Could Wal-Mart actually go out of business?
Consider this, Wal-Mart operates one of the largest private fleets of trucks in the country (7,200+). When oil spiked in 2008, Wal-Mart paid a little less than $4/ gallon for diesel including a .50 cents/gallon volume discount and drove over 900 million miles. Assuming those stats, then Wal-Mart spent 22.36b for fuel costs, a whopping 8.5b more than estimates or 66% of their net income of 12.7b. If fuel prices only go up $1.85 more/gallon over what they were in 2008, then Wal-Mart breaks even. A 1.86/gallon, then they begin losing money. $2 more per gallon..well you get the idea. They don’t have enough cash on hand (7.9b) to sustain revenue loses of that size for extended periods of time. When you consider their suppliers, who are already forced to price below market in most cases and of course how they export most of their products via diesel fueled container ships, then there is nothing left for Wal-Mart to do but to raise prices or pass that off to consumers. That is a dicey proposition because when oil prices reach those levels, then most people will be cutting their driving habits much less going to Wal-Mart to shop. It is a vicious cycle that Wal-Mart is simply not ready to handle. They don’t have a sustainable revenue model when fuel costs start climbing and current forecasts have prices for crude going up 18% by the end of this year alone. It is not a pretty situation.
They’d likely run into a cash problem well before fuel hit $4/gal because the wholesale cost of goods would also rise (due to shipping and subassembly costs going up because of fuel costs).
I suspect that with a fleet that big, they probably have reserves to ride out any spikes in fuel costs
One other thing to look at here though is if you had anything that could save money in shipping costs (better routing, better packaging, better fuel economy, etc) that even a 5% or 10% delta could be a humongous margin protection. When I was at Service Merchandise, we wrote an app that plotted the most efficient way to package and route shipments and it saved $1M in about 3 weeks. That’s was equivalent to a days sales for the average store in the chain.
The sad fact is that energy costs ripple through our entire economy. When the price of bananas quadrupals because your fuel cost went up, then you have serious supply chain problems. It’s one of the most compelling cases for the investment of not only sustainable energy sources, but distributed energy sourcing so that large blocks of people, places, and things are not dependent on highly fragile resources and infrastructure. I think our current water shortage is a good example of how our infrastructure is in fact very weak.
It’s also of some interest to note that by their own estimates, WalMart’s fleet saves them from building some 20 distribution centers. They keep so much cargo in transit, that they save the construction, and ongoing costs of several distro centers.
I can’t imagine Walmart closing. They are really just a real estate company, leasing shelf space to vendors. There is also a good chance they have hedged their fuel buys for years into the future so who knows what price they’ve locked in for billions in fuel.