientation. He lowered his costs of goods sold by ordering more merchandise directly from manufacturers or their agents, since Ben Franklin charged a 25% markup. By the early 1960s, Walton’s chain of 15 stores had become the largest Ben Franklin franchisee, but the absolute scale of operations remained modest. Looking for a bigger opportunity, Walton learned about the development of discount retailers in the Northeast U.S. According to Walton: I started running all over the country, studying the concept.... Then closer to home, Herb Gibson started his stores with a simple philosophy: “Buy it low, stack it high, sell it cheap.” He sold it cheaper than anybody ever had before, and he sold more of it. [When] he branched out to the square in Fayetteville and started competing with our variety stores... we had to act. He was the only one discounting out this way, and, because I had made all those trips back East, I was probably one of the few out here who understood what he was up to.8 In 1962, Sam and his brother Bud opened the first Wal-Mart Discount City store, in Rogers, Arkansas, an attempt to make the discount format work in a much smaller town than suggested by conventional wisdom. The number of Wal-Mart stores increased to 18 by 1970. Walton then took the company public, raising $3.3 million for its first warehouse and to accelerate store expansion. Walton supplemented internal talent by hiring senior managers externally, some from outside retailing and many with skills in “nontraditional” areas. These managers pushed for massive investments in information technology (IT) aimed at tracking every item in the Wal-Mart system at all times via automated distribution centers linked by computers to both stores and suppliers. Wal- Mart became a leader in an IT-driven transformation of retailing, which shrank inventory-taking lags from months in the 1950s to close to real time by the 1990s. In 2003, Wal-Mart was estimated to spend 1.0% of sales on IT while its competitors spent an estimated 1.76% of sales on IT.9 In addition to innovation, Walton placed a premium on imitation and adaptation. He cruised his and competitors’ stores, tape measure and recorder in hand.1 He openly admitted to “borrowing” ideas: self-service (from a Ben Franklin franchisee), company cheers (from a Korean tennis ball manufacturer), greeters (from a Louisiana Wal-Mart store), and SAM’s Club (inspired by the Price Club). Walton’s emphasis on learning was wedded to an obsession with frugality and a plain-folks manner. He emphasized caring for employees, tightly controlled compensation at all levels, and connections with employees. Any employee was supposed to be able to call him at his publicly listed home phone number. Walton communicated pride, and fun, in the Wal-Mart way of doing things. He even danced the hula on Wall Street in a grass skirt after losing a bet to his CFO David Glass. Until cancer forced him to cut back, Walton worked at least six days a week, often starting as early as 4 a.m.—except on Saturdays, when it might be as early as 2 or 3 a.m. to get a head start on preparing 1 He had crashed into at least one vehicle while counting the cars in a competitor’s parking lot. 2 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 for the meeting scheduled to start at 7:30 a.m. Walton passed away in 1992, weeks after receiving the Presidential Medal of Freedom, the highest civilian honor in the United States. David Glass took over as CEO from 1988 to 2000. During his tenure, Wal-Mart’s revenues grew from $20 billion to nearly $200 billion by looking beyond the core domestic discount retailing format. CEO Lee Scott, who took over from Glass, played a key role in developing Wal-Mart’s distribution network before holding top-level positions in merchandising and store operations. Scott reflected: I think Wal-Mart is a story of evolution, not revolution. So much of what we have done have been things that we actually saw other people doing and integrated into what we were doing. All of those things have just kind of incrementally, month by month, year by year, come together to create something that is interwoven and meaningful. Individual decisions, at the time those decisions were made, were not in strategy sessions that laid out, 12 years from now—here’s what we’ll look like and we’ll put these individual pieces together along this schedule to achieve this goal.10 Retailing Formats The Discount Store format required a potential customer base of 150,000 people.11 The average size of these stores had increased from 42,000 square feet in 1975 to 91,000 by 1995. The number of Discount Stores declined with their conversion to Supercenters. Introduced in 1988, the larger Supercenter added a full-line grocery store and specialty departments to a Discount Store. The food was meant to drive traffic to general merchandise departments, but Wal-Mart’s operational efficiencies made its food business profitable by itself. Its Supercenters were typically more focused on food (35% of sales) and had more ancillary services than competitors. By 2003, 42% of the U.S. (118 million people) had access to a Wal-Mart Supercenter,12 which needed a potential customer base of 76,000 people. In 2001, 7% of Supercenters’ sales growth came from new shoppers and 21% from existing shoppers who increased their purchase volume. The remaining 72% was diverted from other channels, including one-third from competing grocery stores and 22% from Wal-Mart’s other formats.13 In 2003 Supercenter operating margins were estimated to average 6.6%, but margins were unlikely to rise to the levels reached by Discount Stores given the narrow margins on food in general and Wal-Mart’s especially aggressive pricing (see Exhibit 5). Neighborhood Markets let Wal-Mart enter space-constrained suburban areas and pack more stores into a domestic market of relatively fixed size. Introduced in 1998, these “SmallMarts” focused on groceries and limited lines of general merchandise, drugstore items, and photo processing. SAM’s Clubs, begun in 1983, were warehouse clubs and a separate division. The format used high-volume, low-cost merchandising, bulk buying, and rapidly changing assortments of relatively few SKUs in cavernous warehouses at discounts deeper than traditional discounters; gross margins averaged 10%, versus 25%–35% for traditional discounters. SAM’s had led in the club segment, but had been surpassed by Costco in terms of sales and customer spending per visit. One observer said that SAM’s did not “develop the consumer side as effectively as Costco did, particularly in the perishables area, which is where Costco gets a lot of fairly high-margin sales that SAM’s does not. And consumers are proud to tell people they bought something at Costco, whereas shopping at SAM’s is not something they brag about.”14 SAM’s president explained the plan for 2003: “Our focus will not be on becoming the dominant club but on being profitable at a lower-volume rate.”15 Walmart.com was founded in 2000 as a wholly owned subsidiary. It generated $100 million in 2003, and improved Wal-Mart’s access to consumers earning $75,000 or more.16 The site helped drive store traffic—for example, digital photos ordered online could be picked up in the stores. 3 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) Procurement In Wal-Mart’s early days, procurement meant buying trips. Walton, ever frugal, decreed that trip expenses not exceed 1% of the value of purchases. This often meant sharing hotel rooms and walking instead of taking taxis.17 Wal-Mart even called its suppliers collect. In the 1990s, it began to bypass manufacturers’ representatives, saving 3%–4% on goods formerly sourced through them. As its private label business expanded, Wal-Mart increasingly dealt with unbranded suppliers and opened offices worldwide to oversee factories. In 2002, Wal-Mart terminated its relationship with its longtime procurement agent and hired hundreds of that firm’s employees instead.18 By 2003, Wal-Mart spent $107 billion on U.S. suppliers. Suppliers who visited Wal-Mart headquarters in Bentonville, Arkansas were not allowed to entertain buyers or visit in their offices. Instead, they were shown into small interview rooms equipped with only a table and four chairs. The negotiations focused on a single price on the invoice, which was to include return management fees, cooperative advertising, and promotional spending. According to one observer, “It’s not even negotiated anymore. No one would dare come in with a half-a**ed price.”19 Although Wal-Mart bargained hard, it built partnerships with suppliers by sharing information electronically. Wal-Mart used electronic data interchange (EDI) to communicate with suppliers about forecasting, planning, replenishing, and shipping. Its Retail Link private exchange provided suppliers with access to point-of-sale data, two-year sales trends, and inventories of their products on a store- by-store basis. Retail Link reportedly cost Wal-Mart $4 billion to develop and perfect; suppliers had to make substantial investments to implement the new system, including hardware and the costs of hiring, training, and employing Retail Link analysts.20 By 2002, all of Wal-Mart’s suppliers were required to use Retail Link. Wal-Mart’s competitors banded together to create public exchanges to reduce transaction costs through auctions and reverse auctions.21 However, as of late 2002, Wal-Mart remained the only source of (close to) real-time retail data for a large community of suppliers.22 By 2002, it took under 10 minutes for information captured by store point-of-sale scanners to move into the data warehouse, which was reported to be the second-largest private database in the world.23 While the information in the database was proprietary, the skills that went into developing and using it and other systems proved harder to protect. By July 1998, over a dozen of Wal-Mart’s key information systems personnel left to work for Amazon.com and its affiliate, Drugstore.com. In the retail industry, an estimated 8% of the items that customers came to buy were out of stock, and one-third of all goods were sold at marked-down prices.24 Up-to-the-minute information about supply and demand helped Wal-Mart reduce both stock-outs and overstocking. Wal-Mart’s suppliers also benefited from being able to schedule manufacturing more efficiently and from economies associated with increased throughput. Wal-Mart mined the data to rapidly restock and optimize its merchandising mix. One example of Wal-Mart’s rapid response was Target’s difficulty in finding American flags on September 12, 2001; Wal-Mart had begun buying every flag it could the previous day. Wal-Mart encouraged its top-75 suppliers to include it in three-year strategic discussions that involved decisions such as factory size and location. While suppliers holding small shares of their respective markets tended to have poorer financial performance when Wal-Mart was a primary customer, large-share suppliers performed better financially with Wal-Mart as a primary customer.25 Procter & Gamble (P&G), one of the first manufacturers to invest in EDI with Wal-Mart, employed over 70 people in Bentonville by the early 1990s. By 2003, Wal-Mart was P&G’s largest customer, by far, accounting for 17% of its total revenue; P&G’s share of Wal-Mart’s revenue was under 3%. 4 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 Wal-Mart was the largest U.S. importer from China by the mid-1990s. If Wal-Mart had been an independent country, it would have been China’s eighth-largest trading partner, ahead of Russia and Britain.26 According to one executive, global procurement could reduce the cost of general merchandise goods by 10%–20%.27 By 2001, global procurement for SAM’s Club was integrated with that for Wal-Mart’s other U.S. stores, and there was some coordination between SAM’s and non-U.S. stores. Wal-Mart required suppliers to comply with its standards concerning child labor, workplace safety, and local laws.28 However, audits in 2001 revealed that over 50% of international suppliers’ factories violated Wal-Mart’s standards; 30% were in “serious violation.”29 Wal-Mart engaged with suppliers to fix the problems. Company data indicated subsequent compliance by suppliers. Wal- Mart was still voted “Sweatshop Retailer of the Year” in a 2003 activist group’s online poll, despite procurement practices that were arguably no worse than its competitors’. Distribution Sam Walton once described why Wal-Mart built its first warehouse: “Here we were in the boondocks, so we didn’t have distributors falling over themselves to serve us like competitors in larger towns. Our only alternative was to build our own warehouse so we could buy in volume at attractive prices and store the merchandise.”30 Warehousing was capital- and scale-sensitive. Wal- Mart leveraged its investment by building stores within a day’s drive of the distribution center. As Glass explained, “We are always pushing from the inside out. We never jump and then backfill.”31 In 2003, Wal-Mart had 84 Wal-Mart and 19 SAM’s Club distribution centers in the U.S. and 43 distribution centers internationally. Distribution centers were the hubs in a hub-and-spoke network: Trucks picked up merchandise from (and returned merchandise to) suppliers and brought it to distribution centers, where it was sorted and then delivered to stores, usually within 48 hours of being ordered.32 Wal-Mart’s Corporate Traffic Department provided coordination; trucking capacity was supplied by both common carriers and Wal-Mart’s private fleet, the largest in the U.S. A typical Wal-Mart distribution center was one million square feet, highly automated, and required an average investment of $70 million.33 It was operated 24 hours a day by 700 associates paid $12–$18 per hour. Each center received hundreds of truckloads of merchandise daily and served about 150 stores within an average radius of 150 miles.34 In 2003, 83% of the merchandise for domestic Division One Stores, 63% for domestic SAM’s Clubs, and 76% for the International Division flowed through Wal-Mart’s distribution centers; direct-store delivery (DSD) by suppliers accounted for the remainder. These percentages were generally higher than for leading competitors. Wal-Mart increased inventory turns from 3.2 in 1973 to 7.6 by 2003 (versus 6.1 at Target and 5.4 at Kmart).35 Expansion of Supercenters meant sales of fast-moving food items, but policy also contributed to increased inventory turns. Back rooms of stores served as staging areas rather than storage areas, freeing up more space for selling.36 Wal-Mart also had a “Scan ‘N Pay” model where suppliers maintained ownership of their items until they were sold at a Wal-Mart store; only then would accounts payable terms begin.37 Wal-Mart’s long-term goal was to double inventory turns to levels comparable to those of Amazon.com, which achieved 14.5 turns by the end of 2002.38 Each additional turn increased Wal-Mart’s payables-to-inventory ratio by an estimated 10% and freed up $2 billion in working capital. In 2003, distribution costs were an estimated 2%–3% of revenues for Wal-Mart, versus 4%–5% for other retailers.39 Wal-Mart had mastered “cross-docking” to transfer merchandise directly from inbound trucks to store-bound trucks without ever storing the goods in its distribution centers. The latest distribution center prototype had increased throughput by 18%.40 Wal-Mart also automated 5 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) distribution through radio frequency identification (RFID) tags on product cases at the point of manufacture. This reduced “shrinkage” (pilferage) and the need for unloading to check products, with estimated cost savings to Wal-Mart of 6%.41 At 15¢ each, the RFID tags were still too expensive to be used on individual items to reduce checkout labor in stores, but their cost would fall over time. Merchandising In 2003 Wal-Mart remained committed to the basic merchandising principles that Walton used to build the company: achieving very high sales per square foot by offering a broad assortment of merchandise at consistently low prices in cheap but cheerful stores. Wal-Mart commanded 30% of the U.S. market in household staples such as disposable diapers and shampoo. Wal-Mart historically placed more emphasis than other discount retailers on hard goods (hardware, housewares, automobile supplies, and small appliances) than on soft goods (apparel, linens, and fabrics). Hard goods generated more sales per square foot than soft goods, built up more traffic, and required fewer markdowns, but at lower gross margins. Recently, consumables’ (food, candy, and tobacco) share of total revenues had surged with the growth of Supercenters. Hard goods, soft goods, and consumables accounted for roughly 60% of Wal-Mart’s total revenues. National brands dominated Wal-Mart’s product mix, but private labels were growing, accounting for $33 billion (20%) of Division One Stores’ sales in 1999, up from $13 billion (15%) in 1995, but still lower than the estimated 50% private-label share of Target’s sales.42 In 2001, Wal-Mart launched Sam’s American Choice detergent at half the price of Procter & Gamble’s Tide. The move “in no way strains our relationship,” a P&G spokeswoman said. Tide still commanded four times the shelf space of Sam’s Choice, but the latter now rated more highly in Consumer Reports. Wal-Mart offered more variety than competitors and reduced stock-outs by managing product assortment by store rather than by region (Target’s approach) and by using sales data and other criteria. A “Volume Producing Item” contest had top managers champion high-potential-revenue items. The “Store of the Community” program tailored product assortments to local demographics and hosted community fundraising events. Further, Wal-Mart used the Modular Category Assortment Planning System (MCAPS) combined with Retail Link to involve suppliers in creating store-specific “modulars”—planned layouts of products—based on historical selling data, store traits, and 10 different consumer segments. Some suppliers had developed 1,000 different modulars for Wal-Mart.43 MCAPS enabled Wal-Mart to vary the size and merchandise mix of many items from one season or month to the next. Management saw the potential for doing even better: 10% of the visitors to U.S. stores (excluding SAM’s Clubs) left without a purchase, representing $9 billion in “lost” sales for the company.44 Pricing As an EDLP (everyday low prices) retailer, Wal-Mart’s slogan had long been “Always the Lowest Price. Always.” In the 1990s, competitors had forced a change, to “Always Low Prices. Always.” Wal- Mart also began to sell more items on promotion: $10 billion worth in 2002. For example, under the “Rollback” program, three to four key items per category were discounted by at least 10% for an average of 75 days. In some cases, the reductions were permanent. Suppliers absorbed the cost of a Rollback, but benefited from volume increases of up to several hundred percent and future preferences from Wal-Mart (e.g., desirable display locations).45 Except for locally sourced items, Wal-Mart set the prices for general merchandise nationally and food prices by zones corresponding to food distribution centers. Broad pricing discussions were held 6 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 only once or twice per year, but store managers were allowed to match or beat the lowest competing price on an item in their trading area by as much as 5%. Wal-Mart conducted price checks in 99.8% of Kmart stores and 98.7% of Target stores every week.46 Some studies showed a pricing differential of at least 2%–4% between Wal-Mart and its best competitors in most markets,47 while others went up to 10% or more, particularly versus supermarkets.48 Kmart had gone bankrupt trying to match Wal- Mart’s prices, while Target emphasized a more upscale assortment and extensive advertising. As a Target executive put it, “If we’re in the business of selling the same stuff that the guy down the street [Wal-Mart] has, we’re not going to be able to sell it for more.”49 Marketing Wal-Mart promoted its EDLP image by advertising, sponsoring community events, and creating in-store excitement. In 2002, Wal-Mart’s advertising-to-sales ratio was 0.3%, compared with 2.2% at Target and 2.0% at Kmart. District merchandise managers often coordinated local radio or cable TV advertising, and store managers often struck deals with selected suppliers for market-level promotions. Wal-Mart distributed flyers less intensively than Target and Kmart. Contributions to local charities, funding of scholarships, and in-store charity-sponsored events helped Wal-Mart counter its portrayal as a retailing giant that destroyed the fabric of communities by displacing local stores. In 2003, Wal-Mart was experimenting with in-store television, since over half of consumers’ purchase decisions were supposed to be made in-store.50 Store Operations Wal-Mart stores were relatively concentrated in small towns and rural areas where Wal-Mart was more likely to be the only “big box” (see Exhibit 6). Wal-Mart leased most of its stores, and its rental costs were an estimated 0.45% of sales versus 0.42% at Target and 1.6% at Kmart.51 Wal-Mart’s U.S. expansion from 1975 to 1996 revealed several patterns among competitors: Competitors deriving 90%+ of revenues from discount retailing stagnated in terms of number of stores, even if they did not exit after Wal-Mart entered their local markets.52 Competitors that had diversified into other retailing formats and who tended to achieve higher sales per square foot were quicker to either exit or to stay in and fight; in the latter case, they increased their number of stores significantly. More profitable, less-leveraged retailers reacted more aggressively to Wal-Mart’s entry, typically by adding stores.53 Most of Wal-Mart’s U.S. discount stores were open 24 hours Monday through Saturday and for a limited time on Sunday, while Supercenters operated continuously. A “People Greeter” welcomed customers entering a store and kept watch for shoplifters. Wal-Mart installed electronic UPC scanners years ahead of competitors, greatly improving checkout efficiency. Credit cards were historically problematic for discount retailers because a bank authorization took several minutes. By the late 1980s, use of Wal-Mart’s satellite network cut authorization times to under three seconds, enabling customers to use most major credit cards; the change also reduced fraud and improved customer service. Wal-Mart’s sales per square foot, a key measure of retail performance, doubled in real terms from 1983 to 2003, reaching $440 versus $249 for Target and $221 for Kmart. EDLP reduced labor 7 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) requirements, since displays and prices changed less frequently, and allowed for steadier operation. Shrinkage was under 1% of Wal-Mart’s discount sales in 2002 versus 2%–3% for direct competitors. Wal-Mart achieved better in-store execution—in receiving, processing, and shelving products—than competitors with similar prices. Store managers had strong incentives to perform and some autonomy in deciding whether to source locally or to run particular promotions. The goal of autonomy was efficiency rather than decentralization for its own sake. For example, to manage energy, Wal-Mart controlled the lights, heat, and air conditioning of all U.S. stores from Bentonville.54 People For Walton, a key to Wal-Mart’s success was how it treated “associates.” Many of his people policies endured to the present day: sharing performance information with associates, soliciting their ideas, offering profit sharing, and maintaining an open-door policy. Initiatives were driven by the need to keep tight control over payroll expenses, which accounted for roughly half of operating expenses. Wal-Mart’s sales per employee increased 25% since 1990 to average $176,000 in 2003, vs. $151,000 for Target and $145,000 for Kmart. IT generated much of the labor productivity improvement, but non-IT innovations such as cross-training and better utilization made a bigger contribution.55 Wal-Mart typically paid $7 per hour for U.S. entry-level retail positions in 2003 but was prepared to go higher.56 (Exhibit 7 includes incentive compensation, which might amount to $1,000 or more annually for full-time associates in stores that met shrinkage and profitability targets.) The average Wal-Mart employee earned an estimated $9/hour.57 Incentives were higher for department heads who operated their own “store within a store,” receiving detailed information on sales and profits in their area, adjusting the merchandise mix, and being rewarded for results. Store managers received a salary of about $52,000/year, less than counterparts at many other chains, but they earned as much again, on average, with satisfactory store performance. Store managers had to keep payroll expenses below a target that headquarters set for each store and were also measured on sales growth, in-stock percentages, and shrinkage. For corporate managers, compensation was almost entirely incentive- based. As for the CEO, performance incentives and stock grants made up more than 95% of Lee Scott’s total compensation in 2002, which was second among the CEOs of the 50 largest U.S. companies. Wal-Mart emphasized that it offered “very competitive benefits and very competitive wages,”58 that it gave more training than any other retailer, that two-thirds of its managers had been promoted from the ranks of associates, and that it was a successful, caring, and fun place to work. Wal-Mart’s average wages in the U.S. were at least $1 per hour less than Target’s and Kmart’s.59 According to critics, its average wages were $2–$3 per hour less than unionized supermarket competitors’ because of low starting levels, small increments, and an alleged emphasis on turning over employees who earned relatively high wages. Overall, it was estimated that Wal-Mart, Target, and Kmart employees worked a similar number of hours—seven hours per day for 250 workdays per year, on average.60 Yet both Kmart and Target were more generous with their health-care and retirement benefits,61 spending 25% over and above an average employee’s wages on total benefits vs. 20% at Wal-Mart.62 Managers agreed that expansion into cities and overseas, shifts to continuous operation (which made it harder for managers to know everyone in their stores), and profitability and growth pressures challenged the culture. A reported employee turnover rate of 44% (down from 70% in 1999) 8 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 was lower than the industry average, but required replacing over 600,000 jobs per year to maintain Wal-Mart’s employee base. Expansion plans called for an increase to 2.2 million employees by 2008.63 Wal-Mart attracted many unionization efforts but resisted them aggressively through its profit- sharing plan and open-door policy, workshops for store managers stressing their role as the “first line of defense” against union campaigns, and anti-trespassing laws to stymie in-store unionization efforts. In 2000, Wal-Mart’s meat cutters in Jacksonville, Texas voted “yes” to union representation. Two weeks later, Wal-Mart switched to pre-cut beef and eliminated meat-cutting in 180 stores.64 Litigation Off-the-clock work A number of lawsuits against Wal-Mart were pending in early 2005. Some employees asserted they were required to work through meal and rest breaks without pay; others complained that managers “secretly ‘shaved’ their time sheets to meet budgets”65 or locked them into stores at night after they had clocked out and forced them to work until a supervisor let them out. A Wal-Mart spokesperson countered, “We have a very strict policy to pay our associates for every minute that they work.... We think the instances in these suits are infrequent and isolated, and really are not the consequence of any systematic abuse.”66 The company indicated that managers who were found forcing employees to work “off the clock” were punished, and sometimes fired. Alleged gender discrimination In June 2001, six past and present Wal-Mart employees filed a gender discrimination lawsuit against Wal-Mart. They alleged they were denied opportunities for advancement in spite of excellent performance reviews and that males were given preference for training and promotions.67 Some women said they were called derogatory names or told that certain retail positions were for men; one explained she had to attend monthly sales meetings at Hooter’s, a restaurant where female servers wore revealing clothing.68 Others complained that it was difficult to advance since the company did not advertise spaces in its managerial training program but rather used the “tap on the shoulder” method, whereby managers invited associates to participate.69 Plaintiffs’ lawyers contended that female Wal-Mart employees were paid less than their male counterparts and that the company “fostered a culture that stereotyped females as unwilling to work long hours or relocate,” both requirements for managerial positions.70 In June 2004, a federal judge ruled that the case could proceed as a class action suit covering 1.6 million women who had worked or were working for the company as of December 1998, making it the largest discrimination suit in U.S. history. Wal-Mart appealed the ruling, asserting that the plaintiffs’ claims were not representative. It also maintained that it did not engage in widespread discrimination and that “a class action was inappropriate on the grounds that Wal-Mart does not have centralized employment policies and that individual store and district managers, rather than headquarters, make decisions on pay and promotions.”71 The lawyers interpreted personnel statistics differently. Wal-Mart maintained that in 90% of its stores, no differences existed between men’s and women’s salaries for the same jobs and that women were promoted in proportion to the rate at which they applied for positions.72 The plaintiffs’ lawyers claimed that women were paid 5%–15% less than men for similar positions at stores nationwide. They also stated that while nearly 66% of Wal-Mart’s hourly employees were women, 33% of the company’s managers were female, vs. 57% at other retailers, and only 14% of its top managers were female.73 (Exhibit 7 presents Wal-Mart data summarized by an expert witness for the plaintiffs.) Wal-Mart countered that competitors had broader definitions of management, but the company made some changes after the suit was filed. It started posting positions in its management training 9 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) program, and its website reported, “Wal-Mart [has] linked officer compensation to diversity goals: bonuses will be reduced by as much as 15% this year if goals are not met.”74 Illegal workers In 2003, U.S. immigration agents raided Wal-Mart headquarters and 60 stores, arresting over 300 illegal workers employed by a contractor that Wal-Mart used to clean some of its stores. Wal-Mart was subsequently sued by some of the arrested workers.75 Wal-Mart claimed it did not know the contractor hired illegal immigrants. In 2005 it agreed to pay $11 million to settle the charges, which the government dropped, and also agreed “to create an internal program to ensure future compliance with immigration laws by Wal-Mart contractors and by Wal-Mart itself.”76 Management According to Sam Walton, “You’ve got to give folks responsibility, you’ve got to trust them, and then you’ve got to check up on them.”77 Walton described his management style as “management by walking and flying around.” This required tight controls (facilitated by technology), considerable time in the stores, and total absorption in the business. This commitment to business was the first of 10 rules listed on the company’s website under “The Wal-Mart Culture” (see Exhibit 8). Wal-Mart was also highly competitive. A banner once hung at headquarters, asking, “Who’s taking your customers?” with “Wanted”-style photos of CEOs of the largest U.S. retailers below.78 There was little that distinguished Wal-Mart’s formal management tools from competitors’. Until the mid-1990s, Wal-Mart used the SWOT (strengths-weaknesses-opportunities-threats) framework for strategic analysis. During the 1990s, it adopted activity-based costing but scrapped it in favor of a simpler costing system similar to Target’s. As of 2003, it relied on the Balanced Scorecard—a widely used management system that balanced financial results with other measures. Wal-Mart continuously improved operational effectiveness by driving centrally located capabilities through to the stores, bringing store-level innovations back to the center, and implementing them more broadly. Headquarters’ attention was focused on the top 20% and bottom 20% of stores and suppliers. Wal-Mart’s management of its store network was relatively centralized. In 1999, 15.4% of its managers were housed at headquarters, versus 8.1% for a group of 20 competitors.79 Still, total headquarters costs amounted to only 2% of Wal-Mart’s sales, a relatively low figure that reflected an emphasis since Sam Walton’s days on keeping the head office as small as possible.80 The lack of regional headquarters in the U.S. had saved Wal-Mart 2%–3% of sales in the 1980s.81 Instead, Wal-Mart held weekly meetings for regional vice presidents (RVPs) at headquarters. Each RVP was responsible for 80–100 stores, and they and their bosses were ferried by 20 Wal-Mart jets from Bentonville to their respective regions at the beginning of the week and returned to headquarters on Wednesday or Thursday. CEO Lee Scott noted, “The regional vice president has to be closer in skill sets to Sam than they would have been 10 to 15 years ago. The CEO can no longer resolve issues for all 1.3 million people.”82 The RVPs also acted as the primary carriers of information back to headquarters. Wal-Mart’s Saturday meeting lasted two hours. The headquarters’ management team and associates, friends, and relatives assembled in Bentonville and were served a mix of entertainment, information, and motivation. Guests often included athletes, country singers, and comedians, as well as other business people. Every meeting closed with employees performing the Wal-Mart cheer. The annual shareholders’ meeting was reputedly the world’s largest, lasting nearly a week and featuring celebrity performances, speeches, questions from the floor, and recognition of individuals— especially associates—followed by a fair. An anthropologist who had attended for 20 consecutive 10 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 years saw Wal-Mart as “restoring the values of a mythic bygone America while simultaneously allowing its followers to participate in a scientific, classless, and rational community.”83 Wal-Mart’s management thought the company was the target of special scrutiny. As Glass noted, “When we were smaller, we were the underdog, the challenger. When you’re number one... you are no longer the hero.” This perspective led Wal-Mart to vigorously contest the several thousand lawsuits filed against it each year. Wal-Mart set up a media relations unit in 1989, expanded its human resources and its legal function in the 1990s, and established a governmental affairs unit in Washington, D.C., in 1999—although three years later, it still employed only four people there.84 This marked a shift from the early days under Sam Walton who, according to one former executive, “would tell us ‘our core business is not government affairs or human resources or accounting or legal. Our business is buying and selling products and taking care of customers and associates.’”85 The Future In 2003, Wal-Mart generated $12.5 billion in operating cash flow and invested $9.4 billion in property, plant, and equipment (plus $749 million in international investments). It had increased its dividend every year since 1974 and had recently repurchased $3.2 billion in stock from shareholders. Shareholders looked to Wal-Mart for more growth: an estimated 69% of the equity value in its stock price was based on growth options rather than assets in place. 86 Opportunities for growth included domestic discount retailing, international discount retailing, and altogether new product lines. For 2004, Wal-Mart planned to spend $11 billion in capital to add 48 million square feet in 335 new stores in the U.S. and 130 elsewhere. Growth rates for comparable stores had recently averaged 5%– 6% for the key domestic formats. Supercenters still afforded substantial room for expansion: Wal- Mart planned to open 1,000 more in the U.S. in the next five years. This could double Wal-Mart’s overall revenues from grocery and related businesses to $162 billion, giving it a 35% share of U.S. food sales and 25% of drugstore sales, and raising its share of certain household staples to as much as 50% by 2010.87 However, overall growth in the core businesses of discounting general merchandise and food in the U.S. was expected to taper off from 15% to 10% over the next 10 years, with total revenues from these businesses reaching $400 billion by 2008 and pushing past $600 billion around 2013. After 10 years of international expansion, international operations were still experiencing performance problems (see Appendix A). Scott thought that Wal-Mart needed to look beyond discount retailing, whether at home or abroad. “I’m not trying to be flippant. But our long-term strategy is to be where we’re not.”88 Wal-Mart was already experimenting with offerings such as vacation planning, flower delivery, and online DVD rentals.89 In January 2003, Wal-Mart announced that it would begin offering basic financial services that did not require bank ownership. According to Scott, the offerings would be targeted at over 20% of customers who did not have bank accounts. He added: “I’d like to do it [financial services] more along the Wal-Mart way than other people’s. Rather than pricing off the market... I’d rather say, what is a fair return on doing that?” Wal-Mart offered money orders at 46 cents, compared with $1 at the post office,90 and payroll check cashing at a flat rate of $3 per check, compared with commissions of 3%–6% charged by rivals.91 11 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  For the exclusive use of J. Lee, 2024. 709-423 Wal-Mart Stores in 2003 (Abridged Version) Appendix A International Retailing By August 2002, Wal-Mart operated 1,212 stores in nine countries outside the U.S. and employed over 300,000 associates. International accounted for $2 billion in operating profit on 2002 revenues of $40.8 billion (without consolidating the results of a $500 million investment for a 37% stake in Japan’s Seiyu, a struggling supermarket chain). Exhibit 9 provides a country-by-country chronology of this process of international expansion. It began in 1991, when Wal-Mart entered Mexico by opening a SAM’s Club in partnership with a Mexican retailer, Cifra, which it later bought out. Wal-Mart rounded out its North American footprint by making a major acquisition in Canada in 1994 and then began to enter large emerging markets in South America and Asia. Since 1997, Wal-Mart had placed more emphasis on expanding into more developed markets, starting with the acquisition of two hypermarket chains in Germany, which was Europe’s largest retail market. However, the challenges of integrating the chains, the apparent German preference for smaller neighborhood shops, and legal restrictions on store opening hours and price cuts had led to large losses through 2003. A much larger and more positively viewed European move was Wal-Mart’s acquisition, in June 1999, of Britain’s highly successful ASDA chain—with 229 stores and $14 billion in sales the previous year—for $10.8 billion. ASDA was more focused on food than Wal-Mart’s Supercenters. However, ASDA’s CEO indicated that “the way we operate is based mainly on ideas we pinched from Wal- Mart”92 (e.g., everyday low prices, calling employees “colleagues,” etc.). Wal-Mart hoped to learn from ASDA’s strengths in food and private-label apparel while infusing it with some of its own information technology systems and skills. Coincident with the ASDA acquisition, the president of Wal-Mart’s International division was replaced by the corporate CFO, John Menzer. Menzer reduced the staff at Bentonville devoted to international operations by 50%, and gave individual country leaders greater decision-making authority, especially in the areas of operations and merchandising.93 Country-level management had previously needed to work closely with Bentonville on almost all aspects of their country’s operations. He also set up “bandwidths of responsibility” that clarified which decisions could be made locally and which should involve Bentonville. Menzer put additional management structures and systems into place, including building a larger finance division—Menzer expected the finance teams in countries to operate within certain governance rules and report on progress in the markets. A finance team in Bentonville was maintained to assist and report and consolidate results for the entire International Division. Wal-Mart planned to open 120 to 130 new international stores in 2003, increasing the number of stores in all of its markets except for Argentina, whose size had imploded in dollar terms with the devaluation of the peso and where demand continued to be depressed. CEO Lee Scott had challenged Menzer to generate one-third of future sales and profit growth from outside the United States. 12 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  709-423 -13- Exhibit 1 Wal-Mart’s Financials, 1994–2003 a ($ millions, except where noted) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Income Statement Net revenues 67,977 83,398 94,765 106,152 119,248 139,025 166,628 193,116 219,671 246,525 Net sales 67,344 82,494 93,627 104,859 117,958 137,634 165,013 191,329 217,798 244,524 Wal-Mart Division One stores 50,082 57,919 66,271 74,840 83,820 95,395 108,721 121,889 139,130 157,121 -Discount Stores 47,151 51,370 55,211 57,821 60,221 63,207 65,097 63,851 65,801 66,146 -Supercenters 2,931 6,549 11,060 17,019 23,599 32,155 43,553 57,846 72,979 90,419 -Neighborhood Markets -- -- -- -- -- 33 72 192 350 556 SAM’s Club 14,749 18,908 19,068 19,785 20,668 22,881 24,801 26,798 29,395 31,702 International -- 1,511 3,712 5,002 7,517 12,247 22,728 32,100 35,485 40,794 Other (McLane, Internet) 2,513 4,156 4,576 5,232 5,953 7,111 8,763 10,542 13,788 14,907 Other income 633 904 1,138 1,293 1,290 1,391 1,615 1,787 1,873 2,001 Cost of sales 53,444 65,586 74,505 83,510 93,438 108,725 129,664 150,255 171,562 191,838 Operating, selling and general and administrative expenses 10,333 12,858 15,021 16,946 19,358 22,363 27,040 31,550 36,173 41,043 Depreciation and amortization expensesb 849 1,070 1,304 1,463 1,634 1,872 2,375 2,868 3,290 3,432 Operating income 4,208 4,968 5,247 5,722 6,503 8,061 10,105 11,311 11,937 13,644 Operating income as % of net revenues 6.2% 6.0% 5.5% 5.4% 5.5% 5.8% 6.1% 5.9% 5.4% 5.5% Interest costs 505 696 880 819 733 614 841 1,195 1,186 925 Taxes 1,358 1,581 1,606 1,794 2,115 2,740 3,338 3,692 3,897 4,487 Net income 2,333 2,681 2,740 3,056 3,526 4,430 5,377 6,295 6,671 8,039 Dividend payments (absolute dollar terms) 299 391 458 481 611 693 890 1,070 1,249 1,328 Balance Sheet Current assets 12,114 15,338 17,331 17,993 19,352 21,132 24,356 26,555 27,878 30,483 Property, plant, equipment, and capital leases 13,176 15,874 18,894 20,324 23,606 25,973 35,969 40,934 45,750 51,904 Total assets 26,441 32,819 37,541 39,604 45,384 49,996 70,349 78,130 83,451 94,685 Current liabilities 7,406 9,973 11,454 10,957 14,460 16,762 25,803 28,949 27,282 32,617 Long-term debt 6,156 7,871 8,508 7,709 7,191 6,908 13,672 12,501 15,687 16,607 Long-term lease oblig. under cap. Leases 1,804 1,838 2,092 2,307 2,483 2,699 3,002 3,154 3,045 3,001 Shareholders’ equity 10,753 12,726 14,756 17,143 18,503 21,112 25,834 31,343 35,102 39,337 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025. For the exclusive use of J. Lee, 2024.  709-423 -14- Exhibit 1 (continued) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Share information Shares outstanding (millions) 2,299 2,298 2,294 2,266 2,240 4,450 4,454 4,470 4,451 4,386 Diluted EPS ($) 0.51 0.59 0.60 0.67 0.78 0.99 1.25 1.40 1.49 1.81 Dividends per share ($) 0.07 0.09 0.10 0.11 0.14 0.16 0.20 0.24 0.28 0.30 Book value per share ($) 4.68 5.54 6.43 7.57 8.26 4.74 5.80 7.01 7.89 8.97 End of fiscal year stock price, split adjusted ($) 13.25 11.44 10.19 11.87 19.91 43.00 54.75 56.80 59.98 47.80 End of fiscal year market value 30.5 26.3 23.4 26.9 44.6 191.3 243.9 253.9 267.0 209.6 Financial Ratios Return on sales (%) 3.5 3.2 2.9 2.9 3.0 3.2 3.3 3.3 3.1 3.3 Return on assets (%) 8.8 8.2 7.3 7.7 7.8 8.9 7.6 8.1 8.0 8.5 Return on shareholders’ equity (%) 21.7 21.1 18.6 17.8 19.1 21.0 20.8 20.1 19.0 20.4 Market Value/Net Sales (%) 90.4 63.7 49.9 52.0 76.1 138.9 147.8 132.6 122.7 86.3 Stores (Numbers) Discount Stores 1,950 1,985 1,995 1,960 1,921 1,869 1,801 1,736 1,647 1,568 Supercenters 72 147 239 344 441 564 721 888 1,066 1,258 Neighborhood Markets 4 7 19 31 49 SAM’s Clubs 417 426 433 436 443 451 462 475 500 525 International 14 163 191 206 584 716 1,003 1,070 1,170 1,288 Other information Total number of associates (000) 528 622 675 728 825 910 1,140 1,244 1,383 1,400 Domestic square footage (millions) 228 273 302 324 355 386 433 467 516 561 International square footage (millions) 227 252 278 298 313 333 358 387 418 454 2 20 24 27 42 53 75 80 97 106 Consumer Price Index (1982 =100) 144.50 148.20 152.40 156.90 160.50 163.00 166.60 172.20 177.10 179.86 Source: Compiled from company reports, MVI (Management Ventures, Inc.) estimates, Standard & Poor’s Compustat® data, and casewriters’ estimates. aFiscal years ending January 31. bA cash flow item is shown here for comparison purposes. This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025. For the exclusive use of J. Lee, 2024.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 Exhibit 2 Growth and Profitability of Wal-Mart’s Businesses 15% Supercenters 10% Discount Stores International 5% EBIT Margin, 2003 (%) SAM's Club 0% -5% *The areas of the different circles are proportional to the revenues from the respective businesses -10% Misc. (McLane, Internet, NM) -15% -10% 0% 10% 20% 30% 40% 50% Revenue CAGR, 1999-2003 (%) Source: Compiled from MVI data and casewriters’ estimates. 15 This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025.  709-423 -16- Exhibit 3 Wal-Mart’s Businesses versus Competing Discount Retailers (FY 2003, $ millions) Wal-Mart: Selected Formatsb Wal-Marta Wal-Mart Wal-Mart Wal-Mart SAM's Targetc Kmartd Corporate Discount Stores Supercenters International Club Corporate Corporate Revenue $ 246,525 $ 66,146 $ 90,419 $ 40,794 $ 31,702 $ 43,917 $ 30,762 Cost of goods sold 191,838 49,742 68,447 32,227 28,354 29,260 26,258 Gross Margin 54,687 16,404 21,972 8,567 3,348 14,657 4,504 SG&A 41,043 10,452 16,008 6,533 2,320 11,393 6,544 EBIT 13,644 5,952 5,964 2,034 1,028 3,264 (2,040) Interest 925 - - - - 588 155 Taxes 4,487 - - - - 1,022 (24) Net Income 8,039 - - - - 1,654 (2,171) Assetse 94,685 24,748e 30,709 4,404 28,603 11,238 Equity - Book Value 39,337 - - - - 9,443 345 Equity - Market Value 210,987 25,654 65 5 Year CAGR Sales 15.6% 1.9% 30.8% 40.3% 8.9% 9.8% -0.9% Net Income 17.9% - - - - 17.1% -254.2% Assets 15.8% - - - - 15.0% -3.7% Equity 16.3% - - - - 16.2% -42.4% Source: Compiled from company records, MVI estimates, SEC filings, and casewriters’ estimates. a Wal-Mart’s revenue includes other income; net margin excludes minority interests. Wal-Mart’s fiscal year 2003 ended on January 31, 2003. Cost of goods sold does not include the logistics costs of its distribution network. Depreciation and amortization for Wal-Mart in 2003 was estimated to be 1.39% of sales; the comparable figure for Target and Kmart was 2.51% and 2.40%, respectively. b Wal-Mart’s financials are disaggregated between Discount Stores and Supercenters on the basis of estimates; estimates are also relied on for all the financials between the top line and the bottom line of the income statement (revenues and EBIT, respectively) for Wal-Mart International and SAM’s Club. c Target Corporate’s business mix resembles Wal-Mart’s Discount Stores except for the following differences: (1) A small but nontrivial percentage of Target Corporate’s revenues in 2003 come from two department store chains that it also owns. After deducting the revenues and profits from those two department store chains, Target’s operating margin is 8.36%. (2) Target’s average prices were thought to be 10%–15% higher than Wal-Mart’s. (3) Target’s revenue includes credit card revenues of $1,297 million, and its credit card segment expenses included bad debt provisions of $460 million and operating & marketing costs of $305 million. d Kmart’s business mix resembles Wal-Mart’s Discount Stores. Its financials are before restructuring charges. e Wal-Mart’s total assets of $94,685 million include not only the assets allocated by line of businesses (the gray cells in the table) but also $34,824 million in “Other Assets” that include all of the real estate This document is authorized for use only by Jiwon Lee in BIZ3147_20242 taught by Bo Kyung Kim, Yonsei University from Aug 2024 to Feb 2025. assets in the United States. For the exclusive use of J. Lee, 2024.  For the exclusive use of J. Lee, 2024. Wal-Mart Stores in 2003 (Abridged Version) 709-423 Exhibit 4 Wal-Mart’s Domestic Store Formats (as of January 31, 2003) Store Grouping Division One SAM's Discount Supercenter N. Market Club Number of stores 1568 1258 49 525 Merchandise 40 depts 40 depts Limited drug Large format Limited grocery Full-line grocery and grocery Consumer Target (by income) A