How Important Is Wal-Mart’s International Business?

by Trefis Team
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Wal-Mart
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Wal-Mart’s (NYSE:WMT) growth has been slow due to tough economic conditions in the U.S. Since the retailer already has an enormous customer base in the country, the domestic revenue growth is largely dependent on the growth in population, per-capita consumer spending and inflation. However, Wal-Mart’s international segment has grown much more quickly in recent years and is one of the main growth drivers going forward. Being a value focused retailer, Wal-Mart has gained acceptance in a number of emerging markets including Brazil, Mexico and China. In 2011, the retailer generated $125 billion in revenues and $33 billion in gross profits from its international business. [1]

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What Is The Importance Of International Business?

With its low price advantage and wide selection, Wal-Mart attracts customers in emerging economies and has gained retail market share in its main markets. For instance, during the last two quarters, every international region generated positive comparable store sales growth for Wal-Mart, with the main contribution coming from the U.K., Canada and Mexico. [1] Brazil, Mexico and China still remain Wal-Mart’s key focus areas for future growth, as they are among the largest emerging countries. In the last quarter, Mexico and Brazil’s revenues increased by 10% and 11% respectively, with their comparable store sales growing by about 5%.

Ever since the launch of its first international store in 1991, the revenue contribution from the international business has been increasing. In 2006, the international business accounted for about 22% of Wal-Mart’s overall revenues, which rose to 29% in 2011. [1] We expect this figure to reach 35% by the end of our forecast period. Additionally, revenues from its international business have increased at an annual rate of 15% over the past two years.

Due to this growth potential, Wal-Mart’s international business segment constitutes about 40% of the retailer’s value according to our estimates.

International Expansion Plans

Wal-Mart’s expansion in international markets has been considerably faster than its expansion in the U.S. The retailer currently operates around 6,000 international stores and has opened roughly 600 new stores annually over the past five years. Going forward, we expect Wal-Mart’s international growth to slow down slightly, but it will still remain significantly higher than its growth in the U.S. Wal-Mart is going ahead with different expansion plans for different regions.
Slowing Expansion To Build Strong FoundationAmid the strong performance, Wal-Mart is altering its expansion plans in Brazil, Mexico and China. The new plans include slowing down its store expansion in Brazil to build a strong foundation for comparable store sales growth and changes in its expansion strategy, leading to delays in store openings in Mexico. Furthermore, the retailer also lowered the number of new stores for China in the latter half of fiscal 2013. According to these plans, the new store square footage will be reduced by 50%, which is again aimed at improving the comparable store sales growth.
Aggressive Expansion In Canada – However, the retailer has planned an aggressive expansion for Canada for fiscal 2014, with 37 supercenters. The retailer will also be expanding its distribution network to support its expansion plans. For the current fiscal year i.e. 2013, Wal-Mart has planned 73 store projects, which is the largest annual expansion in Wal-Mart Canada’s history.
E-Commerce ExpansionWal-Mart is looking to expand its e-commerce in crucial markets such as the U.K., China and Brazil. It also acquired a major stake in Yihaodian, the China e-commerce retailer. This will position the retailer favorably in international markets.
Entering New Markets – Last Year, Wal-Mart also revealed plans to open stores in the second most populous country in the world, India, within the next two years. India provides a huge pool of value conscious customers, and we believe that Wal-Mart can use this to its advantage.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 5% to the market price.

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Notes:
  1. Wal-Mart’s SEC filings [] [] []
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