- New Walmart management is undertaking aggressive cost-cutting measures.
- Wage increases will negatively affect the bottomline.
- Walmart hasn't quite taken to e-commerce as much as they should have.
- Walmart finds itself in a precarious position especially after Amazon's stock growth.
Walmart (NYSE:WMT) has a track record for aggressive cost-cutting measures. Recently, Walmart took the decision to slash 500 jobs from its Arkansas headquarters. On one hand, this could be a good decision if it reduces costs without causing unforeseen circumstances later in the future. On the other hand, cost-cutting doesn't necessarily equate to increased efficiency. The market responded positively to the news as Walmart stock price shot up from $63.50, and is now stable at $66.93 (closing price on Oct 12).
Why is cost-cutting necessary for Walmart?
In brief, Walmart's revenues are less than stellar at this moment in time, especially in China. However, this is due to China's economic problems this year.
Walmart suppliers feeling the pain
Walmart isn't just cutting costs internally, it is also aiming to squeeze as much as it can from its suppliers too. In the first quarter of this year, Walmart 'requested' that suppliers divert the money used for marketing their products inside Walmart's stores, and instead spend it on reducing the price of goods. As usual, this was a decision taken in order to benefit only Walmart. This is the same company that pitches suppliers against each other so that they can squeeze every last cent out of prices.
Last month, Walmart also asked manufacturers in China to share the good fortunes of a cheaper Yuan by lowering the price of goods sold to Walmart by 2-6%. This request was viewed as audacious in certain circles; however, with the situation Walmart is in at the moment, they must squeeze till they can squeeze no more.
Factors driving Walmart's aggressive cost-cutting measures
It is no secret that Walmart's stock has endured a fairly terrible year with the share price decreasing by a staggering 22% in the year-to-date. On the other hand, giant online retailer Amazon (NASDAQ:AMZN) has enjoyed a growth of 77% from the start of the year till date.
As a result, Walmart is aware of the fact that stock investors in the retail and/or ecommerce space have a better investment option. Therefore, Walmart is doing all it can to ensure good results for 2016 in order to inspire investor confidence.
Secondly, due to the fact that Walmart is trying to increase the in-store customer service, new entry-level Walmart employees will earn $9/hour, and this will increase to $10/hour after a 6 month period. This decision is based on the hypothesis that better paid employees would be more productive and helpful to customers. However, it is worth highlighting the reason why people visit Walmart: to get prices that smaller retailers simply can't match. This is due to the vast economies of scale that Walmart enjoys. Therefore, it is worth questioning whether increased wages won't hurt the bottomline.
Amazon stock price gaining by 77% (January 2015 to date) can be partially attributed to consumers being more willing to buy online. Plus, Amazon has been excellent at leveraging their position as one of the world's most visited ecommerce sites to sell more of their own products, i.e. the Kindle Fire.
On the other hand, Walmart hasn't been actively pursuing the online space as much as they could. The fact that they have global distributors could have allowed them to be the world's leading e-commerce storefront. There might be a reason for that. Despite the fact that e-commerce sales continue to grow, only 7.2% of shopping in America takes place online.
It might have been better for Walmart to divert some of the money used to plump up wages, and instead use it to increase their standing as an online retailer, and go toe-to-toe with Amazon.
In conclusion, due to the fact that Walmart is going through a period when incredibly tough decisions are being made, and they can go either one way or the other. Therefore, it is best to 'wait it out' or put your money in Amazon stock due to their recent decisions. For instance, they released a line of affordable Kindle fire tablets, an Amazon fire tv which doubles as a console, and removed certain Apple and Google products from their store. I can foresee Amazon moving to making more of their own products. And with a homepage that gets millions of visitors each day, they have the perfect advertising space to move a significant number of units.
Moreover, historically, Amazon tends to perform well in the Christmas season and into the new Year. For ex in 2014, the stock price increased from $359.00 to $402.00 between November 1st and December 20th.