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Now that Wal-Mart has hit 50, what’s next?
This story first appeared in the March 28, 2012 issue of WWD. Subscribe Today.
The Bentonville-based behemoth has collected a string of superlatives in five decades. It’s the world’s biggest retailer with revenues of $444 billion in the fiscal year ended Jan. 31, and the nation’s biggest private employer with 2 million workers in the U.S. Wal-Mart Stores Inc. recently surpassed the 10,000-store mark worldwide with a unit that opened in Mexico.
The company’s 2011 revenue was bigger than the gross domestic product of Norway. So great is its influence that some economists consider it a proxy for consumer behavior. With 200 million shoppers visiting Wal-Mart every week, the retailer has argued that its sales performance reflects consumers’ economic condition.
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Now it faces the challenge of how to maintain its dominance as its U.S. expansion slows, overseas markets remain tricky, and the expansion of Internet giants like Amazon.com threaten Wal-Mart — all while being cast as the equivalent of the Big Bad Wolf when it comes to retailing.
“Wal-Mart grew up with the Baby Boomers,” said Robin Sherk, senior analyst at Kantar. “Is this going to be the format of Gen-Y? Is the Wal-Mart proposition as relevant to them?”
The recession and its impact on Wal-Mart’s core shoppers led the company to create its famous tag line, “We save people money so they can live better,” a variant on its pioneering Every Day Low Pricing, or EDLP, strategy. While higher income consumers have recovered a bit, Wal-Mart has said shoppers haven’t increased their spending so the retailer has been investing in Every Day Low Pricing to encourage customers to spend.
“Nothing builds more loyalty with customers than everyday low prices,” said Mike Duke, chief executive officer of Wal-Mart, on a recent earnings call. “We offer everyday low prices in every market. No exceptions. No excuses.”
Duke highlighted the company’s success over the past several quarters in leveraging expenses, but said there are still places where Wal-Mart can save money: “No one controls costs better than Wal-Mart because we do it for the right reason. It’s all for the customer.”
Wal-Mart in the fourth quarter ended Jan. 31 delivered its second consecutive period of positive comp-store sales with a 1.5 percent gain. However, Wal-Mart was hampered by poor apparel sales and its investment in EDLP.
The retailer, which replaced Woolworth on the Dow Jones Industrial Average in 1997, said earnings totaled $1.44 a share in the quarter compared to $1.50 in the previous year’s quarter, and were 2 cents below Wall Street expectations. Wal-Mart this year expects profits from continuing operations to rise to $4.72 to $4.92 a diluted share — a range that shows growth from last year’s $4.54, but also opens up a potential shortfall, given the $4.90 analysts had penciled in. Sam’s Club posted a 5.4 percent comp increase for the quarter. Comps for the 13-week period ending April 27 are expected to be flat or up 2 percent. Net sales are forecast to grow 5 to 7 percent, or $22 billion to $31 billion, in 2013.
“We’ve seen the unemployment numbers come down a little bit, and that’s really good, but that hasn’t stopped consumers’ spending paycheck-to-paycheck,” Charles M. Holley Jr., Wal-Mart’s chief financial officer, said when the retailer reported its fourth-quarter results in February.
The Wal-Mart consumers, whose average income is $30,000 to $60,000 a year, are most concerned about rising fuel, energy and food prices, said David Tovar, a Wal-Mart spokesman. “In the U.S., we’re also seeing changes by reducing internal costs,” he said. “We’re starting to widen the gap in terms of EDLP with the competition, and we saw a positive traffic increase in the fourth quarter.”
“There has been margin erosion with Wal-Mart’s investments in price,” said Sherk of Kantar. “Wal-Mart is trying to squeeze more and more out of its productivity loop. But do shoppers really care about shelf prices when they can get coupons and loyalty cards from other retailers?”
Apparel has been Wal-Mart’s Achilles’ heel, but the retailer may be taking another stab at it. When Wal-Mart in October 2011 closed its New York fashion office, the company said that its emphasis would be on basics. However, basic socks don’t have very high margins and Wal-Mart has been both emphasizing national brands more and adding more opening price points. “They’re going after both consumers,” said Sherk. “There’s a great emphasis on assortment and breadth of assortment.”
Hiking the fashion component, however, has been a struggle for the giant. In 2006, then-chairman H. Lee Scott told Wall Street analysts the company must “get better at fashion basics, not what I would call high fashion. There’s a tremendous opportunity without stepping out to the next level, which is so dangerous for anyone to get into unless you’re a high fashion company.”
Since then, its attempts to bring trendy styles and star labels have met with mixed results. The Miley Cyrus and Max Azria collection foundered. George was tweaked and reinvented multiple times in the U.S. even as it remained a star performer in its native U.K. Norma Kamali’s three-year deal with Wal-Mart ended in November.
While fashion has been declining, grocery has been on the rise. Grocery now represents 56 percent of Wal-Mart’s total business in the U.S.
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Wal-Mart knows that if it is to survive and thrive for another 50 years, it must become the predominant force in e-commerce and advance with mobile and digital technology. The retailer in April 2011 bought Kosmix, a company known for its social media genome capabilities, for $300 million and formed @walmartlabs. Since then, Wal-Mart has acquired OnRiot and Grabber, introduced Shopycat for Facebook and launched Ultraviolet, a movie-streaming service. The retailer is said to be developing a mobile payment system more advanced than Google Wallet.
“I’m really stunned by the amount of progress Wal-Mart has made in term of technology this year and its nimbleness,” said Carol Spieckerman, president of newmarketbuilders. “Wal-Mart is exploring social shopping and the leading edge of where retail should go. The next wave for Wal-Mart is encouraging. Very much like Amazon, Wal-Mart is starting to think of itself more as a platform than simply as a traditional retailer.”
Spieckerman believes Wal-Mart can parlay entertainment launches such as “Twilight” and Justin Bieber into limited-time events with exclusive products.
“Wal-Mart has an opportunity to improve its apparel business and leverage its multiplatform marketing capabilities,” she said. Wal-Mart is bullish on its site-to-store program, which makes up 50 percent of its e-commerce business. Pick-Up-Today gives customers the flexibility of placing an order and picking up their purchase the same day.
At age 50, the company has reached a critical point in its development. Wal-Mart’s domestic stores in 2011 had average sales per square foot of $425, higher than international’s average of $400 a square foot. The retailer operates more than 3,000 SuperCenters in the U.S. measuring about 185,000 square feet each. Its 629 discount units — which carry general merchandise but no groceries — each have an average of 108,000 square feet.
Analysts said Wal-Mart can’t keep up the pace of its growth when the available space necessary for building SuperCenters is dwindling. The retailer has acknowledged this, saying stores in the future will occupy 8 percent less space, cost 16 percent less to build and will run more efficiently. However, Sherk said SuperCenters have traditionally been the most profitable format for Wal-Mart because of their large food component and the retailer is “investing more in new SuperCenters than in @walmartlabs. They’re relying on SuperCenters and are building more of them than other formats,” she noted.
Still, Wal-Mart is piloting smaller concepts as well. “The operative word is ‘piloting,’” Sherk said. “The race to urban [locations] is on, but I don’t think Wal-Mart has any delusions about being a dominant urban retailer.”
Although SuperCenters provide the best return on investment, Wal-Mart believes it can capture more domestic market share with smaller stores. Concepts come in a range of shapes and sizes, from a one-off 3,500-square-foot Wal-Mart on-campus unit at the University of Arkansas in Fayetteville to the 30,000- to 40,000-square-foot Neighborhood Markets. Wal-Mart plans to open 80 Markets this year. Wal-Mart Express, with 15,000 square feet of space, is in the test phase with units in northwest Arkansas and Chicago. A Wal-Mart spokesman said Express is being evaluated.
The one major market where it doesn’t operate any units remains New York City, and flexibility will be the key to its ambitions. A Wal-Mart Web site devoted to the cause of opening stores there contains company facts and news stories. The retailer has been mum on its plans.
Stephen Quinn, chief marketing officer of Wal-Mart U.S., said recently, “I can’t really let you in on the specific plans in New York. We’re being much more flexible about the kinds of formats we’re willing to put the Wal-Mart name on and how we’re working with cities to find a way to serve those customers.”
Wal-Mart has been expanding the scope of its heath care and wellness offerings with industry-disrupting innovations such as $4 prescription glasses. Clinics, which have been tested, could be rolled out and have great appeal in urban areas.
The U.S. isn’t the retailer’s only challenge. It also is looking for new frontiers for growth in international markets after penetrating Mexico, the U.K. and South America, but flopping in Germany and struggling in markets such as Japan and China. With sales of $126 billion projected in the coming fiscal year, the international division is growing 15 percent annually. Wal-Mart’s prospects in India seem to be improving since India’s finance minister announced this year that talks were under way with several Indian states to reach a consensus on whether to allow foreign investment in the country’s supermarket sector. This came after the Indian government in December suspended its plans to open the industry to foreign companies. Overseas firms would have been allowed to own up to 51 percent of multibrand retailers.
In mature markets such as Japan and Mexico, Wal-Mart is beginning to reap the benefits of its low-cost price strategies. Wal-Mart said this week it would reopen half of the stores it was forced to close due to the earthquake and tsunami in Japan last year.
China, South Africa and India, at the opposite end of the spectrum, are only starting to embrace the strategy. Wal-Mart recently got the final go-ahead to complete its Massmart deal in South Africa. The company last year bought a 51 percent stake in Massmart for $2.4 billion, but the government and unions appealed to the courts to roll back approval for the acquisition. A South African court dismissed the appeal. Wal-Mart International sees Africa becoming a critical base for targeting other countries in the region such as Nigeria, where affluence levels are rising and the size of the middle class is increasing.
Even with cash equivalents of $6.6 billion as of February, Wal-Mart certainly doesn’t flaunt its wealth, at least not in the “home office” in Bentonville, where founder Sam Walton’s presence can be felt. The likeness of Walton, whose distaste for waste was as well known as his thriftiness, hangs on the walls in conference rooms silently imploring employees not to squander resources.
Walton launched his business in 1945 with a $20,000 loan from his father-in-law and $5,000 of his own savings to open a Ben Franklin variety store franchise in Newport, Ark. He continued to sign leases for Ben Franklin stores, renaming them Walton’s Five and Dime and Walton’s Family Centre. Finally, in 1962, the first Wal-Mart opened.
And the rest is retail history.
Wal-Mart’s sheer size has made it a lightening rod for controversy. For example, some of the retailer’s labor practices have drawn fire, such as its insistence on locking employees working at night inside warehouses. Over the years, several workers have gotten injured, but the company has said it’s done for the safety of employees working in neighborhoods with high crime rates. Suppliers have argued for years that Wal-Mart’s low prices come at too great a cost. Vendors have said that Wal-Mart wields its power with a heavy club, applying pressure for lower prices and dangerously squeezing profit margins. “In our business model, which has remained the same for 50 years, EDLC [costs] and EDLP continues to be the best retail business strategy in the world,” said Tovar. “We’re focused on keeping costs low and offering the broadest assortment of merchandise.”
Employee relations continue to vex the company. A protracted battle between female employees and the retail giant, known as Dukes v. Wal-Mart, started in 2001 with a gender discrimination lawsuit about pay and promotion. (See story, page 12.) It received class action status in 2004 by the U.S. District Court in Northern California. The case eventually went to the U.S. Supreme Court, which in June ruled that it couldn’t advance as a class action because the plaintiffs failed to meet the legal standard of commonality. More than 500 current and former female employees of Wal-Mart in January filed discrimination charges with the Equal Employment Opportunity Commission.
To some, Wal-Mart has come to symbolize a giant stomping on small businesses. Activists in several states have tried to put the brakes on Wal-Mart’s expansion. The retailer, which denies hurting mom-and-pop shops, plays hardball when it encounters community opposition. But Wal-Mart also uses its size to influence social issues. “We’re focused on our overall responsibility to sustainability, global women’s empowerment, fighting worldwide hunger and providing healthier foods for our customers,” Tovar said.
Ceo Duke sees himself as the guardian of Walton’s legacy. “The same culture that drove our growth during our first 50 years can drive our growth for the next 50 years,” he said. “Our next generation customer will include millions who are striving to join the middle class.”