[Vision2020] End of the Wal-Mart era?

[Gray Tree Crab aka Big Bertha]

End of the Wal-Mart era? As the face of retail evolves, more customers think
outside the big box


Shoppers leave the Wal-Mart store in Lebanon, Ore.Associated Press (Associated
Press)

Slow going

» Wal-Mart's shares trade about where they were at the start of the decade,
when the company produced less than half its current revenue. Shares closed
Tuesday up 40 cents at $44.87, and down 9.3 percent from the stock's
year-earlier price. 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.

Gary Mcwilliams
<http://www.spokesmanreview.com/news/bylines.asp?bylinename=Gary%20Mcwilliams>
The Wall Street Journal
October 7, 2007

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 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
Dublin, Ohio-based 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 a new
energy drink in favor of Whole Foods Market Inc. Consumer-products giant
Procter & Gamble Co. gets 15 percent of its revenue from Wal-Mart, down
three percentage points from 2003.
Size matters – to a point

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 170 to 190
more of the 200,000-square-foot supercenters that are its hallmark and to
convert 500 smaller discount stores to the bigger format over the next five
years. "We would love to wave a magic wand and (make) every one of our
discount stores a supercenter," he says.

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.

"All retailers have a formula. They grow as far and as fast as they can with
that formula," says Love Goel, a former Fingerhut Cos. executive and now
chairman and CEO of Growth Ventures Group, a Minnetonka, Minn.-based
private-equity firm that invests in retail businesses. Wal-Mart has outgrown
its supercenter recipe, but efforts to win growth from more affluent
consumers have fallen flat, he says. "They have hit the wall."

Wal-Mart declined to make an executive available for an interview and
declined to respond to written questions, citing an upcoming meeting with
Wall Street analysts.

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 auto makers.
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.
The 'value loop' unravels

Wal-Mart's great insight was perfecting the so-called "value loop" in
retailing. At its most basic, the system works like this: 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, its comparable-store sales, a measure of market share, is
up just 1.3 percent. The pricing gap between Wal-Mart and rivals has
narrowed, and more customers are now choosing convenience over wading
through a supercenter.

That compares with comparable-store 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.

Wal-Mart's shares trade about where they were at the start of the decade,
when the company produced less than half its current revenue. Shares closed
Tuesday up 40 cents at $44.87, and down 9.3 percent from the stock's
year-earlier price. 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 '90s when Wal-Mart was regularly flattening competitors.
Internet reduces influence

But 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. At the same time, the cost of creating and sustaining a national
brand is rising because of media fragmentation. Niche brands, created by
Internet word of mouth, are winning shelf space and sapping profits required
to fund big brands' advertising. Manufacturers such as Apple Inc. and
Phillips-Van Heusen Corp., lacking the retail distribution or presentation
they crave, are opening their own stores. One result is that retail giants
hold less sway over their customers – and over their suppliers.

And across the landscape, numerous rivals are using a form of competitive
jujitsu to keep the Bentonville behemoth off balance.

Grocery-store chains such as Kroger are resurging on sales of prepared or
semicooked meals, which people can grab on their way home. Cincinnati-based
Kroger projects sales at stores open at least a year will climb between 4
percent and 5 percent this year, on top of a 5.3 percent increase last year.

Thomas Kim, a financial analyst for a St. Louis scrap-metal firm, describes
his family as frugal shoppers who check prices on the Internet. But he and
his wife most often shop in local retailers. "It's the convenience factor,"
says Kim. His family avoids supercenters, describing them as too large and
too crowded.
Specialization pays off

Melissa Morris says Best Buy won her loyalty by gladly accepting a notebook
PC return and having trained sales clerks. "I go to a store that specializes
or has associates there that know about it," she says. The Erie, Pa., sales
executive refuses to go to Wal-Mart, citing its crowded aisles and hurried
atmosphere.

Best Buy and specialty retailer PetSmart Inc., which touts pet grooming and
kennel stays, put hard-to-copy services at the forefront of their pitch,
says Howard N. Jackson, president of retail advisers HSA Consulting Inc.,
Knoxville, Tenn. "They realize the best way to win a fight is to make sure
you don't get in one," he says.

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.


-- 
Gray Tree Crab aka "Big Bertha"
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