Wal-Mart Stores Wal-Mart Competitive Advantage Regional Economies-of-Scale (Percentage of Sales) Wal-Mart 2.8 0.9 5.3 9.0 8.

6 Other Stores 4.0 2.3 7.6 13.9 5.9

Notes from Greenwald 3/31/03

Inbound Logistics Advertising Other Overhead Total Total Operating Margin

GAP 1.2 1.4 2.3 4.9 2.7

Pct. of Gap 30% 60% 30% 35%

Wal-Mart makes money in monopoly stores. But WMT does not gain its advantage through purchasing power because this type of advantage should increase as size and scale increases but ROE, ROIC and ROA are decreasing as growth continues into new markets. Monopoly Location ROE Price gain Total gain Gap (WMT K-mart) Two possible stories: 1. Effective operation 2. Regional Economies of Scale. WMT started in Ark. And moved tangently into other regions. Walmart Stores Competitive Advantages Wal-Mart History-Post 1985 YEAR Operating Margin Return on Sales Return on Capital 1985 7.8% 3.9% 18.7% 1992 6.4% 3.7% 18.2% 1997 5.4% 2.9% 14.3% 2002 5.5% 3.1% 14.5% Slower growth-fewer openings Price gap: Kmart is 1.5% higher than WMT WMT 33% 6% 2% KMT 12% 9% 1.1% 0.9%

Return on Equity 25.6% 23.0% 17.8% 19.0%

WMT Stores Competitive Advantage WMT vs. Target Operating Margins Year WAL-MART TARGET 1984 8.6 5.5 (EST) 1992 6.4 5.5 1997 5.4 6.3 2001 6.0 7.8 Targets better profitability has been at greater geographic concentration.

If you compete with Wal-Mart you can copy technology, store lay-outs, product mix, but you can NOT replicate location and grab regional share. WMT and Target has economies of scale reinforced with some small customer captivity DIVISIONAL MARGIN (2000-2002) Division Basic Stores (ROA) SAMS CLUB (ROA) OVERSEAS (ROA) 2002 7.4% (47.1%) 3.5% (26.0%) 4.1% (15.5%) Operating Margins 2001 8.0% 2000 8.0%

3.5%

3.4%

3.5%

3.6%

Here is evidence AGAINST WMT as a big, efficient juggernaut. Competitive advantage is relative to competition. WALMART STORES COMPETITIVE ADVANTAGES REGIONAL ECONOMIES OF SCALE 2002 Drug Stores Walgreens CVS Rite Aid GROCERY STORES Winn-Dixie Kroger Safeway Albertson Operating Margin 6.7% 6.3% 3.0% Ret. On Capital 16.3% 12.5% NMF Ret. On Equity 16.3% 14.0% NMF Return on Equity 19.2% 32.0% 26.0% 14.0%

Ret. On Capital 13.3% 13.0% 12.0% 9.5%

OTHER GEOGRAPHIC CONCENTRATION HISTORIES Ethan Allen Nebraska Furniture Mart Best Co.

Retail the Risks K-Mart History YEAR 1968 1975 1982 1988 1992 1999 RETURN ON SALES 5.6% 6.0% 2.5% 4.6% 3.8% Bankrupt RETURN ON EQUITY 17.3% 19.8% 10.9% 18.2% 13.7%

Retail The Risks Big Box Stores Price Decline Peak-TO-2002 52% 78% 57% 63% 70% 91% 15%

PETS SMART TOYS R US BARNES & NOBLE BORDERS HOME DEPOT CIRCUIT CITY BED BATH AND BEYOND

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