Why the World's Biggest Retailer is Doomed

The history of retailers in the United States has been a history of cycles. Retailers have come and gone: Hudson's M, Service Merchandise, and Montgomery Ward to name but a few. All these companies were economically dominant at one point in time, but have now gone the way of the dinosaurs. Is Wal-Mart WMT soon to follow? Wal-Mart achieved market dominance through innovation. The retailer used massive warehouses within its own store to cut costs, while importing the majority of its goods from China. That business model may be becoming obsolete. On Thursday, Wal-Mart unveiled its new Wal-Mart "Express" stores, according to USA Today. These stores are miniature versions of the much larger Wal-Mart Supercenters. They are designed to offer Wal-Mart priced deals to consumers in geographical locations where Supercenters are impractical. Wal-Mart Express is anticipated to compete with stores like Dollar General DG. While investors may initially view this announcement as a positive, it calls into question the validity of Wal-Mart's business model. If Wal-Mart is downsizing, is it a sign that the concept of the Supercenter is failing? At the same time, Wal-Mart may be failing on the supply-side. Wal-Mart imports the vast majority of its wares from China. This was a good business practice for Wal-Mart, as a weak Chinese currency and low Chinese wages have kept the price of Chinese goods down, which allows Wal-Mart to offer the dirt-cheap prices it is famed for. However, it is starting to look like the Chinese may revalue the yuan. On Friday, a Bank of China official stated that, over the next five years, the Chinese would phase out the conversion restrictions presently in place on the yuan. If the Chinese allow the yuan to be freely traded, the currency may appreciate significantly. That appreciation would make the relative cost of Chinese goods much more expensive for Wal-Mart to purchase. At that point, Wal-Mart would either find its profit margins squeezed, or be forced to pass the rising costs to consumers--robbing the store of its ability to claim "everyday low prices." Traders looking to take advantage of a collapsing Wal-Mart might consider a short play on the company's stock. Alternatively, traders might consider going long the yuan. The WisdomTree Dreyfus Chinese Yuan Fund CYB might offer traders a way to play a bullish yuan.