Where Wal-Mart leads, retail follows.
This story first appeared in the January 13, 2016 issue of WWD. Subscribe Today.
And that’s bad news for all involved given the discount giant’s woes and what its stumbles say about the crushing change sweeping through retail.
Wal-Mart has 11,500 stores, revenues approaching half a trillion dollars and the resources, experience, drive and reputation to get what it wants — or as close to it as possible. Yet faced with the challenges of Amazon.com, modern brick-and-click retailing and a lackluster consumer, Wal-Mart is coming up short. The company, now led by chief executive officer Doug McMillon, has acknowledged that its profits won’t grow until fiscal 2019 as it retools for the future.
That’s a pretty big piece of humble pie for a retailer with enough square footage to cover Manhattan one-and-a-half times over.
Wal-Mart, which became the largest U.S. retailer in 1990, has the billions to spend on a makeover and command of enough markets to give it time to change. Those are advantages most of its competitors lack. Other retailers are forced to either hurt more when the market shifts — suffering serious maladies while Wal-Mart catches a cold — or be more inventive, more aggressive, more forward-looking or just luckier to keep their place in the market. Wal-Mart is also so big and a player everywhere that its moves reverberate broadly.
Any examination of the retail giant’s challenges is a look at issues that every retailer will have to face sooner or later, in their own ways. Wal-Mart’s big yellow smiley face is the industry’s canary in a coal mine and it’s looking a little peaked. That’s telling everyone else to look at Wal-Mart and be on guard for these issues.
After years of being targeted for too-slim paychecks for workers, Wal-Mart has stressed that wages are going to start squeezing earnings. In fiscal 2016, the company will take a hit of $1.2 billion in incremental expenses tied to wages, and another $1.5 billion in fiscal 2017. The pay hikes represent 75 percent of the company’s earnings a share reduction, with wages increasing to $9 an hour last year and set to go to $10 this year.
As Wal-Mart goes higher to compete for workers, the rest of the market gets squeezed.
Some retailers were already sensing the changes in the labor dynamic. Gap Inc. increased its minimum hourly rate to $9 in February 2014 and then up to $10 in 2015. According to Web site Glassdoor.com, the average pay for a cashier is $8.54 at Kohl’s, $9.04 at J.C. Penney and $8.87 at Target.
Management consulting firm Hay Group believes that it would cost other retailers $4 billion to match Wal-Mart’s pay raise. “We looked at the data from 130 retailers and calculated what it would cost them to collectively raise their employees’ salaries and that’s how we came up with the number,” said Craig Rowley, global leader of the Hay Group retail practice.
Turnover is also climbing as these employees chase that higher pay. Retail turnover was 50 percent during the recession and now it has risen to 65 percent. Rowley pointed out that for these employees getting a 25-cent pay increase per hour is worth changing jobs. So if one retailer raises wages, it sets off a chain reaction of job-hopping.
There has also been a shift at Wal-Mart to more decision-making at the store level and less corporate control, leading to 450 job cuts at its Bentonville, Ark., headquarters. This could lead to vendors reducing their teams that worked directly with those employees.
Target and Sears laid off workers in their headquarters in the recent past. And Macy’s offered key executives buyouts late last year — which turned out to be the tip of the iceberg since the company said last week that it would lay off 2,100 workers as part of a program to shave expenses by $400 million annually.
Last week, the Labor Department’s reading on the December employment scene showed that apparel and accessories stores cut payrolls by a seasonally adjusted 17,500 jobs as department stores cut 5,800 jobs.
Meanwhile, Amazon is bulking up in nearly every way, adding staff as it picks up market share and drawing vendors to Seattle.
As Amazon grew from an online book store to a digital Goliath and sank billions into becoming, in its words, “Earth’s most customer-centric company,” Wal-Mart and retail lagged in tech.
Now everyone is trying to make up for lost time while the Amazon juggernaut keeps gaining speed. Wal-Mart is charging hard after the e-commerce business, with Amazon clearly in its sights.
“We all know that retail has changed and will continue to change at an accelerating pace,” Wal-Mart’s McMillon told Wall Street in August. “We also know that what we did in the past wouldn’t by itself be enough to win with customers. Competition is strengthening. Pure e-commerce businesses move fast, innovate well and run on lower margins. Hard discounters run on lower levels of profitability and they’re growing quickly. We know there’s a lot more change to come and we’re motivated by it.”
Wal-Mart based its digital business in Silicon Valley and plans to put out more than $1 billion into its e-commerce business this year. That spending, which few others could stomach, is another big part of the profit drain at Wal-Mart.
To meet the Amazonian challenge, Wal-Mart and many other retailers are trying to make the best of their brick-and-mortar, launching a wave of buy-online-and-pick-up-in-store initiatives. Target offers curbside pickup in some locations, while Sears offers in-vehicle pickup at all of its locations. Kohl’s one-ups them all and offers special parking spots for these customers.
Wal-Mart, which has the biggest physical retail presence by far, offers store pickup for online orders and is testing various curbside pickup options.
Such initiatives help retailers save on shipping, but execution is poor. In a JDA Consumer survey, 50 percent of shoppers who tried picking up orders in stores experienced a service issue. They cited either slow service or missing orders.
A Stella Service study found that retailers are still trying to figure out how to implement the new service. For example, Macy’s and Sears took over two hours to confirm by e-mail that a product was available to customers.
According to Stella Service, shoppers picking up online orders in stores spent more time in the checkout process than regular in-store shoppers. Target makes the pickup area immediately visible upon entering the store and Nordstrom lets shoppers visit any service desk.
Costco has chosen not to respond at all, saying it wants customers to come into the store and not shop online. Costco says it does not want to be everything to everybody.
The digital battle has also spilled over into other, long-standing points of retail contention. Wal-Mart for instance, is trying to work a mobile solution to rid itself of some irksome credit fees.
Wal-Mart filed a lawsuit against Visa in 2014 and has been very vocal about its unhappiness with credit card fees. Michael Pryor of CFO Stack Overflow speculated that Wal-Mart pays nearly $2 billion in credit card interchange fees a year. Certainly, that dynamic help pushed Wal-Mart to enter into the mobile payments industry in December with a proprietary technology called “Wal-Mart Pay” that will work on Apple or Android devices. If shoppers go to the trouble to download Wal-Mart Pay, it’s likely they will use it to shop and place more orders with Wal-Mart and not its competitors.
Wal-Mart’s desire to cut out Visa and MasterCard and save itself some fee money is having huge ripple effects. Wal-Mart was already a member of a group of 40 retailers that called themselves the MCX Consortium, which had been developing a mobile payment option called CurrentC. It wasn’t moving fast enough for Wal-Mart.
In what appears to be another example of Wal-Mart moves forcing others to shift, Target is rumored to be in the early stages of a similar mobile-wallet product. Wal-Mart says it’s still an MCX member, but many are worried that if it leaves the group and then Target, then MCX might not have a chance.
Wal-Mart’s new strategy includes a good portion of its old one: having the lowest prices.
But that’s increasingly difficult in this day of Internet comparison shopping and aggressive moves for market share. Wal-Mart started the holiday 2015 selling season by cutting prices on more than 20,000 products and while in years past that might have seemed like an impossible feat to match for its many of its competitors, Amazon shot back just days later with more than 30,000 of its Lightning Deals for the season.
Wal-Mart managers were told to match Amazon prices.
The lackluster consumer and some pressure from that battle was felt up and down the price scale.
As the holiday season approached its zenith, Wells Fargo analysts said price cuts intensified across the mall, with 36 percent of promotions in their study deemed “deeper or broadly more promotional.”
“The brands where we observed meaningfully higher promotions were both Michael Kors concepts…Coach full-price stores — with a new Cyber Monday and earlier winter sale — Anthropologie…as well as Gap and Banana Republic,” the analysts said.
While consumers benefit from all this discounting, multiline merchants turn around and squeeze their vendors.
Wal-Mart attempted to change the terms of its vendor contracts last summer, requesting amendments such as extended payment terms on items that don’t sell quickly and a discount if it pays the vendor early.
“No supplier will happily accept less payment and/or longer payment terms so we suspect there has been a significant number and level of prolonged ‘discussion’ between suppliers, their merchandising counterparts and Wal-Mart’s supplier administration and/or senior leadership,” wrote Raymond James analyst Budd Bugatch.
“Moreover, we hypothesize that many, if not most, suppliers would have budgets in place for 2015 that such amendments would disturb and threaten.”
This is an area where Wal-Mart with its girth still has an edge, leaving other retailers to scramble.
Retail expert Jan Kniffen of Kniffen Enterprises believes that even though many other competitors will want to get the same deal that Wal-Mart is asking, they probably won’t. “None have the volume that gives Wal-Mart the power to squeeze the supply chain the way it does. And no one can squeeze the supply chain like Wal-Mart,” he said.
Rowley of Hay Group agreed with Kniffen that Wal-Mart would get better terms from vendors because of its size. “The deals are not a secret for long, but the volume players always get better deals. Every retailer is looking to get better deals like shorter shipping times, getting goods delivered just in time, open to buy — not commit to contract.” Rowley said the vendors have to be ready with large quantities for Wal-Mart, which may decide late in the season it doesn’t want them.
“That helps out Ross Stores and T.J. Maxx who get the leftover inventory that the vendors had created for Wal-Mart,” Rowley said.
STORE CLOSURES AND RIGHT-SIZING
Closing stores and shrinking footprint used to be a sign of desperation for retailers. Now it seems as if retail is overstored as more shopping takes place online and mall traffic is down. The time has come to right-size. According to Dorothy Lakner, managing director at Topeka Capital Markets, “The new ideal store count for a U.S. national chain of clothing retailers is 600 to 700 stores.”
As Wal-Mart seeks to reinvent with a sharper digital eye, the company is also focusing on improving its physical touch points.
The first step in McMillon’s plan to reshape the company is to “win with stores.”
“We know customers love shopping in stores, and they’ll want great stores tomorrow,” the ceo said as he laid out his vision. “And why wouldn’t they? The chance to interact with products, to see something new, to look at an item, touch a fabric, smell something, see a color, it’s important to them. The opportunity to buy something and take it home right away is satisfying. Now stores will be different and those we operate today need to change. So we’ll keep refreshing them to make them relevant for the future. They’ll be more convenient, for example, whether it’s a stock-up trip or a top-up trip. The in-store experience will be critical, which is why our investment in people this year is also a bridge to our future. These things are not unrelated.”
But there will be far fewer Wal-Mart store openings this year as the chain sets out to shrink its store footprint. Wal-Mart’s decision to scale back gives other retailers the green light to do so as well.
Other retailers feeling the same pressures that are bearing down on Wal-Mart are in brick-and-mortar retreat.
Most recently, Macy’s said it would shutter 40 doors as part of its reorganization, which is being spurred by a 4.7 percent comparable-store sales decline for the combined November and December period.
“In light of our disappointing 2015 sales and earnings performance, we are making adjustments to become more efficient and productive in our operations,” said Terry J. Lundgren, chairman and ceo of Macy’s. “We can operate more effectively with an organization that is flatter and more agile so we can pursue growth and regain market share in our core Macy’s and Bloomingdale’s omnichannel businesses faster and with more intensity.”
In November, Target revealed it was closing 13 stores, mostly in the Midwest, after years of decreasing profitability. J.C. Penney closed roughly 40 stores, Sears shut down 235 stores in 2015 and Stage Stores is shuttering 90 to improve chain productivity.
By comparison, Amazon is expanding, not only building its own sales by moving into Latin America and bolstering its distribution capacity, but growing as a platform for other sellers to get at its huge customer base.
The company said individuals and businesses selling on Amazon this holiday season sold to more than 80 percent of the people who ordered a physical item through the Web site. Amazon keeps its data close to the vest, but did say that on Cyber Monday alone, sellers received orders for more than 23 million items.
That helps explain why, at least in terms of market capitalization, Amazon shot past Wal-Mart last year and is now worth nearly $290 billion.
While retail executives still gaze in awe at Wal-Mart, try to emulate it and quake over its sheer scale and financial might, some of the edge has been taken off. There’s a new behemoth they all want to be: Amazon.