The coming downfall of Wal-Mart

Seeing this news story made me laugh.

http://www.fool.com/investing/general/2015/05/25/the-most-hated-company-in-the-retail-industry.aspx

The most hated companies in America have a knack for angering people. Whether it’s due to inept management, subpar products, poor service, or lackluster stock performance, these businesses earn the wrath of customers, employees, and shareholders alike.

The retail industry in particular has its share of struggling businesses. It’s a brutal arena, where cutthroat competition can take a toll on even the strongest businesses. Brick-and-mortar retailers are especially vulnerable as consumers steadily shift their purchases online. In addition, the low wages typical in the industry often lead to tension with employees, which can negatively impact customer care.

Maybe no company epitomizes these struggles better than retail giant Wal-MartStores (NYSE: WMT ) . The discount chain is among the greatest retail success stories in history, yet it was recently named one of the most hated companies in America by 24/7 Wall St.

The e-commerce megatrend has taken a toll on Wal-Mart’s business. Amazon.com (NASDAQ: AMZN ) in particular is a major threat, with the retail juggernaut increasingly becoming the first — and last — place people shop online. As more and more dollars flow to the Internet, Wal-Mart’s massive store base could become less of an asset and more of a liability. That’s because the cost of operating its stores and paying its millions of employees puts it at a structural disadvantage to Amazon and other Internet-based competitors. Unfortunately for Wal-Mart and its shareholders, this trend is unlikely to change in the foreseeable future.

Worker compensation is another hot-button issue. Wal-Mart is the largest private employer in the United States and is at the epicenter of the “Living Wage” movement. The company has long been targeted by protesters demanding pay increases for its workers. Recently, Wal-Mart took action to meet those demands by raising its minimum U.S. hourly wage to $9. The company also announced plans to increase it to $10 for current employees next year.

It should be noted that these figures are above the current federal minimum wage of $7.25. However, critics note that even with these pay increases, many Wal-Mart employees will still rely on food stamps, Medicaid, and other government programs to survive.

It’s a difficult position for Wal-Mart: low wages dampen employee morale and can lead to poor customer service, but pay hikes increase labor costs and dent its profit margin. And if Wal-Mart tries to pass on those costs to customers, demand for its products (and thus sales) would likely fall. That’s because Wal-Mart’s customers tend to be more cost-sensitive, and the company’s low prices are what many consumers find most appealing about its offerings.

These labor issues have no doubt affected the quality of care that customers receive from Wal-Mart’s employees. In fact, 24/7 Wall St noted, “Few companies received a lower rating than Walmart for customer satisfaction, according to the [American Customer Satisfaction Index]. Walmart’s scores were low even relative to other discount and department stores, as well as relative to other supermarkets. Walmart was the worst performer in both industries.”

Combined, these issues have resulted in a stagnating stock price that fell about 1% over the past two years even as the S&P 500 index rose nearly 30%. That has angered shareholders, and activist investors have begun to demand change.

However, it’s unlikely these activists can compel management to take action. That’s because the Walton family — heirs of Wal-Mart’s late founder, Sam Walton — controls about half of the company’s stock. So activists’ proposals can be easily defeated even if they are put to a shareholder vote.

Still, Wal-Mart’s management has announced a slate of initiatives intended to spur growth. Of these, I find the plan to expand its store count in China to be interesting. The most populous country in the world is a massive and growing market, and therefore holds tremendous potential for U.S.-based companies that can successfully adapt to the intricacies of the Chinese market. Yet Wal-Mart has struggled for years in China, so the success of this new growth strategy is far from assured.

Clearly, Wal-Mart has gotten too big for its own good, just as political empires so often do, leading to their eventual downfall.

And when Wal-Mart does finally go down, maybe we will see many more examples of THIS. I can hardly wait!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s