Glenn, do you think Amzn is Wal-Marts #1 threat?
February 24, 2002
MONROE, N.Y. – Wal-Mart Stores just became the nation's biggest company, and the first retailer ever to do so. It got there by sounding a single note – low prices – that attracted millions of mostly working-class Americans in search of everything from toilet paper to fishing rods.
Now, after leveling discount chains from Kmart to Caldor, Ames to Bradlee's, Wal-Mart executives are setting their sights on a fresh target: more affluent shoppers who pride themselves on snagging bargains and who discovered stores such as Target, Costco and Kohl's.
Many of the 178 stores Wal-Mart has opened in the past year are in well-off suburbs such as Plano, Texas, and Alpharetta, Ga. All of them include grocery sections the size of a supermarket, with gourmet desserts and fresh herbs to attract people with money to spend. Wal-Marts new and old are also adding pricier products, from big-screen televisions to digital cameras to more glamorous cookware.
But reaching for new customers holds risks for Wal-Mart. The company has succeeded by selling to penny-wise shoppers and could alienate them, experts say, if it replaces too many private-label slacks and run-of-the-mill sheets with European cookware and personal computers.
"As they add these new customers, as they trade up, the risk is that a new Sam Walton in some place that you and I have never heard of says, 'Hey, I'm going to buy it low, stack it high and sell it cheap,' " said Richard Tedlow, a professor of business administration at the Harvard Business School and the author of "Giants of Enterprise," a study of Wal-Mart and other companies. An additional risk is that "traditional customers are going to look at Godiva ice cream and they're not going to want it and they're not going to feel at home."
Founded in Arkansas 40 years ago by five-and-dime merchant Sam Walton, Wal-Mart built its empire with stores in rural areas where land was cheap and shoppers looking for variety and low prices saw few alternatives. By the time Walton died 10 years ago, Wal-Mart was the largest discounter.
Last month, the company passed Exxon Mobil to become the nation's largest company in sales, reporting $217.8 billion for the fiscal year ended Jan. 31. And Wal-Mart is the nation's largest private employer, with more than 1.2 million employees.
There are 2,600 Wal-Marts, with heavy concentrations in Texas, Florida, Illinois, California and Missouri. It has moved into the Northeast more recently – there are a handful of stores in the New York metropolitan area, and 116 scattered across the region's three states – but for the most part, it avoids large cities.
Pursuing more affluent shoppers alters the cost of doing business for Wal-Mart. Stores opening in suburbs typically must pay more for the real estate. And adding big-ticket items to the lineup can be hazardous.
"When you go beyond the basic necessities of life, there is more volatility," said John McMillin, an analyst for Prudential Securities. "There will be times when the diamond rings don't turn as well as the milk."
But analysts say Wal-Mart has no choice.
"They've had to go into more suburban, upscale places," said Carl Steidtmann, the chief economist for Deloitte & Touche. "They've run out of other places to build stores."
Not just Wal-Mart but other discounters have benefited from the slowing economy. Their sales have shot up, while business for department stores and luxury-goods retailers has fallen. Just how Wal-Mart's push for higher-income customers will affect the other chains is not clear. Spokesmen for Kohl's and Target would not comment on Wal-Mart's strategy, and the president of Costco, Jim Sinegal, to whom other executives referred requests for comment, was traveling last week and could not be reached for comment.
But because Wal-Mart is so large and powerful, its move is bound to increase competition, affecting prices in a low-margin business. Its entry into the supermarket business, where it quickly became No. 1, accelerated the sale of small stores to larger ones, said David Orgel, editor in chief of Supermarket News, and inspired industry seminars around one topic: "How to compete against Wal-Mart."
Despite its formidable size, attracting and keeping more affluent shoppers is a battle that Wal-Mart must wage with great care. Though it has always promoted "good, better and best" variety, never has it zeroed in on the wealthier customer with such resolve.
"Wal-Mart knows they have a consumer with high income who takes pride in being a smart shopper, and they want to give them more to buy," said Candace Corlett, a partner with WSL Strategic Retail, a consulting firm in Manhattan. "The next key to sales growth for Wal-Mart is to increase the size of the average transaction."
At the same time, Wal-Mart has to maintain its base – the hard-working people who regularly shop the stores for all kinds of necessities.
"We've always been identified with the most dominant shopper we have, the people who work paycheck to paycheck, week to week," said Tom Coughlin, president of the Wal-Mart Stores division. Though the stores have no intention of ignoring that shopper, "we've got the ability to customize according to the customer," he said.
Some say this is an extension of Wal-Mart's longtime strategy.
"I think they've found a sweet spot, which is great products at great prices," said Robert Eckert, chairman and chief executive of Mattel, which sells millions of Fisher-Price, Barbie and Hot Wheels toys through Wal-Mart. "People are now drawing that conclusion, that they don't have to sacrifice great products for great prices."
Wal-Mart has forged specific agreements intended to bring upscale items into its stores. Among them is a strategic partnership with Olympus, the camera maker, said Burt Flickinger III, a managing partner with Reach Marketing in Westport, Conn.
"Historically, you'd only find Olympus in the specialty camera shops. Wal-Mart has matched Target's lead in going to high-end cameras. They will now go up to the $700 range. They are way beyond the typical Wal-Mart of a few years ago," Flickinger said.
With 70 million of the 110 million weekly Wal-Mart customers earning $25,000 to $50,000 a year, the store is largely supported by the people that Sam Walton dedicated himself to serving.
Coughlin pledged allegiance to the low-budget, longtime Wal-Mart customer. At the same time, he said: "Will we try to find things to do to improve our relationship with customers who have more income? Absolutely."
McMillin, the analyst, put it another way. "Whether you're rich or whether you're poor," he said, "everybody wants a bargain."
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