BOSTON — Wal-Mart isn’t the only big-box retailer under pressure.
The world’s largest company already is battling negative publicity over illegal workers, pay and unionization. Now it, like Target, Kmart, Costco, Sears, Best Buy and Home Depot, is facing a major fight over its ambitions for expansion that could have a significant impact on the future of the supercenter.
The pending arrival of 40 Wal-Mart supercenters in California — mammoth boxes crammed with both food and general merchandise — has been met with strikes, lawsuits and ordinances. Detractors claim supercenters harbinger a lower quality of life: loss of open space, traffic congestion, pollution and poor wages for workers.
In what stands to be one of the most publicized fights about a retailer’s right to expand, the city of Los Angeles is currently drafting an ordinance that would ban stores over 100,000 square feet with more than 10 percent of their floor space devoted to nontaxable grocery sales in all city, state and federal economic assistance zones. Those zones represent roughly 40 percent of land in the city. In addition, the ordinance would place a one-mile buffer around the zones, making it nearly impossible for a supercenter to find enough land suitable for its construction anywhere in the city.
The city council is expected to vote on the draft some time this month.
Wal-Mart has said it’s full steam ahead for all 40 proposed supercenters in the state. “We’ll fight any efforts that limit our ability to better serve our customer,” Wal-Mart West Coast spokesman Peter J. Kanelos said.
Meanwhile, other retailers want to become big boxes, even in California. As part of its tests of five Sears Grand stores by 2005, the Hoffman Estates, Ill., retailer is slated to open in Rancho Cucamonga, Calif., in late 2004.
The 1,500-plus supercenters Wal-Mart operates in the U.S. have been a flock of golden geese, driving revenues since their debut in 1988. Including California’s 40, the retailer is planning to open 1,000 new supercenters in the U.S. over the next five years. Some analysts estimate supercenters represent as much as 40 percent of Wal-Mart’s revenues of almost $250 billion a year.
And California is not alone in trying to regulate the format. It is estimated that over the last 16 years, about 200 U.S. communities have fought their construction.
In recent times, the Bentonville, Ark., retailer has been rebuffed twice by Dallas, is in a long-running feud with Tucson, Ariz., and was given the cold shoulder by Tampa, Fla., which passed its version of the “only under 100,000 square feet” zoning in recent years.
Such fights chip away at Wal-Mart’s public image while eroding all big-box retailers’ prospects for low-cost, optimal expansion.
“Our membership is following what’s happening in California very closely and they’re concerned,” noted Jenny Keehan, senior vice president of the Retail Industry Leaders Association. Formerly the International Mass Retail Association, RILA represents about 120 big-box retailers, including Wal-Mart, Target, Kmart, Home Depot and Best Buy. “The opening of new stores is how they’re driving their top-line results and they don’t want communities to unfairly restrict that.”
The association has been lobbying local and national lawmakers. “We’ve definitely been out there advocating consumer freedom of choice,” Keehan said.
Under constant pressure from Wall Street to maintain their momentum, new store openings are vital to the growth of big-box retailers. City officials for years have been watching closely and formulating positions on the “Wal-martization” of the retail landscape.
These acrimonious fights have played out so routinely in the media that it’s commonplace for local politicians to run either as “pro business” or “antisprawl.” As one industry observer noted: “I can’t imagine a community out there that’s not considering this issue to some degree or another.”
In an apt summary of the national mood, Columbus Dispatch columnist Joe Blundo recently wrote, “If you don’t want to get into an argument, don’t discuss religion, politics or Wal-Mart.”
Daniel Hurwitz, executive vice president of Developers Diversified Realty, which specializes in open-air retail projects, said because more communities are often internally divided, the development process has bogged down everywhere for everyone.
“Things are taking double or triple the expected time,” said Hurwitz. “It’s not unusual for a project to take two to three years to get entitled. In the not-too-distant past, it used to take only nine to 12 months.”
And it isn’t a black-or-white issue.
Wal-Mart has commissioned a report by the Los Angeles Economic Development Corp. that claims its presence would save consumers “at least” $3.76 billion a year and add 36,400 jobs. The job creation partly encompasses what LAEDC sees as a wealth-creation effect from the reduced cost of consumer staples. The report came under immediate fire from the Union of Food and Commercial workers. Rick Icaza, president of Local 770 in Los Angeles, called the study “absurd” and “disingenuous.”
The prospect of tax revenues flowing into municipal coffers also means that big-box retailers have a juicy carrot to wave at cities.
The average Wal-Mart Supercenter brings 400 to 500 jobs to the community, three-fourths of which are full-time positions, according to the retailer’s data. A 200,000-square-foot supercenter generates between $75 million and $100 million a year in sales, spitting out upward of $5 million annually in sales tax revenues. It’s a tantalizing amount for any cash-poor city.
There are also charitable donations. Wal-Mart stores contribute more than $140 million annually to local community organizations, the retailer says. Customers and associates raise an additional $70 million at stores and clubs that benefit local communities.
In California, analysts say some municipalities may rethink Wal-Mart supercenters now that Gov. Arnold Schwarzenegger plans to clip a total of $1.3 billion from local governments in order to quell California’s $15 billion budget deficit.
“The current condition of state budget finance and the threat to local government finance is going to change a lot of minds,” said Jack Kyser, chief economist of the LAEDC.
Richard Hastings, vice president, retail sector, for Deloitte Research, predicts the “big national retailers will gradually become more successful than ever in overcoming community resistance because the tax advantages are just too persuasive.”
Meanwhile, Wal-Mart isn’t sitting on its hands. In what some see as a precursor to the battle with Los Angeles, Wal-Mart fired off a lawsuit Jan. 26 against Alameda County in California, contending the county’s Large Scale Retail ordinance exceeds its authority by imposing “unusual and unnecessary restrictions” on business. Like the ordinance Los Angeles is considering, the Alameda legislation specifically prohibits the current supercenter format.
If Wal-Mart prevails in that lawsuit, it would likely set the stage for the dissolution of the city of Los Angeles’ matching proposed ordinance. In addition, and perhaps more significantly, the decision could set valuable legal precedents for other big-box players, allowing them to overturn or fend off similarly restrictive legislation in other key metropolitan areas nationwide.
Kanelos declined to speculate on how the Alameda case will impact Los Angeles.
“Alameda has a year or two before it will be resolved,” he said. “The city of Los Angeles will likely make a decision before that.”
As did most interviewed, Liz Pierce, an analyst at Sanders Morris Harris, expects Wal-Mart to prevail. “They’ll figure out a way, knowing their history,” she said. “I’d be really surprised if they roll over and just say OK.”
Wal-Mart also is incredibly flexible when it comes to formats for city-center stores. It submitted multiple proposals to the local council 18 months ago when it attempted to open a store in downtown Dallas near the Love Field airport, although it eventually was blocked. And despite Wal-Mart’s insistence that it will not change plans for its California stores, the retailer’s recent actions in Tampa tell a different story.
The retailer neatly limboed under Tampa’s ordinance restricting stores over 100,000 square feet by opening a 99,000-square-foot store last Monday. The store compresses an edited selection of food and general merchandise into the space. In designing that hybrid supercenter, it’s likely Wal-Mart used merchandising strategies refined in its smaller, convenience-driven Neighborhood Markets.
Daphne Moore, Wal-Mart’s regional director of community affairs, said the Tampa store does not represent a new prototype, but a solution to a challenge. The company would have preferred a larger store, she said.
“We had a trade area we wanted to be part of and we simply could not acquire enough land at a reasonable price to build a typical supercenter,” she said.
The smaller store, merchandised with the local Hispanic population in mind, is wedged onto 9.8 acres instead of the typical 20 to 30 acres a supercenter requires, Moore said.
Analysts were not surprised that Wal-Mart — often mischaracterized as slow moving and pedantic — could show such agility.
“Wal-Mart has been dealing with the small town merchants fighting the big box moving into town and the NIMBY [Not-in-my-backyard] syndrome in the larger suburban markets,” said Retail Forward vice president Mandy Putnam. “This is nothing new to them and they’re quite adept at figuring out solutions.”
Tampa, it stands to reason, may be a model the retailer uses in Los Angeles.
Theorizing about how smaller stores increasingly will be used to service markets with restrictive ordinances, UBS Warburg analyst Gary Balter wrote in a research note, “Look for more urban and California expansion from Wal-Mart.”
Wal-Mart has gotten creative in other cities, too. In New Orleans, for example, Wal-Mart is building on the site of a former public housing project. The retailer and the city’s housing authority collaborated on terms, which would allow Wal-Mart-generated tax revenues to partly fund the creation of mixed-income housing flanking the store. The store facade was custom designed to replicate the look of the neighborhood’s old warehouses, Moore said.
In Milwaukee and Long Beach, Calif., the retailer bulldozed vacant enclosed malls. Wal-Mart coped with a cramped location in Long Beach by building a two-level store. Those familiar with its revenues say the store, despite its needs for cart-moving equipment and additional staff watching the entrances, does very well.
In Baltimore, the company decontaminated a former industrial site, according to Moore.
Prior to the current fights, one of Wal-Mart’s most publicized California moments came when the retailer filled a vacant former Macy’s West store in the Baldwin Hills neighborhood of Los Angeles. The two-level store, with 150,000 square feet of selling space, still bears its Art Deco facade and has reinvigorated a blighted area.
As Hurwitz said: “Retailers are looking for creative ways to be themselves. We’re not seeing retailers being willing to shave square footage below 100,000 square feet, but they are looking at a host of other issues, like multilevels and the role of public transportation” when land constriction doesn’t allow for vast parking lots.
DDR is working on a new concept in Miami, which will be “a non-prototypical box, with multilevels and a parking deck,” Hurwitz said. He declined to specify tenants but said it consisted of leaders in discounting.
It’s worth Wal-Mart’s time and money to create new formats for the cities. Because of site scarcity, logistical challenges, high taxes and union pressures, urban cores are virtually untapped by the one-stop, everyday-low-prices format that is Wal-Mart’s forte.
Currently, dense city neighborhoods fall generally into one of two scenarios — either an affluent population served by many small and relatively pricy stores, such as Manhattan, or a working-class population that’s notably under-served, such as Chicago’s West Side. Wal-Mart plans to demolish a shampoo factory in that district and put up a 150,000-square-foot supercenter that will mark its 2005 entry into the Windy City.
Target is also in hot pursuit of city digs, although its SuperTarget food-and-general merchandise concepts are in their infancy. Yet Target executives admit that to remain competitive with Wal-Mart in the long run, it must develop a food business.
In the meantime, the retailer is building a 126,000-square-foot door smack in the center of hipster haven West Hollywood. Along with pulling up its barge in Manhattan every Christmas, Target also has snagged space in Washington and in Boston, in a space formerly occupied by Kmart. There are no SuperTargets in California.
As they enter the cities, Wal-Mart and Target will surely steal business from mom-and-pop operators, national drugstores, grocery chains and Kmart.
Of the big three discounters, the Troy, Mich., discounter still has the best array of inner-city locations, including two stores in Manhattan. Kmart, analysts said, also has done the most work looking at how to merchandise key soft-goods categories to urban minorities. Yet Kmart’s fundamental inability to compete effectively on price with Wal-Mart or on aesthetics with Target, leaves it vulnerable.
Wal-Mart’s Moore confirmed metropolitan expansion is a priority. The company bases store expansion partly on zip code data, she said, and has noticed consumers driving out from many cities to shop suburban stores. Moore said that, given the challenges of acquiring land, the company treats each urban opening as a separate project.
Yet, for all the cities that seem to be an obvious site for big-box expansion, it likely will not be an easy task. Deloitte’s Hastings predicts that Target and Wal-Mart will leave the large, unionized Northeastern cities — like Boston and New York — alone until they’ve gotten significant experience elsewhere.
“Both are a disaster in terms of taxes, wages and logistics,” said Hastings.
The big-box operators are confident that they’ll eventually get there, though. While there is a vocal population that is against supercenters, there also are a substantial number of shoppers who like the convenience and low prices they offer. A major question in the battle, in the end, will be whether American consumers are prepared to forego those two things. Wal-Mart, for one, doesn’t believe they will.
“What we’ve learned in recent years is, like the rural consumers we served when the company first began, there are many customers in urban areas without access to goods and services at reasonable prices,” Moore said. “It’s quite an opportunity and a bit of a challenge at the same time.”