- First it gobbled the mom-and-pops, then mauled discount
department stores. What's the insatiable chain's next target? You name
it
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- In the old days, there were shops of all kinds -- bakeries,
shoe stores, pharmacies, and the like. Then came Wal-Mart. And the fear
that the giant all-in-one store would come to small towns and squash mom-and-pop
operations turned out to be real. American consumers find the Bentonville,
(Ark.)-based discounter, which topped $226 billion in revenues in 2001,
irresistible for its convenience, selection, and low prices. As local stores
have continued to close, Wal-Mart has grown to 2,780 outlets in the U.S.
alone. And that breakneck expansion shows little sign of slowing, despite
the rough economy.
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- Now, Wal-Mart (WMT ) is outmuscling big-name retailers.
The outfit's incomparable efficiency already has sounded the death knell
for second-tier discount retailers like Ames (AMESQ ), Caldor (CLDRQ ),
and Bradlees (BRADQ ). Kmart's (KM-T ) future is looking iffy after the
company filed for bankruptcy protection earlier in 2002. And Wal-Mart is
eyeing new categories to dominate, says Ira Kalish, chief economist for
Retail Forward, a retail consultant. "Wal-Mart's aggressive rollout
of [retail gas] stations could be followed closely with the company selling
used cars, financial services, home improvement, and food service."
The retailer also says it is considering adding a new section to its stores
to compete more vigorously with so-called "dollar format" retailers
such as Family Dollar (FDO ).
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- HAPPY CUSTOMERS. The implications of such moves are enormous.
Because of its buying power and savvy technology, Wal-Mart is a highly
cost-efficient operator in a business with tight margins. And customers
couldn't be happier. "These innovations allowed the company to pass
its savings on to customers," writes Brad Johnson with McKinsey Consulting
in a recent report, "The Wal-Mart Effect." Wal-Mart succeeds
on two counts: Being such a huge buyer, it can negotiate the best wholesale
prices. And it is such a huge seller that it can offer customers the lowest
prices and make up the difference in volume.
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- Meanwhile, less-efficient competitors selling the same
goods must ask higher prices to earn the same profit. Still, competitors
do slash prices, hoping, often in vain, that increased sales will make
up for lost margins. "What has happened to the discount department-store
segment over the past decade will now play out in food over the next couple
of years," says Carl Steidtman, retail-sector economist at Deloitte
Research. Translation: Expect big grocery chains to consolidate or disappear.
The pain is being felt by all competitors. In just a few short years, Wal-Mart
has nabbed the top spot in grocery sales, beating out the Kroger (KR )
supermarket chain, the long-time leader.
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- All this explains why many investors are bullish on Wal-Mart.
At around $53, shares are down about 6.5% year-to-date, but that's considerably
less than the 15.5% hit the shares of retailers as a group have endured.
In part, Wal-Mart has fared better because of the outfit's reliable performance,
no matter the health of the economy. With analysts projecting double-digit
earnings growth for the next several years, they see it remaining a stable
holding for the long-term.
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- PLAYING MONOPOLY. It's hard to name a retail segment
that's immune from Wal-Mart-inspired pressures. For instance, Wall Street
recently cheered strong quarterly results from Toys "R" Us (TOY
), but the good news may be short-lived. Toys "R" Us "will
face great promotional pressures this year in its overwhelmingly important
fourth quarter," Jefferies & Co. analyst Don Trott warned in a
recent report. The long-term problem for the toy retailer, which is No.
2 in market share to Wal-Mart, is that its rival is much more nimble. While
Toys "R" Us must stock toys, -- highly seasonal products -- throughout
the year, Wal-Mart can pull back or step up inventory and shelf space as
demand dictates.
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- Other Wal-Mart targets of opportunity are likely to be
apparel and consumer electronics. On the clothing front, the chain this
fall unveiled a line of women's career clothing under the label George,
which it acquired in its acquisition of U.K.-based retailer ASDA. And it
has also signed a deal with Levi's to sell $30 jeans. If Wal-Mart succeeds
in convincing shoppers to view it as a destination for fashion needs, the
impact will spread quickly. Among the first likely to feel the heat are
department stores, teen clothiers such as Abercrombie & Fitch (ANF
), even "shabby chic" discounter Target (TGT ).
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- Consumer electronics is in for similar treatment. Wal-Mart
has been taking sales away from consumer electronics retailers for years
-- mainly on lower-priced products. These days, the price of hot products
falls so fast that Wal-Mart can afford to jump in and handle them much
earlier in the product cycle, says Colin McGranahan, retail analyst at
Bernstein Research. This means Best Buy (BBY ), Circuit City (CC ), and
higher-end stereo-equipment retailers like Tweeter (TWTR ) have a shorter
window in which to charge a premium for the latest gadgetry, says McGranahan.
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- SHARPENING THE EDGE. All this is a boon for consumers
-- and for U.S. productivity in general. Wal-Mart is the nation's largest
single importer and a major force in lowering the price of apparel and
general merchandise, says Deloitte's Steidtman. Its general-merchandise
market share soared from 9% in 1987 to 27% in 1995, says McKinsey's Johnson.
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- Wal-Mart's aggressive adoption of information technology
to improve logistics and back-office efficiency has also been a major driver
of productivity. While suppliers scrambled to meet Wal-Mart's demands,
competitors big and small followed the retailer's lead and ratcheted up
productivity by 28% from 1995 to 1999, Johnson says. But because of its
early adoption, Wal-Mart reaped the most gains and continues to enjoy an
edge over competitors.
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- There are plenty of other ripple effects, too. For instance,
the difficult economy of the last two years has been a major factor in
the traffic fall-off at shopping malls. But there's little question Wal-Mart
has picked up long-term market share from the malls as well, says Michael
Baker, director of research at the International Council of Shopping Centers.
The mass migration to Wal-Mart effectively takes shoppers away from venues
that contain dozens of specialty apparel outlets and mall-based department
stores. "Mom-and-pop stores are gone, regional chains are gone, and
the national retailers are thinning out," says Al Norman, anti-sprawl
activist and author. "We're left with only the very big players at
the top now that Wal-Mart has chewed right up the food chain."
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- SURVIVAL TACTICS. How can other retailers survive the
Wal-Mart juggernaut? The answer is, and has always been, differentiation.
Baker cites the good job Target has done setting itself apart with marketing
and merchandising that attracts a more affluent demographic. He also lauds
Safeway's (SWY ) efforts to attract wealthier consumers. Best Buy's solution,
according to spokeswoman Julie Keslik, is educating its salespeople about
the gadgets and accessories it carries, as well as keeping them on top
of the innovations that most interest customers.
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- Brave strategies one and all. But it's clear that big
retailers of all kinds are facing the same perils that have wiped out a
lot of mom-and-pop stores over the last 25 years. That's good for consumers
and good for the economy. And it's best of all for Wal-Mart and its shareholders.
-
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- Tsao covers financial markets for BusinessWeek Online
in New York
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- http://www.businessweek.com/bwdaily/dnflash/nov2002/nf20021127_4108.htm
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