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

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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.

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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 Sam’s 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

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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 Sam’s 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

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GB 540: Economics for Global Decision Makers

affect the operations and operating results of the Wal-Mart Stores segment and Sam’s 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-Mart’s 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.

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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

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As the largest employer in the country, Wal-Mart’s 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 retailers—even 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.

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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

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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

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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-Mart’s price push test manufacturers prowess. Retrieved from http://www.reuters.com/article/2012/03/06/us-usa-consumer-walmart-idUSTRE8250GM20120306

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-than-wal-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-100000-veterans/1835397/

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