For the first several decades of its existence, Wal-Mart Stores (NYSE:WMT) kept a laser-like focus on offering the lowest prices possible. The retailer employed a number of tactics, including an ironclad grip on suppliers and strict cost controls, which allowed it to then funnel every penny possible back to a lower price tag. This strategy is what eventually propelled Wal-Mart to become the largest retailer in the world, eclipsing $500 billion in annual revenue.
However, in recent years, its dominant industry position has weakened, giving up significant ground to competitors like Costco, and its growth has stalled. Two key issues have popped up that Wal-Mart is finally addressing: theft and rising costs. In response, the company is doubling down on its efforts to get these problems under control, so that it can restore its position as the everyday low-price leader.
Here is why investors should cheer these developments.
Struggles with shrinkage
Theft is a surprisingly big issue for Wal-Mart. In fact, it is such a problem that the company recently reintroduced greeters in many of its stores for the implicit purpose of discouraging such behavior. Just three years ago, Wal-Mart had removed greeters from store entrances, so they could be redeployed throughout the store, helping customers and restocking shelves. Now, the retailer will also be employing what it calls "asset-protection customer specialists" who will check customer receipts.
The broader goal of these efforts is to reduce shoplifting -- what Wal-Mart refers to as "shrink" -- half of which occurs in groceries. The company has acknowledged it likely loses about 1% of its revenue in the U.S. to theft from both customers and employees.
While 1% might not sound devastating, when you consider the fact that U.S. revenue clocks in at about $300 billion, it is no small matter. During the most recent earnings call, U.S. CEO Greg Foran indicated that shrink was a primary contributor to gross margin declining 13 basis points.
In a recent interview with Reuters, Foran pointed out that even if the company could cut shrink by 10 basis points -- approximately $30 million annually -- it can put this back into competitive pricing for shoppers.
Getting tough with suppliers
Separately, Wal-Mart will begin charging fees to 10,000 of its suppliers in exchange for stocking their items and for warehousing inventory. This is a break from its historical practices when the company levied fees only for select partners, choosing to forgo the common industry practice and instead asking suppliers for their lowest possible prices.
As far as the specifics, Reuters reported on one instance where Wal-Mart wants to charge a food supplier a one-time 10% fee based on the value of inventory shipped, as well as a 1% fee to hold inventory in existing warehouses. Again, the goal of these new fees is to be able to yield lower costs for customers.
Rising costs are pressuring the margins as Wal-Mart begins to raise employee wages and increase investment in its e-commerce business. The company is spending $1 billion to lift the minimum starting wage for all hourly associates.
Wal-Mart is also building out its online business, which is a source of strength for the company. E-commerce sales jumped 17% globally last quarter with plenty of room for continued momentum there as it operates e-commerce sites in just 11 countries across the globe.
Back to the basics
If Wal-Mart is successful in reducing shrink and locking in more lucrative terms with its suppliers, the company can return to its original strategy and let low prices bring the customers into its stores.