Will Wal-Mart's strategic investments pay off?

by Monica Watrous
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Walmart store front
Wal-Mart plans to spend billions on employees, technology and value.

BENTONVILLE, ARK. — Wal-Mart Stores is spending billions to lower prices, increase wages and roll out on-line grocery to more markets nationwide. These strategic investments are expected to deliver top-line growth and increase shareholder value, but executives warned investors to expect operating losses in the near term. The news sent Wal-Mart's share price tumbling 10% in one day.

Doug McMillon, Walmart
Doug McMillon, president and c.e.o. of Wal-Mart

“Our investments in people and technology will continue to pressure our profitability in the near term, especially next year,” said Doug McMillon, president and chief executive officer of Wal-Mart, during the company’s annual meeting for the investment community on Oct. 14. “We will then be positioned to be competitive with an attractive level of profitability. We understand that the dip requires patience from our investors, and we want to be very clear. These are the right investments for our future.”

In February, Wal-Mart announced an increased investment in its employees through wage hikes, training and store structure, all of which amounts to an increased cost of about $1.2 billion this year and an incremental $1.5 billion next year. Total e-commerce and digital capital expenditures are expected to be approximately $1.1 billion in the next fiscal year. And the company said it plans to invest “several billion dollars” over the next three years in reducing prices. With these operating investments, executives expect fiscal 2017 earnings per share will decline between 6% and 12%. By fiscal 2019, however, Wal-Mart projects earnings per share will exceed current levels, rising 5% to 10% over the prior year.

“We made a choice, though, to first invest in technology and people, and those investments are putting pressure on short-term earnings,” Mr. McMillon explained. “The large investments this year and next in store experience, operational improvements and wages will ensure we get the sales lift we deserve for lowering prices further in the future. To put it more simply, you clean up your house before you invite people over. It was smart to improve standards, in-stock and checkout speed, before just leaning on price.”

Wal-Mart’s value strategy includes enhancing its assortment of fresh foods, organic items and private brand products.

Greg Foran, Walmart
Greg Foran, president and c.e.o. of Wal-Mart U.S.

“We have doubled our private brands team, and our focus remains on delivering quality, innovation, price, and ultimately increased market penetration for our customers,” said Greg Foran, president and c.e.o. of Wal-Mart U.S. “So we’ve got key work streams in place to ensure a well-defined brand architecture. We’ve got teams to develop and identify assortment gaps, extend product lines and innovations based on what we have learned from customers, and here’s what is interesting: As customers become Wal-Mart private brand adopters, they also make more trips and they spend more. In fact, of this increased spend, half of it is on non-private brand items. This means that as customers become more engaged with private brands, they become more engaged with Wal-Mart overall.”

Additionally, Wal-Mart executives expect the on-line grocery platform will draw new shoppers. Recently, the company expanded the service to eight new markets for a total of 13. Wal-Mart said it will be operating on-line grocery shopping in 20 markets by the end of the year and plans to add another 20 next year. Over the past six months in the Denver market, one in four customers using grocery pickup is new to Wal-Mart, the company said.

“Customers love the ability to order their groceries on-line or on their phone and pick it up when it’s convenient,” Mr. Foran said. “We know that the basket for customers who shop on-line is two times the average Supercenter basket and that many on-line grocery shoppers are new customers to Wal-Mart.”

Walmart online grocery order and pickup screen
Wal-Mart executives expect the  company's on-line grocery platform to draw new shoppers.

As a result of these investments, the company expects to generate net sales growth of 3% to 4% annually over the next three years, translating to $45 billion to $60 billion during the period.

“We see an exciting opportunity to drive sales today, invent tomorrow, and ensure sustainable growth,” Mr. McMillon said. “Over the next three years our dollars of sales growth will be like adding last year’s combined annual revenues of Netflix, eBay, Whole Foods and Starbucks to our top line.”
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