So long, Sam: A new age in retail
Long-successful megastores victim of shifting trends
By Gary McWilliams
The Wall Street Journal
Article Last Updated: 10/06/2007 11:52:38 PM MDT
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The Wal-Mart Era, the retailer's time of overwhelming business and social influence in America, is drawing to a close.
Using a combination of low prices and relentless expansion, Wal-Mart Stores Inc. emerged from rural Arkansas in the 1970s to reshape the world's largest economy. Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company.
His company helped boost America's overall productivity, lowered the inflation rate and strengthened the buying power for millions of people. Over time, it also accelerated the drive to manufacture products in Asia, drove countless small shops out of business and sped the decline of Main Street. Those changes are permanent.
Today, though, Wal-Mart's influence over the retail universe is slipping. In fact, the industry's titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions to $4. But success is no longer guaranteed.
Rival retailers lured Americans away from Wal-Mart's low-price promise by offering greater convenience, more selection, higher quality or better service. Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image, while other discounters pitched themselves as more upscale and more
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palatable alternatives. The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers.
As a result, American shoppers are increasingly looking for qualities that Wal-Mart has trouble providing. ''For the first time in a long time, quality has a chance to gain on price,'' says Lee Peterson, a vice president at brand consulting firm WD Partners Inc.
Now, the big-name brands that fueled Wal-Mart's climb to the top are forging exclusive distribution deals with other retailers, or working to reduce their reliance on its stores. PepsiCo Inc., which favored mass-market campaigns a decade ago, recently skipped Wal-Mart when launching an energy drink in favor of Whole Foods Market Inc.
Wal-Mart's effort to expand internationally has had mixed success in affluent markets. Last year it exited South Korea and Germany after failing to adapt to local tastes and achieve economies of scale. In Japan, the company's low-price, high-volume approach has struggled in a country where low prices often equate to low quality.
Still a giant
Wal-Mart remains an enormous force in retailing, of course. Its worldwide sales are almost three times those of France's Carrefour SA, the world's second-largest publicly traded retailer. Wal-Mart's U.S. revenue is 4 1/2 times that of discount-store rival Target Corp., and four times that of second-largest U.S. food retailer Kroger Co. Its clothing and shoe sales last year alone exceeded the total revenues of Macy's Inc., parent of Macy's and Bloomingdale's department stores.
The company's unquenchable thirst for scale has been the secret to its market-changing power. ''What we are is a 'supercenter' with one-stop shopping,'' said Wal-Mart's Vice Chairman John Menzer at an investors' conference last month. The company expects each year to build another 170 to 190 of the 200,000-square-foot supercenters that are its hallmark and convert 500 smaller discount stores to the bigger format over the next five years.
But that very focus on scale is now a weakness, for the world has changed on Wal-Mart. The big-box retailing formula that drove Wal-Mart's success is making it difficult for the retailer to evolve.
Consumers are demanding more freshness and choice, which means that foods and new clothing designs must appear on shelves more frequently. They are also demanding more personalized service. Making such changes is difficult for Wal-Mart's supercenters, which ascended to the top of retailing by superior efficiency, uniformity and scale.
Wal-Mart has outgrown its supercenter recipe, but efforts to win growth from more affluent consumers have fallen flat, says Love Goel, chairman and CEO of Growth Ventures Group, a private-equity firm that invests in retail businesses. ''They have hit the wall.''
Wal-Mart declined to make CEO H. Lee Scott or other executives available for an interview and declined to respond to written questions, citing an upcoming meeting with Wall Street analysts.
Dropping the baton
Business history is littered with companies that grew to enormous size and used their girth to re-arrange the world to fit their strengths. Think International Business Machines Corp. in the mainframe business, General Motors Corp. in autos, or Microsoft Corp. in personal computers.
For a time, their success bred an ecosystem that sustained their status. In the 1970s, independent software companies piggybacked on IBM's mainframes, resulting in greater demand for mainframe computers.
Such orchestration can produce solid growth for decades. But it can also produce corporate blinders. Over time, IBM's grip on the corporate data center left it unable to anticipate the decentralizing effects of personal computing. GM's knack at brand creation and frequent model changes left it vulnerable to the incremental quality approach of Japanese automakers. Microsoft was so busy cramming features into its Windows operating software that it lagged others in the shift to the Internet. Each remains among the top in its industry; yet each has relinquished the role of industry definer - IBM to Intel Corp., GM to Toyota Motor Corp., Microsoft to Google Inc.
Wal-Mart's great insight was perfecting the so-called value loop in retailing. At its most basic, lower prices generate healthy sales gains and profits. Some of those profits went into further price cuts, generating more sales. The lower the price, the more consumers flocked to Wal-Mart.
But the value loop is beginning to unravel. For 10 years through 2005, Wal-Mart's sales gains at stores open at least a year averaged 5.2 percent. So far this year, that measure of market share is up just 1.3 percent. That compares with gains of 4.6 percent at Target, which markets itself as a trend-setting discounter, and 6 percent at membership-club rival Costco Wholesale Corp., which peddles $500 Bordeaux wines and $4,000 Cartier watches.
While Wal-Mart has been portrayed as a ruthless employer, Costco has been praised for providing some of the best employee benefits in retail. Earlier this year, Wal-Mart took the extraordinary step of ratcheting down its U.S. expansion plans because its new stores were stealing too much revenue from existing ones. That wasn't a concern in the 1980s and 1990s when Wal-Mart was regularly flattening competitors.
Losing to niche offerings
The Internet is transforming the retail definition of scale. The once-stunning compilation of 142,000 items found in a Wal-Mart supercenter doesn't seem so vast alongside the millions of products available on the Internet. And across the landscape, numerous rivals are keeping the Bentonville behemoth off balance.
Grocery-store chains such as Kroger, which does business in Utah as Smith's Food & Drug, are resurging on sales of prepared or semicooked meals, which people can grab on their way home. Kroger projects sales at stores open at least a year will climb 4 percent to 5 percent this year.
When Wal-Mart pushed heavily into consumer electronics earlier this decade, many industry observers expected it to flatten electronics chains. But five years ago, Best Buy Co. began aggressively marketing installation and other services alongside flat-panel TVs and PCs. Last year, Best Buy's total sales rose 16 percent. Wal-Mart, which has struggled to sell big-ticket HDTVs, has only recently begun selling installation services at a few stores using an outside supplier.
Wal-Mart has long sold prescription drugs, setting up its pharmacy business in 1978. But national drug chains CVS Caremark Corp. and Walgreen Co. reacted by redefining their role and selling basic health services, such as school physicals, diagnostic tests and flu treatment, alongside drugstore wares. CVS and Walgreen each acquired in-store clinic operations, redefining the pharmacy business as basic health care centers. Same-store sales at CVS and Walgreen are running about double that of Wal-Mart this year.
Outside the U.S., Britain-based Tesco PLC is challenging Wal-Mart by cultivating the Tesco brand across five different formats, including convenience stores and urban stores, as well as supercenters. This fall, Tesco will open its first U.S. outlets, stores that will offer fresh and prepared foods and staples. |
