More Information about affiliation, research grants, conflict of interest and how to contact.
Economic Indicators and Wal-Mart Strategy
Introduction
Any business entity operates within a specific economic environment that significantly impacts its success and strategies. Thus, it is imperative for any organisation to conduct an in-depth analysis of its economic situation for successful strategy formulation. Economic indicators present a broad overview of an economy’s well-being. They are statistics about specific aspects of an economy, like unemployment rate, gross domestic product, consumer spending and inflation rate. These indicators not only reflect the health of an economy, but also serve as specific inputs to organizations to devise their investing strategy. This process of strategy formulation is understood taking an example of Wal-Mart as an organization.
The objective of this paper is to identify economic indicators that are relevant for Wal-Mart and explain why. Based on this analysis, the paper also attempts to outline a strategy for Wal-Mart with a goal to maximize revenue in future. The paper is divided into three sections. The first section of the paper identifies and analyses economic indicators that are relevant for Wal-Mart. The second section outlines a strategy for Wal-Mart to maximize its revenue. The third section concludes the paper.
Analysis of Economic Indicators
Some of the key economic indicators that are relevant for Wal-Mart are gross domestic product, consumer spending, unemployment rate, industrial production, consumer price index, money supply and consumer credit. The relevance of these economic indicators for Wal-Mart is discussed in this section.
Gross Domestic Product (GDP)
GDP is essentially the market value of all the goods and services that are made within a country during one year (A. Dawn Journal, 2010). It measures economic output of a nation; hence, it is a vital statistic in determining the economic health of a country. The United States reports world’s highest GDP, which is expected to grow at a rate of two per cent (Rapoza, 2012). The outlook of GDP growth in the United States is modest given the weakening of mortgage market, risk aversion due to global crisis and low global demand. This can also be attributed to reduced government spending. GDP is a pro-cyclical and coincident economic indicator (Moffatt, 2012). It is pro-cyclic because its movement, its peaks and its troughs are in the direction of economy. It is coincident because its movement is at the same time as that of the economy. GDP, as an economic indicator, is important for Wal-Mart as it helps estimate growth rate for the company. It also gives business outlook to the company. If outlook is positive, companies can invest further in infrastructural development. GDP also suggests standard of living of a nation. Higher GDP is usually associated with better standard of living.
Consumer Spending
Consumer spending is the sum total of consumption expenditure of all households in an economy. Like GDP, consumer spending is also pro-cyclical and coincident. Hence, consumer spending has also been impacted because of economic slowdown. The consumer spending is stalled in the United States and significant drop in household sentiments is reported (Kowalski, 2012). Uncertainty in the market conditions increase consumer propensity to save, rather than spending. Consumer spending, as an economic indicator, is important for Wal-Mart as it indicates consumer’s propensity to spend. If consumers are inclination to spending, the company can invest in expansion plans and earn profits.
Unemployment Rate
Unemployment rate is defined as the ratio of the unemployed workforce to total workforce, as a given point in time. Unlike GDP, it is a lagged and counter-cyclical statistic (Moffatt, 2012). It is a lagged indicator as it responds slowly to changes in economy. It is counter-cyclical because its direction of movement is opposite to economy’s direction of change. Thus, with an economic slowdown, unemployment rate increases gradually. Unemployment rate in the United States is stuck at over 8% for the longest stretch since 1948 (Zhang, 2012). Unemployment rate is an important indicator for Wal-Mart for two reasons. First, it directly impacts consumer spending. Low wages mean low consumer spending. Second, it can reduce a company’s manpower cost by downside wage corrections to market standards.
New Construction
New construction includes construction of new houses in an economy. This is a pro-cyclical leading economic indicator (Moffatt, 2012). Since it is a leading indicator, it is closely monitored by businesses. An upsurge in the demand for houses is a good indicator of improved economic health in near future. Thus, it is a relevant indicator for devising Wal-Mart strategy.
The construction of residential houses is showing a gradual upward trend since the end of the 2009 in the United States. A housing index developed by National Association of Home Builders of the US, that incorporates factors like the number of house sales, the expected sales in next six months and traffic of potential buyers, has been increasing since November 2011 (Economics and Statistics Administration, 2012).
Consumer price index (CPI)
CPI index is an indicator of inflation rate as it measures price changes in a basket of consumer goods and services. The information provided by this indicator is important for devising strategy for Wal-Mart in multiple ways. First, it helps companies in adjusting their estimated future profits against expected inflation rate. Second, it helps predict government’s fiscal and monetary policies. Third, it helps companies forecast their inflation-adjusted growth rates. The CPI for urban customers for April and May 2012, adjusting for seasonality, are 0% and -0.3% respectively (Bureau of Labor Statistics, 2012). This depicts a favorable scenario.
Money supply
As the name suggests, money supply is the total money in circulation as a given point in time in a given economy. It is another indicator of consumer confidence in the economy. The supply of money in the United States is showing an upward trend since the mid of 2010, which is a positive movement. It is a leading economic indicator, hence helps predict future economic scenario.
Consumer credit
Consumer credit is a lagging indicator and measures the amount of loan financed to households for purchase of consumer goods. The indicator is important for Wal-Mart as it depicts availability of funds with consumers to spend on purchase of consumer goods. Total consumer credit in the United States is also growing, after a dip that was noticed in 2009. This is a favorable scenario.
Outline of Wal-Mart’s Strategy
The analysis of information on economic indicators depicts that the economy is recovering from slowdown and moving towards expansion phase. Money supply and new construction are leading economic indicators. The housing index and supply of money in the economy are showing positive trend. The lagging indicators like consumer credit and price index are also showing favorable economic trends. However, consumer spending and unemployment rate are two inter-related economic indicators that are still not showing favorable signs.
The proposed strategy of revenue maximization for Wal-Mart has three important elements. First, Wal-Mart needs to expand in unchartered territories. Since, consumer spending is stalled; expansion strategies in existing markets will not yield results. It would be easier for Wal-Mart to compete with small retail shops in smaller towns and attract customers. Given the high unemployment rate, optimum wage rates can be decided to earn profits. The positive outlook of economy also supports further investments for expansion. Second, since the consumers currently have a propensity to save rather than spend, it is important to build marketing campaigns that focus on low daily prices on necessity products vis-à-vis competitors. Third, Wal-Mart needs to make arrangements with its suppliers to store products based on customer demand, rather than relationship with suppliers. This will help reduce inventory cost and avoid loss of sales due to unavailability of necessity products. Fourth, rather than having a bog store, Wal-Mart should focus on starting larger number of small stores for its expansion as it will be easier for people to travel to the stores.
Conclusion
The information from economic indicators cannot be interpreted in isolation. Each economic indicator conveys a piece of jigsaw puzzle and putting all the pieces together completes the picture. Thus, while some indicators convey that economy is slow, others display a positive outlook of economy in future. Summing up, the indicators reveal that the economy is trying to recover from recession and is moving towards expansion. This is a favorable for future investment. Hence, expansion strategy has been outlined for Wal-Mart to increase its revenue. Considering the low level of consumer spending, expansion in untapped smaller towns is suggested.
References
A. Dawn Journal (2010). What is GDP (Gross Domestic Product)? Retrieved from http://adawnjournal.com/2010/03/20/what-is-gdp-gross-domestic-product/
Bureau of Labor Statistics (2012). Consumer Price Index. Retrieved from http://www.bls.gov/cpi/
Economics and Statistics Administration (2012). Economic Indicator: New Residential Construction up in January 2012. Retrieved from http://www.esa.doc.gov/Blog/2012/02/16/economic-indicator-new-residential-construction-january-2012
Kowalski, Alex (2012). Consumer Spending In U.S. Stalls As Hiring Weakens: Economy. Retrieved from http://www.bloomberg.com/news/2012-06-29/u-s-consumer-spending-unchanged-in-may-weakest-in-six-months.html
Moffatt, Mike (2012). Some Important Economic Indicators: a Beginner’s Guide to Economic Indicators. Retrieved from http://economics.about.com/cs/businesscycles/a/economic_ind_2.htm
Rapoza, Kenneth (2012). IMF cuts U.S. growth forecast, Cites Smaller Gov’t. Retrieved from http://www.forbes.com/sites/kenrapoza/2012/07/03/imf-cuts-u-s-growth-forecast/
Zhang, Moran (2012). US Unemployment Rate Likely To Hold At 8.2% In June, With Little Job Growth Improvement. Retrieved from http://www.ibtimes.com/articles/358979/20120703/unemployment-rate-june-nonfarm-payroll-job.htm
