Wal-Mart facing the Wall - Faith Barnes

    Over the last year, Wal-Mart has faced a decline in profits and is expecting a further decline in the coming year. Wal-Mart is going through great lengths to protect their companies’ profits in the long run. However, the short term results are declining profits.

    One of the ways, Wal-Mart is dealing with long term growth is that they are investing in human capital by hiring more workers and increasing the wage of their workers by one dollar. These changes will speed checkout lines and better stocked shelves.  As a result of these changes, Wal-Mart’s customers are spending more which in turn has increased their sales. Their opportunity cost is trading short term loss for long term profit. Only time will tell if this will pay off. 

   However, the addition of human capital is not the only reason that profits have dropped for Wal-Mart.  Currency fluctuations and low reimbursement for their pharmacy business has also eaten into their profits.  Another problem for Wal-Mart is competition from online stores like Amazon, dollar stores and their closest rival Target.  Wal-Mart has been investing in e-commerce to compete with online companies but this requires further capital.

    There has also been a demand for goods happening in the last month with items like clothes, furniture, building supplies and other everyday items. Because of competition and drop of profit Wal-Mart’s opportunity cost is not only higher wages but less marketing in return for lower prices.  They are sacrificing not only for the chance to gain more consumers and in return receive more profit. Competitors like Target are producing higher class items to attract a wealthier group of costumers by looking at their distribution efficiency. So to step up their game, Wal-Mart is moving their management system to one where they will be able to work faster to produce more efficiency in their stores. Hence, the opportunity cost for Wal-Mart is that their sacrificing some of their marketing to increase price cuts to beat out competitors like Target, who are known for having higher class items. By lowering their spending on marketing, which they really do not need because of how nationally known they are, they will gain money to lower their cost of items.

    While I applaud Wal-Mart’s move to invest in human capital, I cannot see how this would increase profit.  Faster lines and well stocked shelves may bring in more customers but ultimately Wal-Mart shoppers are attracted to the low prices.  Although, it is the goal of Wal-Mart to lower prices, I cannot see how they can do this with higher spending on wages.  Sacrificing more marketing is not going to be enough to keep prices low.