Walmart, Inc: Foreign Exchange Practices for Multinational Corporations.
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Walmart, Inc: Foreign Exchange Practices for Multinational Corporations.
Founded in 1962 by the famous American entrepreneur Sam Walton, Walmart has risen to the world’s biggest retailers. Walmart focused its operations in rural areas in its early stages, where they launched stiff competition against the existing retail giants like Kmart and Sears (Encyclopedia Britannica, 2020). The company then progressively grew over the years to explore other retailing formats like Walmart discount warehouses, Walmart supercentres, and Walmart groceries. Their versatile nature in providing retailing options hastily catapulted them to be one of the popular retailing brands across America. Moreso, Walmart placed a keen emphasis on customer attention, cost controls, and increased efficiency in their distribution networks. By the beginning of 1990, Walmart had asserted its presence in the American retail market enough to consider exploring cross-border trading activities. They went on an international retail acquisition spree that saw them buy out established retailers in other countries like Mexico, China, Canada, Germany, and the United Kingdom. Although Walmart used unorthodox means of debt acquisition in their expansion strategies, the risk paid off handsomely. Walmart doubled its sales with its global expansion plan. By 1999 the company was recognized as the world’s largest employer, and shortly afterward, in 2001, they were ranked as the largest corporation in the world.
Although their headquarters are in Bentonville, Arkansas, Walmart operates in over fifteen global markets, with over 4000 stores outside the United States accounting for over half of their total stores. Their ardent success in the global marketplace stems from the symbiotic relationship they create with suppliers worldwide. Suppliers are encouraged to engage with Walmart due to the high sales volumes Walmart stores offer to suppliers. According to Oded Shenkar (2016), Walmart has achieved unprecedented economies of scale. Its suppliers enjoy profits from the overall sales volume despite losing a small percentage of profitability per product. Walmart suppliers are likely to make more revenue overall compared to most other stores.
Walmart’s business internalization strategy has only asserted its dominance in the global retail market. On the flip side, for them to buy products from around the world, they have to deal with different currencies extensively. Insignificant changes in the daily foreign currency market pose significant impacts on Walmart’s recurring costs, which can, in turn, affect their profitability and that of their suppliers. A multinational corporation like Walmart needs foreign exchange for their cross-border operations of building premises, purchasing local products, paying salaries, and cashing out their profits. While multinational corporations have to buy and sell in different currencies, their focus is to avoid losses incurred from foreign exchanges, thereby manage their profits.
In a classic example of foreign exchange controversies, Walmart was reported to import goods worth $15 billion from China in the fiscal year ending 31st January 2004. The Walmart Company directly imported half of the $15 billion while the rest was imported indirectly by their suppliers. At the same time, their total sales reached $256 billion, with $209billion from sales in the United States. The situation depicts the famous US trade deficit with the Chinese Yuan’s de facto pegging to the US dollar (Flint, 2014). As a result, the Chinese Central Bank ends up with large reserves of the US dollar, which they use to buy treasury bonds in a move to inject back the US dollars back to the economy. Walmart bank accounts in other regions worldwide have to continually invest in US treasury bonds and stocks to correct the trade imbalance caused by their cross-border trading operations. The capital markets play a vital role in Walmart, carrying out their economic functions of directing their capital to the intended use worldwide.
References
Encyclopedia Britannica. (2020nd, June 12). Walmart Inc. Retrieved from Britannica: https://www.britannica.com/topic/Walmart
Flint, R. (2014). How Walmart Treads Heavily In Foreign Exchange Forest. The Wallstreet Journal, 1-12.
Shenkar, O. (2016). Global Alliances: The Secret of Size. Ohio: Fisher College of Buseiness.