Economic Analysis of a Domestic Firm (Research Paper Sample)

Economic Analysis of a Domestic Firm
Name
Institution
Economic Analysis of a Domestic Firm: Walmart
Background
Walmart Inc. (NYSE: WMT) is an American company founded in 1945 and incorporated in 1969 (Banerejee, 2018). The company has its headquarters in Bentonville Arkansas. Walmart is the largest retail brand in the US and has been experiencing fast growth over the years. The company reported to have 11300 stores in 2019. The company also has many e-commerce websites across 27 countries serving about 27 million people per week. The company offers quality prices at low prices compared to their competition. The company also operates wholesales. It is composed of three segments including Walmart U.S., Walmart International, and Sam’s club. Its store includes supermarkets, warehouses, clubs, cash and carry stores, supercenters and discount stores. Walmart is classified under “Consumer Staples” GICS Sector , and “Foods and Staples Retailing” GICS Industry Group.
Products and Target Customers
Walmart offers products such as pet supplies, baby products, consumables, alcoholic and non-alcoholic beverages. It also stocks dry grocery, frozen foods, snacks, dairy, meat, produce, and bakery. It also offers product such as furniture, apparel, tools and power equipment, appliances, software, video games, gift cards and accessories. The company also offers financial services such as money orders, check cashing and bill payment. Walmart employs over 2.3 million people. Out of the 2.3 million employees, 1.5 million are in the United States while about 0.8 million work around the world.
Due to its high-quality products at low prices, Walmart targets everyday people who aim to save some money from any of the many products offered by the store. Walmart clearly states its intention in its mission which is to help people all over the world to save money and improve their living standards wherever they are at any time both in their retail stores and even through online shopping. In their vision they identify their target market as “busy families”. Its vision states ‘make every day easier for busy families’. The company, therefore, targets to make shopping cheap and convenient.
Change in Demand Curve
A shift in demand curve occurs when there is a change of demand that is caused by other factors other than a change in price (Balleer et al., 2020). A shift in the demand curve may be caused by changes in taste an increase or decrease in population, changes in income, a change in the prices of complement goods, or the expectation of changes in future conditions.
A shift in the supply curve occurs when the supply curve changes its position. The shift is caused by a change in the cost of producing the product. Cost may change due to changes in factors such as labor raw materials. When the cost of the product increases, then the product production decreases. This means that the products supply decreases at any given price. On the other hand, a decrees in the cost of producing the commodity means that more of the product is produced at any price. Such a change leads to more products being supplied and thus the prices also fall.
Elastic/Inelastic Demand
A product has an elastic demand if a change in the price of the commodity leads to a huge change in the quantity demanded. Elastic demand mainly occurs in products that are rarely purchased such as automobiles. Inelastic demand occurs when a product’s demand has little change resulting from a change in the prices of the product. Such products include necessities such as food. Walmart mainly sells products such as groceries and other food stuffs. Most of its products have inelastic demand while others such as furniture have elastic demand.
Profitability, Accounting Profit, and Economic Profit
Profit is among the most popularly used fiscal metrics for assessing an organization's financial health. Even while accounting profit and economic profit are comparable, there are substantial differences between the two measures. Accounting profit is often described as an organization 's net income or bottom line, and is usually the profit left over after all costs and expenses have been deducted from total income or sales (Karpac & Bartosova, 2020). Walmart's annual total revenue for 2020 was $523.96 billion, while its annual operating expenses were $503.396 billion, resulting in a net income of $20.564 billion, according to its income statement (Walmart Inc., 2020). Economic profit, also known as economic value, is the difference between revenues and expense together with capital costs. It is a metric of an organization's performance calculated by multiplying the difference between the return on invested capital (ROIC) and the cost of capital with the invested capital (Karpac & Bartosova, 2020). Walmart reported a net operating profit after taxes (NOPAT) of $ 18,200 million in fiscal year 2020, a cost of capital of 5.26 percent, invested capital of $167,329 million, and an economic profit of $9396 million (Walmart, Inc., 2020).
Costs Incurred and Nature of Costs
The cost of sales is Walmart's primary expense group. Besides the cost of sourced products from the retailer’s suppliers, the cost of sales also includes additional costs, and the main category is the cost of goods. Besides actual cost of products, there are also transportation costs that cover for supplier distribution to Walmart’s facilities, stores, and clubs; transportation of products from Walmart’s distribution facilities to the stores, clubs, and consumers; and warehousing for Sam’s Club sector and import distribution facilities. As per the Walmart's income statement for financial year 2020, the cost of sales was $394.6 billion (Walmart, Inc., 2020).
Another key group of expenses incurred by Walmart in operating its business worldwide is operating, selling, general, and administrative expenses. Excluding the cost of sales, these costs cover all of the corporation's operational expenses. Thus, Walmart incorporates most of the expense of warehousing and occupancy for the Walmart U.S. and International sections’ distribution centers in operating, selling, general and administrative costs. Walmart's operating, selling, general and administrative expenses for the financial year 2020 were $108,791 million (Walmart, Inc., 2020).
The retail industry is characterized by intense competition, and Amazon, in addition to actual retail outlets, is a major rival of Walmart. Walmart is an established, well-known brand. However, the corporation must invest in marketing efforts and promote its brand and products to increase demand and boost sales, and also retain its ability to influence consumer perception. Every year, the corporation spends a substantial amount of money on marketing and advertising. Walmart spent $3.7 billion on advertisements in fiscal 2020. (Walmart, Inc., 2020). Walmart is increasingly largely relying on digital advertising to promote sales and increase brand awareness. Additionally, the Tv and print media are relied upon by Walmart for advertisement.
Walmart had a variable cost element of $394,605 million in the fiscal year 2020 (which ended on January 31, 2021), which was comprised of $394,605 million in cost of sales. The fixed expenses element, which included operating, selling, general, and administrative expenses, was $108,791 million (Walmart, Inc., 2020). Variable expenses account for 77.4 percent of total costs, while fixed costs account for 22.6 percent. These percentages demonstrate that Walmart has a high variable cost and a low fixed cost.
Market Structure
The way various industries are categorized and differentiated depending on the level and nature of rivalry for items and services is referred to as market structure. Economists have identified the number, size, and size distribution of buyers and sellers, the level of differentiation, and the barriers of entering into the market as the most prevalent characteristics of market structure. Within the market structure, competition among companies is made actual. Accordingly, market structures comprise of the critical, minimal strategic environmental elements that affect the company’s decisions (Lбbaj, et al., 2017).
Companies sell goods and services under market structures. As mentioned earlier, a market structure highlights the fundamental characteristics of a market, inclusive of the number of companies, level of differentiation of their products, and the ease of marker entry and exit. Companies that operate under different market structures constitute different business sectors within an economy. The major market structures are Perfect competition, Monopoly, Monopolistic competition and Oligopoly, while the minor market structures are Duopoly and Monopsony (Lбbaj, et al., 2017).
Walmart Inc is best described as having an oligopolistic market structure. An oligopoly market structure is defined by the presence of only a few suppliers (Li, Xu, & Yang, 2017). Accordingly , Wal-Mart shares a market structure with Kmart, Kroger, Target, Lowe's, and Costco. Wal-Mart is the dominant corporation in terms of product production, with other corporations falling below its capacity. Walmart is an oligopoly since the retailing industry in the U.S. is dominated by only a few companies. Walmart competes in an industry that has just a few other companies that sell similar products as Walmart. Kmart, Kroger, Target, Lowe's, and Costco (Ahn & Chung, 2021) are some of the key competitors who have tried to carve out a position in the market.
Walmart's oligopoly includes a number of characteristics, including the fact that it imposes barriers to other companies entering the market, that it manufactures identical or...