Lesson 1. Opening Case: Why a Main Street Firm, Walmart, Is

Impacted by Foreign Exchange Fluctuations

Most people in North America are familiar with the name Walmart. It conjures up an

image of a gigantic, box-like store filled with a wide range of essential and nonessential

products. What's less known is that Walmart is the world's largest company, in terms of

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revenues, as ranked by the Fortune 500 in 2010. With $408 billion in sales, it operates in

fifteen global markets and has 4,343 stores outside of the United States, which amounts to

about 50 percent of its total stores. More than 700,000 people work for Walmart internationally.

With numbers like this, it's easy to see how important the global markets have become for this

company (Walmart Corporation, 2010).

Walmart's strength comes from the upper hand it has in its negotiations with suppliers

around the world. Suppliers are motivated to negotiate with Walmart because of the huge

sales volume the stores offer manufacturers. The business rationale for many suppliers is that

while they may lose a certain percentage of profitability per product, the overall sales volume

of an order from Walmart can make them far more money overall than orders from most other

stores. Walmart's purchasing professionals are known for being aggressive negotiators on

purchases and for extracting the best terms for the company (International Business, 2012).

In order to buy goods from around the world, Walmart has to deal extensively in

different currencies. Small changes in the daily foreign currency market can significantly

impact the costs for Walmart and in turn both its profitability and that of its global suppliers

(International Business, 2012).

A company like Walmart needs foreign exchange and capital for different reasons,

including the following common operational uses (International Business, 2012):

To build new stores, expand stores, or refurbish stores in a specific country

To purchase products locally by paying in local currencies or the US dollar, whichever

is cheaper and works to Walmart's advantage

To pay salaries and benefits for its local employees in each country as well as its

expatriate and global workforce

To take profits out of a country and either reinvest the money in another country or

market or save it and make profits from returns on investment

To illustrate this impact of foreign currency, let's look at the currency of China, the

renminbi (RMB), and its impact on a global business like Walmart. Many global analysts argue

that the Chinese government tries to keep the value of its currency low or cheap to help

promote exports. When the local RMB is valued cheaply or low, Chinese importers that buy

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foreign goods find that the prices are more expensive and higher (International Business,

2012).

However, Chinese exporters, those businesses that sell goods and services to foreign

buyers, find that sales increase because their prices are cheaper or lower for the foreign

buyers. Economists say that the Chinese government has intervened to keep the renminbi

cheap in order to keep Chinese exports cheap; this has led to a huge trade surplus with the

United States and most of the world. Each country tries to promote its exports to generate a

trade advantage or surplus in its favor. When China has a trade surplus, it means the other

country or countries are running trade deficits, which has "become an irritant to a lot of China's

trading partners and those who are competing with China to sell goods around the world"

(Barboza, 2010).

For Walmart, an American company, a cheap renminbi means that it takes fewer US

dollars to buy Chinese products. Walmart can then buy cheap Chinese products, add a small

profit margin, and then sell the goods in the United States at a price lower than what its

competitors can offer. If the Chinese RMB increased in value, then Walmart would have to

spend more US dollars to buy the same products, whether the products are clothing,

electronics, or furniture. Any increase in cost for Walmart will mean an increase in cost for

their customers in the United States, which could lead to a decrease in sales. So we can see

why Walmart would be opposed to an increase in the value of the RMB (International

Business, 2012).

To manage this currency concern, Walmart often requires that the currency exchange

rate be fixed in its purchasing contracts with Chinese suppliers. By fixing the currency

exchange rate, Walmart locks in its product costs and therefore its profitability. Fixing the

exchange rate means setting the price that one currency will convert into another. This is how

a company like Walmart can avoid unexpected drops or increases in the value of the RMB

and the US dollar (International Business, 2012).

While global companies have to buy and sell in different currencies around the world,

their primary goal is to avoid losses and to fix the price of the currency exchange so that they

can manage their profitability with surety (International Business, 2012).

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Global firms like Walmart often set up local operations that help them balance or

manage their risk by doing business in local currencies. Walmart now has 304 stores in China.

Each store generates sales in renminbi, earning the company local currency that it can use to

manage its local operations and to purchase local goods for sale in its other global markets

(Barboza, 2010).

Analyze the case and Use the following format.

I. Case Summary

II. Case Problem

III. Case Facts

IV. Alternative Courses of Action

V. Evaluation of Alternatives and Solution to the Problem

VI. Recommendation

VIII. Conclusion