Wal-Mart (WMT 1.32%) is facing competition from almost every angle, and it seems like common knowledge that Amazon.com (AMZN -1.64%) is the biggest threat to the company's retail dominance. But what if I told you that Amazon isn't the biggest threat to Wal-Mart's success?
A closer look at the numbers shows that Wal-Mart's business in the U.S. is actually doing quite well despite Amazon getting all the headlines. Revenue isn't growing at breakneck speed, but operating income is growing steadily, and for a company the age and size of Wal-Mart, that's what we should expect. Instead, it's the international market where Wal-Mart is struggling the most.
Wal-Mart's international stores can look very different than what U.S. consumers are used to, as seen in this image of a Despensa Familiar store in Honduras shows. Source: Wal-Mart.
Wal-Mart's dominance doesn't translate overseas
Success seemed to come easily for Wal-Mart in the U.S. over the last five decades, but with the U.S. market saturated, the company has to look overseas for growth. The challenge is that the factors that drove Wal-Mart's success in the U.S. don't necessarily exist overseas. Consumers buy products differently, delivery networks aren't as efficient, and financial results are lagging as a result.
A look at Wal-Mart's operating income tells the broad story of the company's international struggles. As you can see below, operating income is actually rising consistently in the U.S. but it's falling internationally.
Even more concerning is that overseas operating margins have been falling consistently over the last three years. Again, this is exactly the opposite of what's taking place in the U.S.
Online sales may be hurting growth in the U.S., but they aren't taking anything out of margins or profits. It's struggles overseas that are hurting the bottom line, and Wal-Mart is dangerously close to seeing its international operations be a net negative for the company.
Wal-Mart giving up on international growth
Falling returns overseas are forcing Wal-Mart to prioritize where it's going to put in efforts to compete, and the number of options are dwindling because it's running into challenges in almost all of its major international markets.
The company agreed to sell 360 Vips restaurants in Mexico, which accounted for 14% of sales in Mexico last year. Financially, the emerging country's sales only rose 2.2%, and EBITDA was only up 3% before the asset sale, so it wasn't like the region was hot for Wal-Mart.
A Wal-Mart store in Argentina. Source: Wal-Mart.
Brazil is the third largest international region for Wal-Mart, and it's also one of the most frustrating for the company. Consumers seek out the lowest prices for goods and are willing to go to multiple stores to save money, which circumvents Wal-Mart's one-stop-shopping business plan. The company is planning to close at least 20 stores in the country as a result of losses, and store count was down by two already in 2013.
China is equally problematic, forcing Wal-Mart to change its strategy to fit local needs. At least 29 stores will be closed in the country as management adjusts to the desire for high-quality products, not low prices that locally imply cheapness. Fines from regulators for mislabeled meat, which is the responsibility of the retailer in China, have also given the company a black eye with Chinese consumers, and the company may never be a big player there.
Mexico, Brazil, and China are just the latest challenges for Wal-Mart and continue a long history of challenges internationally. Last year, the company ended a joint venture in India that was planned to open hundreds of superstores to serve over 1 billion consumers. Wal-Mart even took a $1 billion loss to sell 85 stores in Germany in 2006 and sold out of South Korea the same year.
Efficient distribution centers like this one are key to Wal-Mart's success, and this network is harder to replicate overseas. Source: Wal-Mart.
Why can't Wal-Mart compete around the globe?
Retail is a fickle business no matter where you're operating, but Wal-Mart is finding out that the factors that led to massive success in the U.S. haven't translated overseas.
Consumer preferences are different around the world for a variety of factors. Sometimes consumers look to shop at local retailers, they have a willingness to forgo one-stop shopping, and Wal-Mart can give off the appearance that "everyday low prices" are the same as selling cheap, unsafe products.
But operationally, Wal-Mart runs into an equal number of challenges. Buying power has always led to lower costs for Wal-Mart in the U.S., but integrating acquisitions and building a business from scratch makes that same scale harder to leverage overseas, as it's finding out in Brazil. That makes it difficult not only to negotiate price, but also to control inventory and pricing in the same efficient way it can domestically.
The secret sauce to Wal-Mart's low prices has always been an ability to leverage superior systems to lower working capital and operating costs. Without company or national infrastructure in many of these countries, Wal-Mart is facing an uphill battle to replicate that competitive advantage internationally.
Wal-Mart faces an uphill battle around the globe
It's clear that the international market isn't the growth engine Wal-Mart hoped it would be, and I don't see any of the challenges I point out above going away anytime soon.
Domestically, the challenges are just as big. The chart above shows that operating income and margins are up in the U.S. because Wal-Mart has been squeezing more profit from every dollar of sales, but sales are no longer growing. Same-store sales at Wal-Mart are down each quarter for the past year, and online sales are only going to add to that sales pressure. It's this top-line pressure that Wal-Mart is seeing from Amazon that isn't going away anytime soon.
No matter where you look, Wal-Mart is under fire, and I don't see how the company's fortunes will improve significantly in the future. It looks like Wal-Mart's best days are behind it.
