[Texgreen] Wal-Mart era wanes

[Roger Baker]

Not even the corporate titans are secure in changing times is the =20
theme below in this rather interesting analysis.

What is missing from this analysis is the fact that low margin, low =20
cost retailers like Wal-Mart can be expected to do particularly well =20
during hard times, so long as shoppers can still afford to get there =20
and back with the goods as energy prices rise. Durability and =20
practicality as well as low price are yet to be properly appreciated =20
as virtues, but I think thats increasingly what smart low income =20
shoppers want. Given the current state of the economy, I think hard =20
times are on their way back as a defining feature of consumer =20
behavior. -- Roger

                   =20
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<http://online.wsj.com/article_email/SB119135657404946747-=20
lMyQjAxMDE3OTAxMzMwNTM2Wj.html>

Wal-Mart Era Wanes
Amid Big Shifts in Retail
Rivals Find Strategies
To Defeat Low Prices;
World Has Changed
By GARY MCWILLIAMS
October 3, 2007; Page A1

The Wal-Mart Era, the retailer's time of overwhelming business and =20
social influence in America, is drawing to a close.

Using a combination of low prices and relentless expansion, Wal-Mart =20
Stores Inc. emerged from rural Arkansas in the 1970s to reshape the =20
world's largest economy. Its co-founder, Sam Walton, taught Americans =20=

to demand ever-lower prices and instructed businesses on running a =20
lean company. His company helped boost America's overall =20
productivity, lowered the inflation rate, and strengthened the buying =20=

power for millions of people. Over time, it also accelerated the =20
drive to manufacture products in Asia, drove countless small shops =20
out of business, and sped the decline of Main Street. Those changes =20
are permanent.

Today, though, Wal-Mart's influence over the retail universe is =20
slipping. In fact, the industry's titan is scrambling to keep up with =20=

swifter rivals that are redefining the business all around it. It can =20=

still disrupt prices, as it did last year by cutting some generic =20
prescriptions to $4. But success is no longer guaranteed.

Rival retailers lured Americans away from Wal-Mart's low-price =20
promise by offering greater convenience, more selection, higher =20
quality, or better service. Amid the country's growing affluence, Wal-=20=

Mart has struggled to overhaul its down-market, politically incorrect =20=

image while other discounters pitched themselves as more upscale and =20
more palatable alternatives. The Internet has changed shoppers' =20
preferences and eroded the commanding influence Wal-Mart had over its =20=

suppliers.
As a result, American shoppers are increasingly looking for qualities =20=

that Wal-Mart has trouble providing. "For the first time in a long =20
time, quality has a chance to gain on price," says Lee Peterson, a =20
vice president at Dublin, Ohio-based brand consulting firm WD =20
Partners Inc.

Now, the big-name brands that fueled Wal-Mart's climb to the top are =20
forging exclusive distribution deals with other retailers, or working =20=

to reduce their reliance on its stores. PepsiCo Inc., which favored =20
mass-market campaigns a decade ago, recently skipped Wal-Mart when =20
launching a new energy drink in favor of Whole Foods Market Inc. =20
Consumer-products giant Procter & Gamble Co. gets 15% of its revenue =20
from Wal-Mart, down three percentage points from 2003.

Wal-Mart's effort to expand internationally has had mixed success in =20
affluent markets. Last year it exited South Korea and Germany after =20
failing to adapt to local tastes and achieve economies of scale. In =20
Japan, the company's low-price, high-volume approach has struggled in =20=

a country where low prices often equate to low quality.

Wal-Mart remains an enormous force in retailing, of course. Its world-=20=

wide sales are almost three times those of France's Carrefour SA, the =20=

world's second-largest, publicly traded retailer. Wal-Mart's U.S. =20
revenue is 4=BD times that of discount-store rival Target Corp., and =20
four times that of second-largest U.S. food retailer Kroger Co. Its =20
clothing and shoe sales last year alone exceeded the total revenues =20
of Macy's Inc., parent of Macy's and Bloomingdale's department stores.

The company's unquenchable thirst for scale has been the secret to =20
its market-changing power. "What we are is a 'supercenter' with one-=20
stop shopping," said Wal-Mart's Vice Chairman John Menzer at an =20
investors' conference last month. The company expects each year to =20
build another 170 to 190 of the 200,000-square-foot supercenters that =20=

are its hallmark and convert 500 smaller discount stores to the =20
bigger format over the next five years. "We would love to wave a =20
magic wand and [make] every one of our discount stores a =20
supercenter," he says.

But that very focus on scale is now a weakness, for the world has =20
changed on Wal-Mart. The big-box retailing formula that drove Wal-=20
Mart's success is making it difficult for the retailer to evolve. =20
Consumers are demanding more freshness and choice, which means that =20
foods and new clothing designs must appear on shelves more =20
frequently. They are also demanding more personalized service. Making =20=

such changes is difficult for Wal-Mart's supercenters, which ascended =20=

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 =20
can with that formula," says Love Goel, a former Fingerhut Cos. =20
executive and now chairman and CEO of Growth Ventures Group, a =20
Minnetonka, Minn.-based private-equity firm that invests in retail =20
businesses. Wal-Mart has outgrown its supercenter recipe, but efforts =20=

to win growth from more affluent consumers have fallen flat, he says. =20=

"They have hit the wall."

Wal-Mart declined to make an executive available for an interview and =20=

declined to respond to written questions, citing an upcoming meeting =20
with Wall Street analysts.

Business history is littered with companies that grew to enormous =20
size and used their girth to re-arrange the world to fit their =20
strengths. Think International Business Machines Corp. in the =20
mainframe business, General Motors Corp. in autos, or Microsoft Corp. =20=

in personal computers. For a time, their success bred an ecosystem =20
that sustained their status. In the 1970s, independent software =20
companies piggybacked on IBM's mainframes, resulting in greater =20
demand for mainframe computers.

Such orchestration can produce solid growth for decades. But it can =20
also produce corporate blinders. Over time, IBM's grip on the =20
corporate data center left it unable to anticipate the decentralizing =20=

effects of personal computing. GM's knack at brand creation and =20
frequent model changes left it vulnerable to the incremental quality =20
approach of Japanese auto makers. Microsoft was so busy cramming =20
features into its Windows operating software that it lagged others in =20=

the shift to the Internet. Each remains among the top in its =20
industry; yet each has relinquished the role of industry definer -- =20
IBM to Intel Corp., GM to Toyota Motor Corp., Microsoft to Google Inc.

Wal-Mart's great insight was perfecting the so-called "value loop" in =20=

retailing. At its most basic, the system works like this: Lower =20
prices generate healthy sales gains and profits. Some of those =20
profits went into further price cuts, generating more sales. The =20
lower the price, the more consumers flocked to Wal-Mart.

But the value loop is beginning to unravel. For 10 years through =20
2005, Wal-Mart's sales gains at stores open at least a year averaged =20
5.2%. So far this year, its comparable-store sales, a measure of =20
market share, is up just 1.3%. The pricing gap between Wal-Mart and =20
rivals has narrowed, and more customers are now choosing convenience =20
over wading through a supercenter.

That compares with comparable-store gains of 4.6% at Target, which =20
markets itself as a trend-setting discounter, and 6% at membership-=20
club rival Costco Wholesale Corp., which peddles $500 Bordeaux wines =20
and $4,000 Cartier watches. While Wal-Mart has been portrayed as a =20
ruthless employer, Costco has been praised for providing some of the =20
best employee benefits in retail.

Wal-Mart's shares trade about where they were at the start of the =20
decade, when the company produced less than half its current revenue. =20=

Shares closed yesterday up 40 cents at $44.87, and down 9.3% from the =20=

stock's year-earlier price. Earlier this year, Wal-Mart took the =20
extraordinary step of ratcheting down its U.S. expansion plans =20
because its new stores were stealing too much revenue from existing =20
ones. That wasn't a concern in the 1980s and 1990s when Wal-Mart was =20
regularly flattening competitors.

In some ways, Wal-Mart's loss of clout is a reflection of a more =20
fragmented world. Retailing is a mirror to how we live and work. Big-=20
box stores thrived by selling highly recognizable national brands, =20
which themselves were fed by two phenomena: the growth of mass media =20
and freeways, which encouraged large stores in remote areas. Stores =20
and brands together achieved scale efficiencies that allowed them to =20
overwhelm local chain stores and regional brands.

But the Internet is transforming the retail definition of scale. The =20
once-stunning compilation of 142,000 items found in a Wal-Mart =20
supercenter doesn't seem so vast alongside the millions of products =20
available on the Internet. At the same time, the cost of creating and =20=

sustaining a national brand is rising because of media fragmentation. =20=

Niche brands, created by Internet word of mouth, are winning shelf =20
space and sapping profits required to fund big brands' advertising. =20
Manufacturers such as Apple Inc. and Phillips-Van Heusen Corp., =20
lacking the retail distribution or presentation they crave, are =20
opening their own stores. One result is that retail giants hold less =20
sway over their customers -- and over their suppliers.

And across the landscape, numerous rivals are using a form of =20
competitive jujitsu to keep the Bentonville behemoth off balance.

Grocery-store chains such as Kroger are resurging on sales of =20
prepared or semicooked meals, which people can grab on their way =20
home. Cincinnati-based Kroger projects sales at stores open at least =20
a year will climb between 4% and 5% this year, on top of a 5.3% =20
increase last year.

Thomas Kim, a financial analyst for a St. Louis scrap-metal firm, =20
describes his family as frugal shoppers who check prices on the =20
Internet. But he and his wife most often shop in local retailers. =20
"It's the convenience factor," says Mr. Kim. His family avoids =20
supercenters, describing them as too large and too crowded.

When Wal-Mart pushed heavily into consumer electronics earlier this =20
decade, many industry observers expected it to flatten electronics =20
chains. But five years ago, Best Buy Co. began aggressively marketing =20=

installation and other services alongside flat-panel TVs and PCs. =20
Last year, Best Buy's total sales rose 16%. Wal-Mart, which has =20
struggled to sell big-ticket HDTVs, has only recently begun selling =20
installation services at a few stores using an outside supplier. It =20
doesn't break out consumer-electronics sales, but analysts estimate =20
sales last year rose 7.6% to $22.6 billion.

Melissa Morris says Best Buy won her loyalty by gladly accepting a =20
notebook PC return and having trained sales clerks. "I go to a store =20
that specializes or has associates there that know about it," she =20
says. The Erie, Pa., sales executive refuses to go to Wal-Mart, =20
citing its crowded aisles and hurried atmosphere.

Best Buy and specialty retailer PetSmart Inc., which touts pet =20
grooming and kennel stays, put hard-to-copy services at the forefront =20=

of their pitch, says Howard N. Jackson, president of retail advisers =20
HSA Consulting Inc., Knoxville, Tenn. "They realize the best way to =20
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 =20
business in 1978. But national drug chains CVS Caremark Corp. and =20
Walgreen Co. reacted by redefining their role and selling basic =20
health services, such as school physicals, diagnostic tests, and flu =20
treatment, alongside drugstore wares. CVS and Walgreen each acquired =20
in-store clinic operations, redefining the pharmacy business as basic =20=

health-care centers.

Same-store sales at CVS and Walgreen are running about double that of =20=

Wal-Mart this year. Wal-Mart has begun offering leases to clinic =20
operators.

Then there's the host of new entrants. In apparel, smaller retailers =20
with niche market appeal like Hennes & Mauritz AB's H&M, Inditex =20
Group's Zara and Los Angeles-based Forever 21 Inc. are growing by =20
offering consumers rapid style changes. Outside the U.S., Britain-=20
based Tesco PLC is challenging Wal-Mart by cultivating the Tesco =20
brand across five different formats, including convenience stores and =20=

urban stores as well as supercenters. This fall, Tesco will open its =20
first U.S. outlets, stores that will offer fresh and prepared foods =20
and staples (see related article).

As Wal-Mart's influence erodes, so does its allure to manufacturers. =20
Burt P. Flickinger III, managing director of retail consulting firm =20
Strategy Resource Group, says Wal-Mart now takes a back seat to =20
regional grocery and national drug chains when it comes to striking =20
deals.

He says some manufacturers now sell their wares faster at other =20
retailers. "Four of the top 10 consumer-products companies say they =20
can move merchandise faster with Walgreen and CVS," says Mr. =20
Flickinger, who came up with the estimate from his talks with =20
consumer-products firms. Such retailers have been rewarded with lower =20=

costs and better sales gains.

The change is apparent at PepsiCo. Wal-Mart is PepsiCo's largest =20
customer world-wide, accounting for $3.16 billion in sales of drinks =20
and snack foods. But earlier this year, PepsiCo opted to launch =20
Fuelosophy, a new energy drink, at Whole Foods, a high-end =20
supermarket chain.

"We thought that was the best place to introduce and test it," says =20
PepsiCo spokesman David DeCecco. Whole Foods customers'"health and =20
wellness" profile better match that of likely Fuelosophy buyers than =20
Wal-Mart's, he says. He declined to name which other retailers were =20
considered for the rollout.

Wal-Mart's loss of influence can also be seen in logistics. In 1984, =20
Wal-Mart's decision to embrace bar-code scanners in its distribution =20
centers and stores helped quash the use of a less-efficient =20
technology then used at Sears, Roebuck & Co. and other retailers.

In 2003, the retailer brashly jumped onto the next big logistics =20
technology, called radio-frequency identification, and mandated big =20
suppliers begin slapping RFID tags on products shipped to its =20
warehouses. Wal-Mart installed tag readers at warehouses and stores, =20
hoping to further automate warehouses and lower inventory costs.

Wal-Mart quietly dropped the mandate earlier this year and refocused =20
its development after suppliers complained of the high costs and lack =20=

of a return on their investment in the new technology. While the =20
company says it's pushing ahead, Wal-Mart says it realigned efforts =20
to focus on areas where the technology offered the most promise, such =20=

as assuring vendors' promotional displays are properly deployed in =20
its stores.

Wal-Mart wasn't able to demand big suppliers continue investing in a =20
technology that was raising their operating costs, says Ken Rohleder, =20=

president of Rohleder Group, a Louisville, Ky., supply-chain =20
consulting firm. "There was a time when they could have dictated =20
anything," he says.

Write to Gary McWilliams at gary.mcwilliams@wsj.com=