Last February, Wal-Mart Stores Inc., this country’s fourth-largest company and the world’s biggest retailing colossus with annual sales of $94 billion, found itself humiliated. After 99 consecutive quarters of sales and earnings growth, Wal-Mart’s fourth-quarter profits were down 8.5 percent.
Alas. Wal-Mart, too, had feet of clay. The end of an era, said a somber Wall Street.
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David Glass, Wal-Mart’s president and chief executive, asked his management team at headquarters in Bentonville, Ark., to attach quarters–as in 25-cent coins–to their name tags as a sign of commitment to improving the next quarter.
Since Wal-Mart went public in 1970, the company founded by legendary folk hero Sam Walton has had steady–sometimes phenomenal–growth. It breezed by then Nos. 1 and 2–Kmart Corp. and Sears, Roebuck and Co.–in 1990. It revolutionized the way people shopped. It lured customers with unbeatable prices made possible because Wal-Mart was–and is–admired as the most efficient retailer with the most penny-pinching management anywhere.
But the 20 to 30 percent sales and profit growth pattern Wal-Mart enjoyed in the ’70s, ’80s and early ’90s couldn’t last forever. Category killers–Best Buy, Toys “R” Us, Home Depot–were proliferating. Times were good. Everybody was buying everything. The overstoring of America was on a roll. And there was Target, the discount-store division of Minneapolis-based Dayton Hudson Corp. The new kid in town, to this day not acknowledged by Wal-Mart as a significant competitive threat, was becoming just that.
Was it any wonder that Wal-Mart’s growth slowed? That its stock, at a high of $36 in 1993, gradually slipped to the $20s? It closed Friday on the New York Stock Exchange at $25.62.
Then came Jan. 31. As Glass has noted: The fourth-quarter decline was not a “disaster.” Net income was still an envied, record-breaking $942 million. Fiscal ’96 ended with record earnings of $2.7 billion, making Wal-Mart the 13th most profitable U.S. company.
Glass called it “an acceptable year by most standards,” though he noted it was “not a Wal-Mart year. We are not compared with other retailers or other companies, but with our prior results.”
And, he put battle plans in place.
Glass expects this year’s sales will top $100 billion; he intends for Wal-Mart’s sales and earnings to grow 14 to 16 percent annually over the next five years.
Analysts find that prediction too rosy. The sales potential is there, but they’re skeptical about the growth rate.
“Impossible,” declares St. Louis-based retail analyst Philip Abbenhaus of KPMG Peat Marwick LLP.
Among the more optimistic, analyst Richard Nelson of Chicago-based Nesbitt Burns Securities Inc. sees 12 percent growth as tops.
They have reason to doubt: Last year, Wal-Mart’s earnings grew just 2.2 percent; sales rose 13 percent. Net income for the first quarter this year was up 3 percent; sales, 11 percent.
But Wal-Mart is confident its strategies will work.
The thrust will focus on Supercenters (mammoth discount operations that combine food and general merchandise) and international expansion.
Wal-Mart also will strengthen its successful apparel lines (including McKids, Faded Glory, Kathie Lee Gifford; the latter, despite its alleged sweatshop affiliation, is so popular it will expand to include items such as hair dryers and curling irons).
As for global expansion, Wal-Mart plans to open 30 to 35 stores outside the U.S. this year. Wal-Mart also plans to invade the Northeast and Pacific coasts–now nearly virgin territory for the company. Domestically, this year Wal-Mart will open 75 discount stores, 12 Sam’s Clubs (warehouse stores) and 110 Supercenters (95 will come from relocations or expansions of existing discount stores).
Wal-Mart insists its plans do not include raising prices. Company spokesman Jay Allen denies both reports that Wal-Mart will raise prices and that it will go upscale.
But analysts say Wal-Mart may succumb eventually to such Band-Aids that it forcefully rejects now.
For one, competition is simply too fierce.
Kmart didn’t expire, as expected. Sears not only made a comeback, it’s thriving, especially in apparel, which Wal-Mart itself hopes to strengthen. Target keeps marching to its own tunes and the rest of retailing is consolidating and also searching for ways to grow.
And, there are potential hazards in Wal-Mart’s key growth strategies.
For example, food is not as profitable to retailers as apparel, which has higher markups. Yet, Wal-Mart’s big push revolves around combining food (produce, bakery, deli, frozen foods, meat departments, etc.) and everything from toothpaste to treadmills under one very expansive roof. Supercenters carry some 6,000 different items. The industry believes this “tomatoes-to-tires” concept may eventually be rolled out in all Wal-Marts.
And, the competition from supermarkets matches that of category killers.
But Steve Johnson, retail and electronics managing partner at Chicago’s Andersen Consulting, says Wal-Mart has parlayed its efficiency, state-of-the-art distribution techniques and technology to its food operations and is already the second-largest player in the grocery business.
Wal-Mart’s Allen claims the most dominant chain in the $406 billion grocery industry is Kroger Co. with a 6 percent market share. “We have a 42 percent share of the discount store business,” says Allen. “If we achieve half that percentage in food–that’s success. And, we’ve just begun.”
Wal-Mart’s theory that food will attract customers who want one-stop shopping is being realized. Allen says general merchandise business increases by 20 to 30 percent after food is added.
The international arena may be tougher than Wal-Mart expected.
“They’ve run into competitors in South America, players they’ve never dealt with that are not pushovers,” says Johnson. “And they’ve had resistance from suppliers who have loyalties to other retailers.”
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Wal-Mart entered the South American market when the economies of some of its countries were stronger than now. Reports say that Wal-Mart’s losses there are far larger than expected.
Long-term success in the Far East, which requires understanding differences in lifestyles, may be even more formidable.
Wal-Mart opens its first Supercenter and Sam’s Club in Shenzhen, China, just north of Hong Kong, and one Supercenter in Jakarta, Indonesia, in July.
Johnson, experienced in working with Andersen retail clients in those countries, says the sites chosen by Wal-Mart are very densely populated. “While large-store formats are well-suited for people with cars and trucks, the people there either walk or travel on motorbikes.
“The excitement about Wal-Mart’s arrival is there, but whether customers can take advantage of that is questionable,” according to Johnson. And, “The competition is fired up. They’re waiting for Wal-Mart.”
Wal-Mart’s chief financial officer, John Menzer, sees it differently. By 2003, he says, China will have the same buying power as the U.S. and Wal-Mart could have as many stores there as it does here.
Yet Wal-Mart still has its U.S. competitors across the road and in the next mall. And, unexpected foes are on the rise.
Steve Klein, of Western Illinois University, who researches Illinois’ rural economic development, sees rural-area local chains gaining appeal as they diversify and cater to hometown needs. Mentioned frequently in retail circles as increasingly aggressive competitors are Meijer Inc. of Grand Rapids, Mich., and Menomonee Falls, Wis.-based Kohl’s Corp.
Though Wal-Mart has become synonymous with bigness, it, too, has put effort into testing ways to localize and improve customer service.
Most radical: Three stores (in Missouri, Texas and Arkansas) enjoy home delivery. Groceries can be ordered by phone or fax for a flat service fee of $7.95; that includes shopping and delivery, whether a customer orders a pound of hamburger or all 6,000 items stocked in a Supercenter.
Wal-Mart also has a separate division–374 Home Town Stores–that tailor stock to specific locations. The Jay, Okla., store, for example, carries cattle feed and ranch-suited wares along with typical merchandise.
But all together, that won’t produce enough for the kind of growth Wal-Mart wants.
Johnson says it’s essential that Wal-Mart venture into new areas of business. “Any mass market product–home improvement, books, auto parts–but operating out of the down-and-dirty big-box formula.”
With some 30 years of researching and teaching retailing, Robert Blattberg of Northwestern University’s J.L. Kellogg Graduate School of Management, suggests a penetrating look at management–Wal-Mart’s own and those of the competition. “Something happens when an entrepreneurial founder, a key visionary is gone. Sam Walton had a philosophy, a culture, a passion in the belly. The question becomes: Can the next generation carry on with that fire?”
Not a soul doubts that Wal-Mart will retain its current retail supremacy. Not a soul disagrees that it has had a jolting wake-up call.