The Greatest Retailing Machine Ever Devised
Most people know that one of my interests is retailing and retail chains. I am a member of the "Remembering Retail" group on Yahoo! For the last week or so, a lively discussion has been occuring on the group's message board concerning the many regional discount chains that have closed shop over the last 10 years (Venture, Bradlees, Zayre, Caldor, Clover, Ames, etc.). The post that started it all asked a simple question: Why did these chains go out of business? A big part of the answer, of course, is Wal-Mart.
This morning I added my 2 cents to the discussion. Since I doubt anyone reading this blog is a member of the group, I've decided to copy my post here:
I have observed during the course of this discussion and many others on this board a sentiment that Wal-Mart's days are numbered, that it has reached its peak and is destined to soon enter the retail "graveyard." I don't agree - Wal-Mart is going to be around for a long time, and it's not nearly as big as it can (and will) get.
What makes Wal-Mart different from Bradlees, Caldor, Venture, Ames, Zayre, Kmart, and all other discounters before it is that it refuses to grow complacent, as those chains did. Wal-Mart is in a constant state of expansion, which entails a constant re-evaluation of its existing stores. Wal-Mart will not operate a store that is too small or in a bad location. Wal-Mart is constantly expanding, relocating, or closing obsolete stores - other chains never did and found themselves with a chain of stores time had passed by.
"Njyogibear" brings up an excellent point - not only does Wal-Mart make sure its stores meet today's needs, but it stocks them with merchandise in a way no one else can. This is Sam Walton's legacy: efficient distribution. Wal-Mart adopted computerized distribution in the early 1970's while other discounters continued to operate in the "stone age." Even before it became the nation's largest retailer, Wal-Mart knew how to get the "upper hand" in dealing with its vendors, even to put the "squeeze" on them and pass the concessions and savings it recieved directly to its customers. Now that it's so big, every company must have its products on their shelves or risk going out of business.
Before Sam died, he knew Wal-Mart would have to get into the food business in order to keep growing. Although his "Hypermart USA" experiment wasn't a resounding success, the lessons learned were applied to the Supercenter concept and, later, the Neighborhood Markets. Wal-Mart's effect on food retailing is only now being felt. The supermarket chains are running scared.
Today Wal-Mart is obsessed with entering urban markets, the "final frontier." Yes, it is running into resistance, but this doesn't mean the entire operation is in trouble. The well-publicized setbacks in New York City, Chicago, and L.A. are opportunities for Wal-Mart to regroup and refine its strategy. Wal-Mart does not give up, it just keeps pushing to be bigger and better.
Wal-Mart is the greatest retailing machine ever devised. Every segment of retail has felt the heat: local retailers and "mom and pops", competing discounters (most of which are gone), department stores (Wards is gone, Sears is on the run, May and Federated combined just to stay competitive), and supermarkets (Kroger, Safeway, and Albertsons have built empires that may no longer be "relevant"). Yes,there are ways to compete with Wal-Mart, but no one can "out-Wal-Mart" Wal-Mart. It is like no other retailer in the history of the world.
We all know Wal-Mart can't grow at its current pace forever, but it will continue to grow and will be around for a very long time. What should concern everyone is that its drive to lower prices threatens to drive down wages and living standards in cities throughout America. By refusing to pay a "living wage" and by buying a majority of their goods overseas because labor costs there are lower, they are threatening to make the United States into a Third World country. Our economy cannot be sustained by buying and selling things - we have to make things too.
Target remains competitive because it is perceieved as being more "upscale." Of course, Target is not different from Wal-Mart at all. Even though Target is growing (and is opening supercenters of its own), it is a much smaller retailer and will never be able to "catch up."
Kmart cannot compete at all - its reputation as a retailer cannot be salvaged. Although Kmart ostensibly acquired Sears, the motivation for the recent merger was for Sears to acquire Kmart's real estate and its expertise in categories such as pharmacy, pantry, HBA, and garden. Sears had already acquired about 50 former Kmarts before the merger in an effort to launch its "off mall" growth strategy; now it has the rest. I expect the Kmart name to be eliminated from the retail landscape within 5 years.
Sears may be able to compete with Wal-Mart, but it has to offer something decidedly different from Wal-Mart, Target, and Kmart. Sears was smart to recognize that if it continued to hitch its wagon to malls, they'd be gone soon. Not only are there very few malls being built every year, but many of them are becoming less viable and shutting down. Furthermore, the mall is not necessarily where Sears customers are or where they prefer to shop. The answer is to open freestanding stores. Like most on this board, I am very curious to see how the Sears Grand and Sears Essentials experiments play out, andI think a big concern is that Sears is "muddying" its brand - people will have a hard time viewing Sears mall stores, Sears Grand, and Sears Essentials as part of one retailer that they'll feel loyalty to. And Sears Grand and Sears Essentials can't be "like Wal-Mart,"they have to be different. I am not sure that offering Kenmore appliances will be enough. I will say this though - the Sears name is still good and has a good reputation, unlike Kmart - if they do a poor job executing this "off mall" push, they'll lose that advantage and will close shop very quickly.
Don't expect any new discount retailers to come along. The category is saturated.
This morning I added my 2 cents to the discussion. Since I doubt anyone reading this blog is a member of the group, I've decided to copy my post here:
I have observed during the course of this discussion and many others on this board a sentiment that Wal-Mart's days are numbered, that it has reached its peak and is destined to soon enter the retail "graveyard." I don't agree - Wal-Mart is going to be around for a long time, and it's not nearly as big as it can (and will) get.
What makes Wal-Mart different from Bradlees, Caldor, Venture, Ames, Zayre, Kmart, and all other discounters before it is that it refuses to grow complacent, as those chains did. Wal-Mart is in a constant state of expansion, which entails a constant re-evaluation of its existing stores. Wal-Mart will not operate a store that is too small or in a bad location. Wal-Mart is constantly expanding, relocating, or closing obsolete stores - other chains never did and found themselves with a chain of stores time had passed by.
"Njyogibear" brings up an excellent point - not only does Wal-Mart make sure its stores meet today's needs, but it stocks them with merchandise in a way no one else can. This is Sam Walton's legacy: efficient distribution. Wal-Mart adopted computerized distribution in the early 1970's while other discounters continued to operate in the "stone age." Even before it became the nation's largest retailer, Wal-Mart knew how to get the "upper hand" in dealing with its vendors, even to put the "squeeze" on them and pass the concessions and savings it recieved directly to its customers. Now that it's so big, every company must have its products on their shelves or risk going out of business.
Before Sam died, he knew Wal-Mart would have to get into the food business in order to keep growing. Although his "Hypermart USA" experiment wasn't a resounding success, the lessons learned were applied to the Supercenter concept and, later, the Neighborhood Markets. Wal-Mart's effect on food retailing is only now being felt. The supermarket chains are running scared.
Today Wal-Mart is obsessed with entering urban markets, the "final frontier." Yes, it is running into resistance, but this doesn't mean the entire operation is in trouble. The well-publicized setbacks in New York City, Chicago, and L.A. are opportunities for Wal-Mart to regroup and refine its strategy. Wal-Mart does not give up, it just keeps pushing to be bigger and better.
Wal-Mart is the greatest retailing machine ever devised. Every segment of retail has felt the heat: local retailers and "mom and pops", competing discounters (most of which are gone), department stores (Wards is gone, Sears is on the run, May and Federated combined just to stay competitive), and supermarkets (Kroger, Safeway, and Albertsons have built empires that may no longer be "relevant"). Yes,there are ways to compete with Wal-Mart, but no one can "out-Wal-Mart" Wal-Mart. It is like no other retailer in the history of the world.
We all know Wal-Mart can't grow at its current pace forever, but it will continue to grow and will be around for a very long time. What should concern everyone is that its drive to lower prices threatens to drive down wages and living standards in cities throughout America. By refusing to pay a "living wage" and by buying a majority of their goods overseas because labor costs there are lower, they are threatening to make the United States into a Third World country. Our economy cannot be sustained by buying and selling things - we have to make things too.
Target remains competitive because it is perceieved as being more "upscale." Of course, Target is not different from Wal-Mart at all. Even though Target is growing (and is opening supercenters of its own), it is a much smaller retailer and will never be able to "catch up."
Kmart cannot compete at all - its reputation as a retailer cannot be salvaged. Although Kmart ostensibly acquired Sears, the motivation for the recent merger was for Sears to acquire Kmart's real estate and its expertise in categories such as pharmacy, pantry, HBA, and garden. Sears had already acquired about 50 former Kmarts before the merger in an effort to launch its "off mall" growth strategy; now it has the rest. I expect the Kmart name to be eliminated from the retail landscape within 5 years.
Sears may be able to compete with Wal-Mart, but it has to offer something decidedly different from Wal-Mart, Target, and Kmart. Sears was smart to recognize that if it continued to hitch its wagon to malls, they'd be gone soon. Not only are there very few malls being built every year, but many of them are becoming less viable and shutting down. Furthermore, the mall is not necessarily where Sears customers are or where they prefer to shop. The answer is to open freestanding stores. Like most on this board, I am very curious to see how the Sears Grand and Sears Essentials experiments play out, andI think a big concern is that Sears is "muddying" its brand - people will have a hard time viewing Sears mall stores, Sears Grand, and Sears Essentials as part of one retailer that they'll feel loyalty to. And Sears Grand and Sears Essentials can't be "like Wal-Mart,"they have to be different. I am not sure that offering Kenmore appliances will be enough. I will say this though - the Sears name is still good and has a good reputation, unlike Kmart - if they do a poor job executing this "off mall" push, they'll lose that advantage and will close shop very quickly.
Don't expect any new discount retailers to come along. The category is saturated.
posted by Mitch Glaser @ 10:43 AM
7 comments
7 Comments:
I recieved this response on the "Remembering Retail" message board.
I tend to be critical of Wal-Mart's business plan--in terms of thelong run, but I think they'll still be around and grow for some timeto come.
It's important to note that they have stumbled in some very important ways: they have put an emphasis on building volume through low margin items such as food, CDs, and books. Even in their public filings, they
admit that this has hurt their margins. They also have been deriving an increasing proportion of their profit from check cashing and money wires, i.e., they are being forced to go outside of retail to please Wall Street and even with these moves, they are struggling to do that. They've tried to start a bank in Utah and I would not be surprised to go into areas like subprime credit cards or rent to own. I suspect we
aren't seeing more neighborhood markets, because Wall Street is
telling them that they are a bad idea.
Wal-Mart has a lock on small town/rural markets, but will have
difficulty really growing in large metropolitan areas, because of
greater costs of doing business and greater political sophistication. If people in the Atlanta area (where County governments tend to be "in bed" with developers) can successfully fight them (as has happened
twice in the past year), then they really are in trouble in terms of
the future. Moreover, in metro areas, people have many more
choices---big boxes of every variety and can overcome Wal-Mart's
narrow selections. Also, as noted above, their trajectory seems to be
non-retail and targeting customers with limited choices. An association with poor people will be poison for trying to open in
middle to upper middle income areas of metropolitan areas. And once those places have a Target, it will be easier for them to say "no" to Wal-Mart.
Wal-Mart is already emerging as an election issue. Candidates who've
provided them with tax abatements and other corporate welfare are
becoming targets and have been successfully defated (and get national publicity when this happens). This will only increase in the future. Their opponents used to be preservationists, small numbers of hard core community organizers, and local eccentrics. Not anymore. Wally World is too big a target and the discrimination suits against them
make it even easier to draw attention to their dark side in communities.
Target is smaller but has a more defined market segment. They also
have more latitude for building profit in the future. Even if they
lose some of their "edgy" cache, they still operate as the
"anti-Wal-Mart", which would allow them to continue drawing a
clientele with larger discretionary incomes than Wal-Mart. They also emphasize high margin items like clothing and could easily build more
depth in other soft goods. They would be well placed to accept name
brand clothing---I could see Levi's main line in Target, but not in Wal-Mart. Target is clearly ambivalent about food and could easily cut the food space in many stores to stock something else. They recently experimented with "Pier 1"-type merchandise in Atlanta. It didn't look that successful (it was poorly promoted), but furniture is another
direction they could try. Another consideration is that Target is
welcome in malls in metropolitan areas---Wal Mart isn't and this gives them more flexibility in their location choices.
Sears will have to define a niche for itself. Getting rid of more
K-Mart real estate wouldn't hurt. Nor would going back to building
strong brands as they had in the past. Nonetheless, they have some
strengths to build from---lots of people are still loyal to Craftsman
tools, etc.
You're right about saturation, but this is true in virtually every
major retail segment. The future seems to be in niches.
Good points all around.
I think the threat to Wal-Mart's ultimate survival is its size. By focusing on being the largest and most dominant retailer in town, they create a situation whre the ability to respond to smaller trends among its customer base is reduced.
Stores like Dollar General and Dollar Tree cannot beat Wal-Mart on comodity pricing and selection, but they're smaller, convenient, more easily placed stores with virtually no store construction costs and an ability to be responsive at a store level with convenience items, fads and trends. They occupy the same place in the industry that Wal-Mart did in comaparasin to Sears and Kmart a generation ago.
Dollar Genreal and Dollar Tree are very small and highly inefficient now by comparasin to Wal-Mart, but are gaining fast and could be the straw that breaks the back of Wal-Mart, just as Wal-Mart was the straw that broke the back of Kmart.
Geez...where do I begin...(I mean that in a nice facilitative let's-talk-about-this kind of way)
First of all, some (hey, maybe it's only one...mine) urban areas do allow Wal*Mart to attach to their malls. I live about 5 minutes from one....
Second, Wal*Mart is on the fast-track to experiencing the "Law of Diminishing Returns" (and as we all know, growth, as is life, is not infinite). Right now, the market is inundated, and soon we'll be able to use the word *saturated* with well over 3,000 Wal*Mart's. They are popping up within 5 miles of one another. So what we have, in essence, is a booming exciting clean new store cannibalizing sales from a "mature store," located immediately down the road, and same-store sales (which are used as a base measure for success) are taking a major hit. Eventually, sales will even out between the two stores, which will make for mediocre year-over-year growth for both parties. However, at the moment, Wal*Mart is blaming stale same-store-growth on the sky-rocketing gas prices' impact on the lower-income customer. However, one would think that the increased gas-spending (a currently inelastic purchase) would just drive all the retails' "castes" down a level, and Wal*Mart would pick up some Target customers that are taking a financial hit from the petro-spending.
Third, Target cares a lot about their margin and quality of goods, and is likely having a tough time entering 100% into the the "perishable" market without sacrificing one or the other. Stale/rotting/moldy food products on the shelves would kill the "Tar-shay" image, a moniker given by the heavy-shopper guest and embraced by the company as an indication they can be considered quasi-high-end by their audience. If Target can't figure out a way to come up with a classy smudge-free way to pull it off, it won't happen.
The dollar store channel is kicking butt right now in year-over-year growth, and the real lower-income bargain shopper is sacrificing an additional retail stop at the dollar store to pick up non-perishable commodity items at a steal. This trend may or may not last...that is yet to be seen, and the results will be based on what (needs-to-broadened) variety of products they will offer in the future.
My own personal opinion is that in the end quality will prevail over cost. For example, I bought a floor-squeegie for a dollar and it broke in the midst of its first use. Upon the purchase I thought, heck, I'm wiping my dirty cat-litter-sprawled bathroom floor with this thing, why would I trade up to the higher price point?...I place no grand value on this! Now, I wish that I had because I will have to make an additional trip to the store to buy another, which this time I will "prod" for durability before buying. The outsome? A huge-pain-in-the-ass for me making the extra trip, I'm a dollar plus tax poorer, and the local landfill is one floor-squeegie richer. My cheap-ness did nothing but contribue to our mounting waste/landfill/environmental issues.
I wonder if all consumers feel that way or if many are just willing to settle for the bottom line??
This post has been removed by a blog administrator.
Carrie, you raise some excellent points. I know that you work with the retail industry and know what you're talking about. However, I recommend you read this book because it supports my position that Wal-Mart is still on the rise.
I don't want to come off as a cheerleader for Wal-Mart; I feel that is contributing to the "race to the bottom" that seems to characterize our economy. The nation's move to a service-based economy of low-wage jobs, coupled with continued outsourcing of the few manufacturing jobs left to the Third World, should concern each of us. That being said, if you look at Wal-Mart solely as a retailer, it's magnificent. My original post was written in response to several messages posted on Remembering Retail that argued Wal-Mart was on the run, that somehow it would soon face the same fate as Ames, Bradlees, Caldor, and Zayre. That simply isn't the case; while the company has encountered some problems, on the whole it's still on solid ground.
I know that Wal-Mart has penetrated many urban markets, but it's had trouble getting into the 3 most important: NYC, L.A., and Chicago. Moving into existing malls may prove to be its best strategy. Wal-Mart was able to move into a former Macy's in L.A.'s Baldwin Hills Crenshaw Plaza and was heralded for revitalizing the neighborhood, while it was fought tooth-and-nail a few miles away in Inglewood when it wanted to build on a vacant lot.
I understand the arguments that Wal-Mart will soon "saturate" the U.S. market. In Phoenix, not only are Supercenters being built three miles away from each other, but Neighborhood Markets are being built only two miles away from Supercenters. CEO Lee Scott says the nation can support 6,000 Supercenters (double the current number) and I think the company has done the homework necessary to validate this claim. The Neighborhood Market push is still in its infacy, and I believe it will prove to be a major growth vehicle in the next 10 years. Same-store sales may not be growing fast enough to keep Wall Street happy, but they're not falling. Even if the U.S. market is reaching its saturation point, Wal-Mart's international operations (especially its China division) will continue to expand, keeping the company quite healthy.
I myself prefer to shop at Target over Wal-Mart, but I'm not willing to concede that their business models are fundamentally different. A lot of Target's "upscale" image is only a matter of perception. I haven't been to a SuperTarget yet, so I don't know how well they're executing on perishables, but I think Target will ultimately falter if it doesn't keep pushing into groceries. Target will eventually figure out how to do it right.
You're right about dollar stores being the "next big thing." Steven has raised this point with me as well. We have 99 Cents Only Stores on the West Coast, which are a tremendous success...their highest-volume unit is on the border of Beverly Hills! These stores demonstrate that everyone loves a bargain but I don't think they can directly compete with a Wal-Mart Supercenter.
You and Steven both think that the desire for quality will eventually override the desire for low costs. Quality and low cost are not antithetical concepts - Wal-Mart has put the squeeze on national vendors to offer quality brand-name products at its stores at prices no one else can beat. It's also important to note that the middle-class is shrinking...ironically, Wal-Mart is somewhat responsible for this, but it also benefits them. We're rapidly becoming a country of "haves" and "have-nots," and the have-nots won't ever be able to pursue "quality" if it means shopping at Nordstrom and Neiman Marcus, or even at Sears and Target. Even the wealthier classes love Wal-Mart and its big box brethren because there are many categories where price is all that matters: a rich person will get jewelry and clothing at ritzy department stores, but will settle for pickles and lawn tools from Wal-Mart. I fear that consumers, and America itself, is becoming increasingly willing to settle for "the bottom line" no matter what the costs are to the economy, our society, or our environment. Welcome to the age of Wal-Mart, it's not ending any time soon.
Didn't get my facts straight...the company believes the U.S. market can bear 3,000 Supercenters, not 6,000. There are about 1,500 right now.
I have done extensive research on Sears and Kmart over the past 6 months, inclusing a visit to the Sears Essentials in Louisville, Ky and grand opening of the Sears Grand in Austin, TX.
They both had that same fun and exciting feeling that I get when I go to Target, prices were good and selection was great. While many items of course will be more expensive than Wal-mart, I believe you get what you pay for.
I truly believe in the Sears Holdings Eddie Lampert story but only after doing the research.
My main concern though, while the Sears Grand in Austin was jam packed with huge lines (maybe due to the great location right down the street from Dell HQ), the Sears Essentials was virtually empty, however I went on a Tuesday morning at 10am, not a big shopping time.
I am very intereted to see how these stores do under normal conditions and during typical peak shopping hours in the evening and on weekends.
Lots to debate here
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