Analysis of Wal-Mart Store Manager Compensation, Incentives and Benefit Plan

The store managers in Wal-Mart receive a fixed salary and incentives on an annual basis based on the performance of the store at the end of the company year. The benefits given to the store managers are in accordance with mandated laws such as paid sick leaves, vacation leaves, and medical insurance and retirement packages. The compensation, incentives and benefits of store managers appear to be substantial but needs to be enhanced in order to increase motivation and employee retention.

Store managers are young professionals who have competitive qualifications and the danger of turnover is very real especially if other companies offer them a more attractive compensation plan. Recommendations Motivating employees to increase productivity and prevent turnover can be done through an attractive compensation and benefits program. According to Maslow’s hierarchy of needs, one must resolve the lower level needs before going to the higher needs such as self-actualization (Aamodt, 2003). It is also evident that younger workers are in the process of fulfilling their basic needs such as security and belongingness needs.

Having a well paying job gives young store managers the security they need to build their own life, while having money at this age gives the store manager a sense of belongingness to his/her peer group that earns the same as he/she does. In this aspect, store managers would become motivated to increase productivity because it ensures that their needs are met (Rynes, Gerhart & Minette, 2004). Herzberg’s motivation-hygiene theory says that compensation and benefits are factors that lead to dissatisfaction and possibly turnover (Aamodt, 2003).

Developing an attractive compensation and benefits program would not lead to satisfaction but it would at least prevent dissatisfaction and turnover. Compensation, Incentives and Benefits Plan Compensation The fixed monthly salary of the store managers is not very competitive, some companies offer a higher salary and Wal-Mart should look into the possibility of increasing the amount of the fixed monthly salary. Increasing the store managers salaries would encourage employee retention because it will be competitive compared to other companies (Rynes, Gerhart & Minette, 2004). Find P ay for performance examples

Incentives The company should use flexible pay rate incentives for the store managers on a quarterly schedule rather annually. When the incentives are quarterly, the store managers would have a realistic time frame in which to increase productivity and performance. Moreover, the reward would be readily attained rather than wait for a whole year to receive it (Rynes, Gerhart & Parks, 2005). By being flexible, it would mean that the incentives would be based on a given criteria and the amount received would be based on the given criteria.

This would increase the motivation of store managers to work well since he/she has a reward at the end, and it would not result to discontent since a given amount of work is still rewarded. The store manager has the freedom to choose whether to work more and receive more incentives or to work less and receive fewer incentives. Benefits In addition to the benefits plan of the store managers, provisions for professional growth should also be included. Young professionals feel the need to grow and learn more about their jobs and functions and attending seminars, conferences and going to school answers these needs.

The store managers would likely value this benefit and would feel indebted to the company and inspire retention. The company could pay for the registration fees for seminars and workshops, shoulder travel expenses; it could also pay for the tuition fees of an employee pursuing a master’s degree. In order to protect the company’s interests store managers should be made to agree to a contract wherein they have to render return service for the educational benefits they availed (Benson, Finegold & Mohrman, 2004). References Aamodt, M. (2003). Applied Industrial/Organizational Psychology 4th ed.

Boston: Thompson/ Wadsworth Publishers. Benson, G. S. , Finegold, D. & Mohrman, S. A. (2004). You paid for the skills, now keep them: Tuition reimbursement and voluntary turnover. Academy of Management Journal, 47: 315-331. Rynes, S. L. , Gerhart, B. , & Minette, K. A. (2004). The importance of pay in employee motivation: Discrepancies between what people say and what people do. Human Resource Management, 43: 381-394. Rynes, S. L. , Gerhart, B. , & Parks, L. (2005). Personnel psychology: Performance evaluation and pay for performance. Annual Review of Psychology, 56: 571-600.

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Walmart globalization

Beware Consumers Walmart is undoubtedly the largest global retailer, employing more people than any army. The mega-store’s presence is known all around the world, with a reach stretching from the United States to China. According to the Public Broadcasting Service (PBS), Walmart is the largest employer in the United States, just after the Federal government, with over 925,000 employees. In addition, every year they hire 550,000 more employees, which is three times the number of people the U.S. military recruits every year. Even with such a huge army of employees, Walmart is known for some major problematic business practices—ones about which consumers should be made aware; ones that might motivate them to refrain from shopping at Walmart stores. They relate to their treatment of their workers in America; their use of sweatshops and child labor; and the low quality of their products.

Growing up, my mother worked for Walmart for the majority of my childhood. She had to work the night shift because it provided the higher rate of pay she needed to care for her five children. After having worked for Walmart for over ten years, my mother was still unable to secure any type of insurance coverage for our family. Reporting on Walmart’s employee compensation practices, PBS noted, “This pay scale places employees with families below the poverty line, with the majority of employees’ children qualifying for free lunch at school”. Another reason why it is hard for Walmart’s American employees to make ends meet is their inability to unionize in order to improve benefit packages, hourly pay and basic labor rights. PBS documented that new employees are oriented by being required to watch videotapes explaining the benefits of being an anti-union company. The videos explain an open door policy that would allow them to take their complaints beyond their supervisors to higher management. Without an advocacy group fighting for the workers’ rights, they are left without a voice. When the United Food and Commercial Workers tried to organize workers across the country to rally together for a change in the system, Walmart recruited labor experts for “coaching sessions” with the personnel who support unionization. Many employees filed complaints with the National Labor Relations Board, stating that these meetings were in fact intimidation sessions. Consumers would be wise to give a higher value to the well-being of our communities and our overall economy than to the small individual savings Walmart offers its customers. Consumers may get a discount at the cash register but their tax dollars are going toward providing government assistance programs like free and reduced lunch and public health clinics being utilized by poorly-paid Walmart employees and their families. In the end, we all pay for Walmart’s low prices before and after the shopping experience ends.

Not only does Walmart fail to provide their American employees with the proper labor conditions and means by which to provide for their families, but the roots of their global operation–their factory workers—are being denied adequate treatment and pay as well. The non-profit Institute for Global Labor and Human Rights (formerly known as the National Labor Committee) conducted a study in 2007 highlighting conditions at the Guangzhou Huanya Gift company—an ornament maker and Walmart supplier in China that employs 8,000 workers. The study found that some employees had been paid as little as 26 cents an hour–half the legal minimum wage in China. Additionally, employees in the spray paint department were found to have handled potentially dangerous chemicals with little or no protection, thus directly putting workers lives at risk. PBS noted that out of all Walmart’s goods, “85 percent of the stores’ items are made overseas, often in Third World sweatshops (Hutchinson)”. There have also been reports of child labor practices in Bangladesh in sweatshops that make products for Walmart and other well-known national brands. According to the Institute for Global Labor and Human Rights, over 200 children have been beaten, slapped and worked to the point of falling down from exhaustion. Some children are eleven years of age and younger and are worked on average twelve to fourteen hours per day for a meager six and a half cents per hour. These children are using their fingers and ashes to brush their teeth because they cannot afford to purchase even the most basic necessities required to be healthy individuals.

Under no circumstances should a child be forced to work in a factory. Purchasing goods at Walmart means that American consumers are directly contributing to the poor living conditions of workers and innocent children all around the world. The quality and safety of the countless products that are being manufactured at these sweatshops is also another major concern consumers should be aware of when purchasing anything at Walmart., t. Recently reported in a CBS news report,”Cadmium in children’s
jewelry became a public concern in January when the AP published the results of an investigation that showed items at Walmart’s and other large chains were as much as 91 percent of the toxic metal by weight.”(CBS News) This cheap children’s jewelry priced around the six dollar amount range, was of the Miley Cyrus brand. One can only imagine if this small piece of jewelry was found to be toxic to the consumer, then the people who are making this product in an unsafe, poorly compensated sweatshops are directly in contact with this metal on a regular basis. Looking at this serious health concern from the consumer’s point of view, it would be more health conscience when purchasing any product, it might end up taking lives or sending people to the hospital. Walmart’s prices are tempting, they claim to save you money. This comes with the cost of the livelihood and health of people all around the world. In other words, save money now, then at the end of the day people end up paying an increase in medical bills, public assistance programs and other tax based funded programs.

Works Cited

“Children Found Sewing Clothing For Walmart, Hanes & Other U.S. & European Companies – n National Labor Committee.” Harvard Law School. National Labor Committee, Web. 30 Apr 2013. . . “PBS – STORE WARS: Walmart Business

Practices.” PBS: Public Broadcasting Service. 1995. Web. 30 Apr 2013. .
“Senator Says Walmart Sells Products From Sweatshops – New York Times.” The New York Times – Breaking News, World News & Multimedia. NYTimes, 13 Dec 2007. Web. 30 Apr 2013. . “Walmart’s Miley Cyrus Jewelery Contains Cadmium.” CBS News. 15 Jun 2010. Web. 30 Apr 2013. < http://www.cbsnews.com/2100-204_162-6499679.html>.

Image:
fanpop.com. fanpop, 2003. Web.

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Mapping Compensation

Wall-Mart has a lot of these things in common with Microsoft, although Wall-Mart tries to soften the low at times by cushioning their employment strategy with a discount card or special privileges. Most of the employees at Wall-Mart start at around $8. 80 an hour, but that is just the base pay. If an employee does well within the company, over time, Wall-Mart will steadily increase the employee’s paycheck, depending on his or her performance of their duties that year. That is where the performance-based pay that is similar to Microsoft’s strategy comes into play. If an employee does well, he or she will get a raise.

If not, then the raise will not happen. A lot of people who try to work at places like Wall-Mart expect instant gratification for their accomplishments, but they will not receive it. An employee must work hard to earn the raise given to him or her at their time of the year. In Figure 2. 8 in the text, Microsoft and AS are compared and contrasted in a compensation map. On Microsoft’s side, there seems to be a very low focus on work/life balance, and the same can be said for Wall-Mart. If an employee accepts a shift at Wall- Mart, he or she had better show up, or risk being fired.

Wall-Mart is very strict in this area and does not accept a lot of excuses as far as frequent “family emergencies” or problems. From personal experience, if there is a death in the immediate family, Wall-Mart will ask for a copy of the death certificate as proof that the employee is not lying. This is a bit disturbing and could be considered offensive to some. Another mapping point from Figure 2. 8 is that Microsoft puts heavy emphasis on hierarchy. Wall-Mart and Microsoft share this part of their strategy. Wall-Mart believes that the basic employees receive Asia pay, while the managers and those on salary receive higher pay.

However, there is a “price” to being on salary versus being an hourly employee. As an hourly employee, the shift is worked within the hours specified, and the job is done. There are no established hours for salaried managers at Wall-Mart. Some have even worked 80 hour weeks in the busy season just to try to keep up with customer satisfaction. One thing that does differ between the two compensation strategies is that Microsoft puts a medium importance to sharing group success, while Wall-Marts strategy is more about the individual.

There are really no “groups” per SE within Wall- Mart’s hierarchy, just groups of employees who perform the same job. There is no focus on group success, or group incentives. There are the occasional pep talks in which the managers try to get their employees motivated, but really, the employees would rather be working than sitting in a meeting. It seems that Microsoft values group success, but it also values the individual as well, offering incentives for jobs performed. These companies seem very different from the outside, but when an inside look is taken, there are more molarities than can be seen from the outside.

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Ethical Obligation Of Wal-Mart

The focal point of the paper is to analyze if Wal-Mart have an ethical obligation to increase wages and improve health care benefits for its employees or is Wal-Mart simply an ethically legit business operating within a capitalistic society? For the purpose it is important to evaluate the background of the company and its wage structure incorporated with utilitarianism ethics. It can well be stated that Wal-Mart is a retail giant. According to walmartfacts. com, Wal-Mart operates over 3,800 facilities in the United States and more than 2,600 facilities overseas.

More than 176 million customers per week shop at Wal-Mart. It employs over 1. 8 million associates worldwide, making the company the largest private employer in the United States. For the fiscal quarter ending in January 2006, Wal-Mart reported $312. 4 billion in sales and $3. 8 billion in net profit. In light of all this, Wal-Mart prides itself on its low prices – making products affordable to all, including the less well-off. (Data supplied by customer) Wal-Mart, however, has been the target of criticism. In 2003, for example, the company increased part-time employees from 20 percent to 40 percent.

Employees are required to be available 24 hours a day and on weekends. Wal-Mart spent $1. 3 billion of its $256 billion in sales in 2003 on employee health care to insure about 45 percent of its workforce (Costco insured 96 percent). Many Wal-Mart employees cannot afford Wal-Mart’s health care package. Finally, according to 2003 statistics, full-time employees make about $1,200 a month or $8 an hour, below the federal poverty level for a family of three (Union grocery workers earn approximately 30 percent more).

Full-time Wal-Mart employees who are not self-sufficient are encouraged by the company to go on food stamps. (Data supplied by customer) Under such conditions it could be stated that ethics are often called upon when making a decision, especially when the choices become a simple matter of right or wrong. In many cases, the easier choice is often the unethical one. So does that, in fact, make it wrong? With so many differing opinions on the subject, it is hard to say for sure. One particular view allows common ethics to be thrown by the wayside in order to achieve happiness for oneself.

The view, or way of life for some, is known as utilitarianism. It is the belief that good is whatever brings the greatest amount of happiness to the largest amount of people, thus meaning that those not included in the ‘largest amount of people’ will more than likely be left with some form of pain. That, in a broader view, is essentially what utilitarianism is – pleasure versus pain. Actions are right if they promote happiness and are wrong if they produce the reverse of happiness—not just the happiness of the performer of the action but also that of everyone affected by it.

Through the years the theory has been changed to simply “the greatest happiness principle”, so as not to pit one human against another in order to achieve their own personal happiness. (Dollard, 89-92) The utilitarian view could absolutely affect the way in which a person makes their important decisions. Sometimes it is a matter of who should be happy when all is said and done – the decision-maker, or those affected by the decision? That, as hard as it may be, is up to whoever is dealing with the problem. Whether utilitarianism is ethical or not is a matter of opinion.

If the utilitarian ideas are used by a moral-minded intelligent person, then it could be considered ethical, and even just. The bottom line is that it is extremely important to have ethical judgment in all decision making processes. No matter what views are taken, an ethical side to it can always be found. As seen with utilitarianism, some acts can be deemed unethical, while others are ethical because they do what is best for all involved. Utilitarian decision making means that the happiness of the greatest amount of people involved will be the reason for the final outcome.

That, paired with moral thinking, creates ethical decision making. Under such conditions it could be stated that the influence of ethics is very relevant in decision making in this modern world of business environment. However, it should be remembered and it is an extremely notable point that under these circumstances of the Wal-Mart there was a significant change in another sector of employment. It is found and has been reported that within this time frame the agreement of employment under the head of individual contract has risen in a considerable number.

This suggests that there is a considerable rise in the context of pay per performances and there is rather a utilitarian perspective in the context of employment. That way this method of contact system with an individual has given birth to a system that evolved on greater and direct communication system or method with the top management and the employee. This is another excellent example of the usage of the term unitary mode where the details of each employee is monitored by the management system without the intervention of any third parties like the trade union or the labor union or any other similar employee beneficial groups.

This example of the term unitary mode defines a method where the administration hold the key to any and every employee by treating them a singular number thereby cutting down the enforcement criteria of the individual without hampering the area of that individual’s responsibility towards the organization. In other words the employee would be liable for each and every function that is imposed on him but on the other hand the organization or the administration would hold a limited liability towards that individual. (Fletcher, 188)

Furthermore, it should be added in the context of the above mentioned formulation and implementation of the utilitarian perspective, that while the individual is regularly judged by the dint of individual feedback process and assessment of individual employee attitude, it should be remembered that in the same context and under the same time frame the programs like joint decision making declined in a struck contrast but all in all it should be taken into account that all these approach are in the direction towards a better formation of utilitarian perspective and the Wal-Mart managers are highly successful in this regard.

However it should be state that labor has been a major sector of problem in many industries over a long period of time and measures had been taken in behalf of this variable by the dint of different means and it could be ascertained that utilitarian perspective is one such method to solve this problem. It should be remembered that this technique of utilitarian perspective was implemented in the Wal-Mart scenario as a calculated move and this remains as a philosophy and a principal in the Wal-Mart context of the business plan. (Kar, 145)

Therefore it is obvious that steps relating to utilitarianism are sometimes obvious and these obvious steps are taken into account by the industry and its managers to the extreme by transforming them into well defined criteria of formulated principals. Thus, in a way, the statement made by several studies confirming that Wal-Mart managers generally hold to a strongly utilitarianism perspective on employment relations in the Wal-Mart workplace is basically true but at the same context it should be stated that as calculated measures the outlook of utilitarianism perspective on employment relations is a result out of need.

However, it should be mentioned that this perspective is quite appropriate for an understanding of relations between employers and the workforce in contemporary US workplaces as this principal of utilitarianism perspective on employment relations is the usual norm and it is latently backed by the government. (King, 126) In conclusion it should be stated in this context that Utilitarianism represents all ethical theories where the goal is maximization of some measure of goodness. These are outcome-oriented ethics where goodness is measured by its results.

Commandments of God are ethical theories that accept some higher power as their source. It is self-evident that a major weakness of these theories is disagreement about just what it is that God has commanded. In this context it could be stated that to sum it up- it would be very relevant to state that in our all utilitarian materialistic market economy driven needs of urban life the advertisements play a vital role and salary structure and Wal-Mart payment methods are an integral part of it.

Thus the method taken by Wal-Mart can always be stated as an ethical company and it has no obligation to raise the payment in favor of the workers. It would be wrong to address the company as ‘simply an ethically legit business operating within a capitalistic society’ because under capitalist economy every dollar saved is every dollar earned and not dollar ever come cheap. Thus Wal-Mart can raise the pay if it wishes but there is no hike of payment the company would not be responsible and should not be charged with ethical obligation as per as utilitarian materialistic point of view is concerned.

Works Sited:

Dollard, John; Modern Industries in the United States: A look into Tomorrow. New Haven and London: Yale University Press. 2006 Fletcher, Robert. Art of Corporate War: Beliefs and Knowledge; Believing and Knowing. Christchurch: Howard & Price. 2006 Kar, Pranab; Modern American Super Giants; Kolkata: Dasgupta & Chatterjee 2005 King, Herbert. Business Today Vol. IV Plymouth: HBT & Brooks Ltd. 2005 Lamb, Davis. Cult to Culture: The Development of Civilization on the Strategic Strata. Wellington: National Book Trust. 2004.

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ANNUAL REPORT COMPARISON: WAL-MART and KROGER

Table of contents

ANNUAL REPORT COMPARISON: WAL-MART and KROGER

Name of Retailer
Components

2009 Annual Report (US $/in millions)
2010 Annual Report (US $/ in millions)
Increase (by Net Sales/in US $ millions)

Wal-Mart Stores Inc.

  1. Net Sales
    404,374.0
    408,214.0
    3, 840.0
  2. Cost of Good Sold
    304, 056.0
    304, 657.0
  3. Gross Margin
    97, 031.0
    100, 389.0
  4. Operating Expenses
    77, 520.0
    79,607.0
  5.  Gross Profit/ Loss
    13,400.0
    14, 335.0
  • (52 weeks)
  • (52 weeks)

Kroger Co.

  1. Net  Sales
    76, 148.0
    76, 733.0
    585.0
  2. Cost of Good Sold
    58, 544.0
    58, 958.0
  3. Gross Margin
    17, 604.0
    17, 775.0
  4. Operating Expenses
    13, 709.0
    14, 046.0
  5. Gross Profit/ Loss (0)
    1,249.0
    70.0

Wal-Mart Stores Inc., one of the Top 100 Retailers in 2009 and the world’s largest retailer, outlined the company’s progress with respect to social responsibility measures, labor conditions, emissions reductions, and energy efficiency. Relatively comparing the company’s performance from 2009 to 2010, net sales and gross profit/net income in 2009 (404,374.0 and 77, 520.0 respectively) showed a considerable increase as maximum control of Operating Expenses (Selling/Administrative) was continuously monitored. It respectively increased to 408,214.0 and 14, 335.0 the following year (Wal-Mart Stores Inc: Financial Statement). In 2010, Wal-Mart’s sustainability efforts were focused on its sustainability goals overseas. This includes addressing problems encountered by every major particular geographic area, ensuring fleet efficiency, and maintaining energy-efficient superstores. This allowed the company to save 30 percent of the company’s total energy consumption which minimized operating expenses. Sustainability efforts by the company started in 2005 (continuously adding real value to the current business). This includes the company’s transition to renewable energy sources (Global Sustainability Report”; Wal-Mart Corporate).

New products and packaging methods have become available as the company continuously sends its waste to recycling facilities. The increase in gross profit is obviously attributed to the company’s intense regulation of its operating expenses. The lesser operating expense there is, the higher gross profit one may expect; however, this is still subject to subsequent deductions such as minority interest, extraordinary items, U.S. GAAP Adjustment, equity in affiliates, etc.) Kroger Co.’s net sales also increased between 2009 and 2010 under a 52-week period length; however, its minority interest appeared higher in 2010 relative to 2009. This explains why the company’s net income in 2010 (70.0) is way lower than in 2009 (1,249.0).

Reference

  1. “Wal-Mart Stores Inc: Financial Statement”. MSN: Money.  Publication: Income Statement.
  2. “Kroger Co: Financial Statement”; MSN; Publication: Income Statement
  3. BC Upham; (2010). “Wal-Mart Releases 2010 Sustainability Report”; Article.
  4. “Global Sustainability Report”; Wal-Mart Corporate

 

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Employee Pseudo-Benefits

Lieff Cabraser represents separate classes of hourly wage earners at Wal-Mart in the States of Washington and New York who allegedly have been forced to work “off-the-clock” which obviously work without pay. The plaintiffs for such cases are current and former Wal-Mart employees who claim that Wal-Mart has violated state wage and hour laws. Wal-Mart’s alleged misconduct drew a plethora of opinions among lobbyists. The lawsuits in New York and Washington charge that Wal-Mart, the self-proclaimed fastest growing and largest private employer in the United States, has systematically avoided paying employees their full, earned wages.

Wal-Mart provides a rather perverse set of incentives for managers to lower overhead costs, the largest component of which is employee payroll, by offering financial compensation and bonuses (www. lieffcabraser. com/wal-mart. html). Managers make under-staff projects and Wal-Mart stores in general. These efforts force employees to work off-the-clock and through lunch and rest breaks, which is deemed unethical and not apt for an employer to abuse its employees. Managers always pressure employees to complete tasks, while refusing to permit employees to stay on-the-clock for the full amount of time it takes to accomplish their duties.

The class action lawsuits include specific allegations that Wal-Mart: • “Understaff’s” its stores and pressures employees to complete assignments while refusing to permit employees to stay on-the-clock for the time it takes to accomplish them; • Denies pay for time worked off-the-clock, through meal or rest breaks, and overtime; and • Keeps employees locked in Wal-Mart stores after closing and requires that they remain there after clocking out until store managers have visited every department. (Longo, Donald, “Wal-Mart hands CEO crown to Glass – David Glass. ” Discount Store News, February 15, 1988)

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Wal-Mart Case 19: Target

Table of contents

This case provides insight into how capital budgeting decisions are made and the factors that influence the decision making process of large corporations. Specifically, the case centers on the capital expenditure meeting for the Target Corporation, which is one of the top ten retailers in the United States. All corporations have some version of this meeting. The goal of the meeting is to determine what capital expenditure projects the company will undertake in the future to promote growth. Below is our analysis of the Target Corporation’s top five capital budgeting requests (CPR) up for debate. We will first compare Target’s business model with its two top competitors, Wal-Mart and Costco, then we will analyze Target’s capital budgeting process, explain the importance of dashboards to managers, explain how we decided which CPRs to accept, discuss the different hurdle rates Target uses and discuss whether financing CPRs through debt or equity is a good decision for Target in the future.

Business Model Comparison

Target’s main competitors are Wal-Mart and Costco. While other retail stores such as Sears, JCPenney and Meijer’s create competition, Wal-Mart and Costco have similarities with Target’s business strategy and thus investment analyst tend to compare these three firms regularly. Target’s mission is “to make Target your preferred shopping destination in all channels by delivering outstanding value, continuous innovation and exceptional guest experiences by consistently fulfilling our  The store’s business model centers on appealing to style-conscious consumers by offering unique assortments of home and apparel items, while competitively pricing on items unique to both Wal-Mart and Target. They also call all customers guests to make the shopping experience more comfortable.

Target prefers not to fund any CPRs through debt or equity. Due to massive advertising campaigns the round bulls-eye logo is one of the most recognized logos in the United States (U.S.). Target’s business model focuses on its’ core customer base of college-educated women, with children at home who are more affluent than typical Wal-Mart customers. Wal-Mart’s business model is somewhat similar, but centers on “saving people money so they can live better” at “every-day low prices”. They also call all employees associates, which is designed to increase employee morale and create a more professional shopping experience.

Wal-Mart stores are set up similar to Target, operate in the same trade areas and have similar merchandise. Even though Wal-Mart’s earnings surpass all other retailers by a substantial amount they are still one of Target’s top competitors. The differences lie in Wal-Mart’s focus on “everyday low prices” and Target’s focus on appealing to style-conscious consumers while also pricing competitively. While Wal-Mart’s business strategy has proven to earn more, Target’s strategy has proven to be very successful as well. Costco on the other hand has gone a different route with its business strategy, but attracts the same type of consumers Target does.

Costco is “a membership warehouse club, dedicated to bringing [their] members the best possible prices on quality brand-name merchandise. Costco provides a wide selection of merchandise, plus the convenience of specialty departments and exclusive member services, all designed to make your shopping experience a pleasurable one”. The main difference in their business strategy compared to Target’s is the membership-fee format, which requires customers to pay a fee for membership, which in turn allows them access to discounted retail items. Both Target and Costco’s business strategies overlap in the area of delivering a pleasurable shopping experience along with low prices, and have led to similar financial earnings. While Costco, Wal-Mart and Target have overlapping business strategies major differences exist which set each company apart and help them to stay competitive in the ever-changing retail industry.

Target’s Capital Budgeting Process

Capital budgeting is the process of evaluating and selecting long-term investment. For target, this process is meant to be rigorous because capital investment has significant impact on the short-term and long-term profitability of the company.

Targets Capital Budgeting process includes:

  1. Proposals are prepared. CPRs (Capital Project Requests) go through a 12-24 months of development prior to being forwarded to the CEC for consideration. These proposals vary widely from remodeling, relocating, rebuilding, and closing existing stores.
  2. Projects are then partitioned because not all projects that are proposed as investment opportunities can actually be profitable. It’s at this point that the CEC (Capital Expenditure Committee) reviews the proposed CPRs.
  3. Projects in excess of $100,000 are evaluated by the CEC; however projects larger than $50 million, require approval through the board of directors.
  4. Also in situations where the CEC cannot agree, the CEO will make the final decision. Management’s highest priority in their decision-making process was to continue its growth by opening approximately 100 stores per year in the United States and maintain a positive brand image. Their strategy to maintain growth was not necessarily to focus on low prices such as Wal-Mart; however, their strategy was to consider the customer’s shopping experience as a whole.

This is definitely in line with the company’s business and financial objectives because according to the article, projects also needed to meet a variety of financial objectives, starting with providing a suitable financial return. The measurement of this is NPV, IRR, projected profit, and earning per share impacts, total investment size, impact on sales of other nearby Target stores, and the sensitivity of to sales variations. Therefore, when the CEC needed to make investment decisions, the financial objectives are the driving force in order to meet the 100 store per year goal as well as maintaining brand image.

There are both negative and positive aspects to Target’s capital-budgeting system. To begin, the main goal of Target’s management is to open approximately 100 stores every year; therefore, in the case of these new store proposals, a real estate manager assigned to that geographic region was responsible for the proposal from beginning to end as well as reviewing and presenting the proposal details. This is a logical approach because the real estate manager has a better understanding of the region in which a store would be open. For example, is the area very brand conscious or not? Does the region get a lot of foot traffic? Is the region growing rapidly and therefore, the area is a good candidate for a Super Target? This process would be similar to having a subject matter expert. The real estate manger should have a good understanding of what type of store would fit best in which region. However, as the article noted, there are expenditures that cannot be recovered if a project is rejected as well emotional sunk costs. According the finance theory, it says to accept all positive NPV projects.

Therefore, the CEC is in place to essentially eliminate projects even though they have a positive NPV. Two problems including an increasing marginal cost of capital and capital rationing occurs when not all positive NPVs are accepted. A higher cost of capital would appear to investors as risky and capital rationing places restrictions on the amount of new investments or projects. Although the restrictions on investments could be considered a negative aspect, it does have some possible positive results. For example, capital rationing is important in situations where if Target were to approve projects in excess of the budgeted amount, they would need to borrow money to fund the shortfall. Adding debt also increases the risks to shareholder. Nonetheless, not accepting all proposed projects with positive NPVs limits market capitalization and brad visibility.

It also appears that a significant amount of investment decisions are made by executive officers rather than the board of directors. This can lead to a variety of behaviors that could harm the firm. The CEC could avoid some difficult decision such as closing a store out of loyalty to others in the company. Also, the CEC could choose to reject risky positive NPV project to avoid looking bad if a project fails or the CEC could make the decision to pay too much in acquisitions. However, all of the CEC members have been with Target for a significant period of time. Each has a significant amount of experience that can aid in the decisions to either invest or not invest in a particular project. Sometimes, despite the numbers, experience is an intangible asset.

Importance of Dashboards

As a Target manager, the CPR dashboards are essential for understanding the risks and rewards each proposed request brings to the company. Each piece of information has been chosen to be part of the dashboard for a specific reason. The dashboards are separated into the following 8 sections plus graphs:

  1. Financial Summary
  2. Store Sensitivities
  3. P&L Summary
  4. Investment Detail
  5. Building Cost vs. Prototype
  6. Incentive Summary
  7. Demographics
  8. Comments

The Financial Summary section is included so managers can see how the proposed project compares with the prototype project. The following subsections are included:

  1. Total R&P Sales
  2. Incremental R&P Sales
  3. Investment
  4. Value

For example under the subsection Total R&P Sales, the 1st year 2006 equivalent for the project could be $27,000, if the B/(P) Proto column shows a negative amount this means the project’s 1st year 2006 equivalent is that much less than the prototype. If the number is positive the project is expected to earn more sales than the prototype. This section lets managers quickly see the projected sales, the amount of investment required and the overall value compared with the prototype.

The Store Sensitivities section is included to provide an overview of the project’s possible hurdle adjustment, risks/opportunities and variance to prototype. The hurdle adjustment shows managers how sales, gross margin and construction costs could impact the Net Present Value (NPV) and Internal Rate of Return (IRR) values with respect to the prototype amounts. The Risk/Opportunity section shows managers the impact of a possible decrease in gross margins, increases in construction costs, market fluctuation impacts (changing market margins, wage rates, etc.) and a 10% increase or decrease in sales.

Depending upon the level of risk associated with the project and the likely hood of these risks coming to fruition, managers could decide the risks are too high even if a project has a positive NPV. The P&L Summary explains the impact on earnings before interest and taxes (EBIT). The Investment Detail section is included because it shows specific investment details for the CPR and allows managers to compare these with other current and past CPRs to see if the investment is in line with them. For example, the PSF line item allows managers to see the cost impacts of different project locations. The next section, Building Costs versus Prototype Costs, is included to provide managers with a quick comparison of the projects expected construction costs compared to the prototype costs. In some cases managers may question why building costs are different from past projects and ask for an explanation even though the NPV value is positive. This section helps managers to avoid setting a new precedence for the amount of building costs allowed. The third to last section, Incentive Summary, gives managers insight into additional fees the project may include. The last two sections provide basic demographic details and any additional comments the project leads may want managers to know.

The demographic details help managers to align the location of projects with the overall corporate vision and business strategy for the future. They also help managers see whether future growth, for example a Target supercenter, is possible. The comments section allows the project lead to included data not specifically addressed in other sections of the dashboard because each project is unique and has its own set of risk and rewards. This comment section is very important as it can provide additional details to mangers that could change their initial decision on the project. For example, a project with a negative NPV could be accepted if the opportunities and rewards explained in the comments section outweigh the quantitative data presented. Lastly, four graphs are included so that managers can quickly see comparisons without having to delve into the specific data; the first is a graphical representation of NPV & Investment of the project versus the prototype and the second is project sales versus prototype sales. The third and fourth graphs show how Target stores compare percentage wise with Wal-Mart stores, both regular and supercenters, in a particular area. This aids mangers by helping them decide what type of store would be best suited to compete against Wal-Mart.

The main quantitative figure managers rely on is the NPV. IRR is also included on the dashboard, but can conflict with the NPV results. IRR is included because it forces managers to weigh all aspects of the project and not simply rely on what the NPV value says. While NPV is the most widely used figure for making investment decisions we think other tools should at least be considered. While NPV takes into account all future cash flows, the time value of money (TVM), the riskiness of cash flows and is an objective benchmark, there are negatives associated with it. Some of the negatives include fluctuations in the weighted average cost of capital (WACC), it ignores liquidity risks, ignores unequal project lives and ignores profit margin. In Target’s case most of the CPRs are for new stores, which most likely have slight fluctuations in project life. While managers see the numbers in comparison to a prototype we believe adding an Equivalent Annual Annuity (EAA) figure and Profitability Index (PI) would be beneficial.

EAA is similar to NPV, but takes into account unequal project lives and partial liquidity risks. It’s reasonable to assume each proposed project’s life would never match exactly and thus having this EAA figure would allow for a better comparison of each project. PI compares profits to costs and while not necessarily a figure to solely base decisions on it would provide managers with a quick look at how profits of a project compare with their costs. If profits do not surpass costs substantially this could signal problems in the future. Other tools such as payback, discounted payback and modified IRR should be computed, but only at lower levels of management. Management should be prepared to provide these figures if for some reason corporate management asks for them during their evaluation.

Analysis of CPR’s

NPV and IRR

Both the NPV and IRR are strong for Gopher Place. The NPV is positive and above the prototype numbers. The IRR for the store is at 12.7% which is above the 9% used to calculate NPV for the store. Also the IRR for credit is 8.1% which is above the 4% used to calculate the NPV for credit. For Whalen Court, IRR is strong with both store and credit IRR over the cost used to determine NPV. NPV is less that the prototype NPV by about 3k in the store but greater by about 7k in credit. However NPV and IRR are both low in terms of investment. Because this project is such a unique one, it’s hard to use the prototype as an accurate benchmark. For Goldie’s Square, NPV is weak compared to the prototype store’s NPV below almost $20,000 and IRR for the store is also weak at 8.1%. Although the NPV and IRR’s are weak this may still be a good investment when considering competition and brand awareness. NPV is positive and IRR is also above the rates used to calculate NPV for the Stadium Remodel.

Size of the project

Gopher Place would be a P04 store around 127,000 square feet. There would be an initial investment of $23.0 million which is higher than the prototype numbers. Whalen place is a large project with a 170,000 square foot store requiring $119.0 million in investment. The store would be a unique single story store in a major urban area. The Barn would also be a P04 store around 126,000 square feet requiring a $13.0 million investment. This store would be a superstore at 170,000 square feet and an investment of $24.0 million. Goldie’s Square would be a SuperTarget at 170,000 square feet and an investment of $24.0 million. Stadium Remodel would be a $17.0 million investment to remodel the interior of a SuperTarget.

Cannibalization of other stores’ sales

Gopher Place would have a high cannibalism rate because currently there are five other Target stores in the Gopherville vicinity. It is estimated that 19% of the new store’s sales would come from other Target stores. There are currently 45 other stores in the Whalen Court market however there are none like this potential store in the center of the large metropolitan area. It is not estimated that other stores would lose any sales because of the new store.

There would be no cannibalization with The Barn as the closet Target store is 80 miles away. There would be some cannibalization of other stores with Goldie’s Square. Currently there are 12 other stores in the market with a plan to have 24 in the future. There would be transfer sales of three nearby stores. With the Stadium Remodel, there would be no cannibalization of other store since this is just an interior remodel.

Store sensitivities

Gopher Place’s sensitivity analysis for the hurdle adjustment is relatively strong. Sales could decrease by 5.3%, gross margin could decrease by 0.72, and construction costs could increase by 5k and still reach the prototypes NPV. Also the risk/opportunities section is strong compared to the other CPR with an 10% decrease of sales lowering NPV by 4k and 1 pp GM decline lowering NPV by 3k. Both of these are relativity low compared to the other CPRs. For Whalen Court, both the hurdle adjustment and risk/opportunity sensitivity analysis are both weak when compared to the prototype. As stated before since this is such a unique project it’s hard to have an accurate benchmark to compare to. Also the potential marketing benefit could outweigh any initial loss. BARN. All areas of the hurdle adjustment for Goldie’s Court would need to be stronger in order to reach the NPV of the prototype. Looking at the market specific conditions NPV would increase by $6,000. The risk/opportunities seem reasonable for the Stadium Remodel. There are no benchmarks to compare with making it difficult to make an accurate judgment.

Variance to prototype

All areas are strong with the variance to the prototype except for the non-land investment which brings a 4.7k negative variance for Gopher Place. For Whalen Court, the only store variance to prototype is sales which bring a positive variance of almost $100,000. BARN. The only strong indicator for Goldie’s Court would be the land investment being a positive $1,500 to the prototype. Not applicable for the Stadium Remodel.

Customer demographics

Currently there is a small population for the amount of stores in the Gopher Place area at only 70k but there is expected to be a 27% increase over the next five years. Also the median income is higher than the other areas in which a CPR is being considered. A higher income population is more likely to shop at Target than at Wal-Mart, as Target markets to these types of consumers. For Whalen Court, the strong points are the customer demographics is the large population size and large percentage of college educated consumers. The Barn’s customer base has a lower income with a small population growth projected for the next five years. There are strong customer demographics with a large population and an estimated population growth of 16% over the next five years for Goldie’s Court. Also about a fourth of the population has a college education. There is a high median income and a large percentage of consumers hold a college degree in the Stadium Remodel area.

Brand-awareness impact

The consumers in the Gopherville area are already aware of the Target Brand with five other stores in the area. The potential brand awareness is the strongest attribute for the Whalen Court project. Being located in a large urban area provides advertising to any passersby.

The Barn would be a new store entering a new market. Increasing brand awareness is one of the strongest components of the Goldie’s Court project. The store would be going in a new area where many competitors will also be. A remodel would certainly help the brand awareness in the Stadium Remodel area but more importantly no remodel would serious damage the brand in the affluent family-oriented area. After analyzing the different aspects of the dashboard for each CPR, we can come to the conclusion that each CPR has its pros and cons.

Looking at each CPR individual, they each provide value to the company. If possible all CPR’s should be should be accepted but this may not be realistic. So in order to choose which CPR should be accepted comes down to which pros are more important and which cons can be accepted for Target. For example, since Target’s stock price has been declining the company may want to consider which projects will bring them short term financial goals in order to capitalize on their main goal: maximize profits for the shareholders. So looking at some financial indicators such as NPV Whalen Court, and The Barn provide the biggest NPV and the smallest negative impact on the first years EBIT. If the company was more focused on providing more long term growth, they would want to invest in the CPR’s that would improve their brand image such as the Stadium Remodel and Glodie’s Square. It’s difficult to determine which CPR’s should be accepted without knowing the specific short and long term objectives and goals for the company.

Hurdle Rates

There are several reasons why Target would use different hurdle rates when considering multiple capital expenditure requests across a multitude of different project types. In this case, Target uses a hurdle rate of 9% for stores and 4% for credit cards. This number represents the baseline minimum that Target expects a new store project to have an IRR of greater than 9%, and for credit cards, the IRR needs to be greater than 4%. One of the reasons is that stores represent a far greater economic investment in order to pursue the project and expand the company by creating a new one. In order to have a functioning store land needs to be bought, a building needs to be constructed and inventory needs to be purchased for store shelves along with all the human resources that will need to be hired to manage and run the daily operations of the facility. All of these things represent continual fixed costs that are to be incurred by Target in the long term after opening the store.

The higher hurdle rate helps to give the company a more conservative estimate of what future WACC rates the company might incur. The credit cards would likely have a substantially smaller hurdle rate as they do not require substantial investments in operating capital, nor do they operate on a razor thin margin. The case mentioned that 14.9% of operating earnings came from the credit card division, making the division highly profitable. Even if the WACC for target was to increase 1-2%, the credit cards would still be a very profitable venture, while for a given store it could easily be make or break in regards to its profitability.

CPR’s with External Funding

As a member of the CEC, I would analyze what the cost of capital would be both considering both debt and equity in order to determine if any given project should be granted approval. Just because outside funding needs to be secured does not automatically mean that further capital projects need to all be rejected. External funding for projects is a great use of a company’s financial leverage in order to further advance the strategic objectives of the firm. It was explained within the case multiple times that the corporate strategy of Target is to expand operations, increase sales revenue, and enhance the brand image of the company.

It is important for the company to pursue expenditures which help to support these goals. Although additional debt or equity might have to be incurred to finance these projects, the cost of the additional capital should be used to adjust the standard calculations to ensure that the proper rates are used when calculating NPV, EAA etc. If the WACC for Target goes from 10% to 11% due to an added debt or equity load on the company, that could have a drastic effect as to if any given project would be accepted; especially if said project only has an IRR of 10.75%, for example.

Even though that initial example project might be rejected, there could very well be other projects that have an IRR of 11.5% or 12% that would still be very acceptable even with the higher WACC that Target would be incurring. Another thing to consider would be the WACC effect on CURRENT projects and operations of the firm. If the WACC goes from 10% to 11%, current outstanding projects and facilities could quickly go from being profitable to non-profitable, depending on how steep the NPV profile is for any given project. Lastly, it was stated within the case that there are financial statement considerations in regards to taking on additional debt to fund a new project.

If the funding requirements for the project are substantial, it can have a material effect on the income statements of the firm. Any substantial changes to the financial statements of the firm can have a large impact on the stock price, and as an executive in the company, the compensation I receive would likely be directly tied into stock performance, so I would personally have an incentive to not do anything that might have a strong adverse effect on the company’s shareholder return.

References

  1. Mission and Values. Target Brands, Inc., 2013. Web. 29 June 2013.
  2. Why Become a Member. Costco Wholesale Corporation, 2013. Web. 29 June 2013.

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