Retail Traffic

Taking Aim at WAL-MART

Wal-Mart Stores Inc., Fortune's most admired U.S. corporation for the past two years, is quickly becoming the most reviled. From contractors locking cleaning crews in stores overnight to the state of California complaining about the cost of providing health care to Wal-Mart employees, the biggest company in America is garnering some of the worst headlines. “We've got to eliminate this constant barrage of negatives…that cause people to wonder if Wal-Mart will be allowed to grow,” CEO H. Lee Scott told investors at the annual Goldman Sachs Global Retailing Conference in September.

Scott sees it as mostly a public relations problem. “Our message has not gotten out to the extent that it should. I think that's management's failure,” he told the Goldman audience. “We thought we could sit in Bentonville, take care of customers, take care of associates and the world would leave us alone.”

In January, Wal-Mart went on the offensive, taking out full-page newspaper ads to defend its business practices. It also set up a special Web site to counter the flurry of Wal-Mart bashing sites that have proliferated.

The Thrill is Gone

But it may take more than deft spinning to see “admired” and “Wal-Mart” in the same sentence. The stock price had by late January lost 17 percent of its value since Jan. 4, 2000. In the same period the discount and variety subsector climbed 25 percent and the retail sector rose 19.22 percent.

In another sign that the market's love affair with Wal-Mart might be over, analyst George Strachan of Goldman Sachs lowered his stock rating to neutral from outperform in December 2004 because he believes the company's policy of building Supercenters close to existing ones is leading to “self-cannibalization” of sales. (Wal-Mart acknowledges that the saturation approach could have short-term effects on profits, but says the move could ultimately double its U.S. market share to 15 percent.)

Other retail analysts, including Bill Dreher of Deutsche Bank Securities, say Wal-Mart is failing to keep up with consumers' tastes and is losing ground to more upscale discounters like Target and specialty retailers like Best Buy. “Wal-Mart is good at keeping costs low but they have not been able to respond to changes in customer tastes,” Dreher wrote in a December report.

But there's no question about Wal-Mart's fundamental health. With profits of $9 billion in 2004 on sales of $256 billion, it is an economic juggernaut. The deeper issue is that the company's growth in the U.S. has limits. It is running close to the saturation point for its Supercenter concept. Danger signs include its stock price, reduced rate of growth in the U.S. and increasing opposition to the firm from unions, activists, other retailers and even some developers. To maintain its trajectory, Wal-Mart will either have to morph again and take on new categories, much as it has demolished the toy and grocery sectors. Or it will have to further grow its international expansion plans.

“They've been shot at from so many different angles,” says Richard Walter, president of Faris Lee Investments, an Irvine, Calif.-based retail brokerage and advisory firm. “The industry perceives that they've always done things the way they want to do them. But now they're on the radar screen and they're finding opposition.”

And while many communities are happy to land a Wal-Mart, including Birmingham, Ala., (see sidebar, page 37), the retailer has become a lightning rod for opponents in a way that Home Depot and Target haven't.

Fights over new stores are common — especially in California, a state in which it hopes to build 40 Supercenters this year. Community groups are wrangling to keep out Supercenters now that Wal-Mart has colonized most hamlets; Inglewood, Calif., where Wal-Mart spent $1 million lobbying on its behalf, is a notable exception. And bans on gigantic stores have been adopted by local governments in Oregon, Georgia and Florida,

Wal-Mart's having similar problems in the big cities. The Los Angeles City Council approved a measure making it harder to build Supercenter-size stores there. And a proposal to build New York City's first Wal-Mart, in Queens, is being bitterly fought by a coalition of small businesses, unions and politicians. Chances of it being built are doubtful, suggesting a slowdown in U.S. store growth if Wal-Mart doesn't move onto something new, emphasizing different products such as pharmaceuticals, banking and car rental services and branded apparel.

In reality, Wal-Mart's U.S. store growth — while still healthy — is off its peak. It posted double-digit growth for 25 straight years before the pace dropped in the mid-1990s (as it started opening foreign stores). Last year it grew its U.S. count by 7.7 percent — the biggest jump in 10 years. What Scott doesn't want is any unplanned drop-off in growth.

How this battle turns out will have serious consequences for retail development. Wal-Mart plans to add as many as 250 more Supercenters this year to bring the total to more than 1,900. At the same time, it continues to shutter regular-size stores. At the end of 2004, it had 1,363, more than 600 down from a height of 1,995. It also has 550 Sam's Clubs and 76 neighborhood centers. Last year was the first time its Supercenters outnumbered its regular-size properties.

But this aggressive growth plan — which in some cases has entailed opening a regular-size store only to close it a couple of years later to open a Supercenter — is having a devastating impact on other retailers and is annoying developers. Wal-Mart's supremacy prompted Kmart Holding Corp.'s pending acquisition of Sears, Roebuck & Co. — a move that will likely result in a glut of excess space as redundant stores are closed. Wal-Mart's newfound dominance in toys has crippled Toys ‘R’ Us, which now plans to sell 683 U.S. stores. And more shakeouts are likely.

The grocery sector has seen its share of bankruptcies as smaller, regional players have been pushed out of business. The department store segment will also undergo changes, even if the rumored Federated/May merger doesn't go through. Lastly, Wal-Mart's own pattern of closing smaller stores has contributed to the excess space market. At last count, there were more than 380 dark Wal-Marts nationwide.


Perhaps the biggest question, however, is when will the ever-expanding Wal-Mart grow too much in the U.S.? One broker says the Supercenter concept “is going to have to reach the saturation level before too long, and that's a problem because there's no way they can keep up their revenue growth without adding stores.” (Or increase overseas activity.) That's when Wal-Mart is likely to morph again, possibly by upping its share of the apparel market. It will also continue expanding into malls and continue its stabs at urban markets, which so far have been resistant to Supercenters.

To take on its foes, it's also more likely to modify construction plans and change store designs, so it's not seen as the Great Monolith anymore. The effort at image burnishing, Faris Lee's Walter says, is a sign that “rather than fighting it out community by community, they hope to make voters see Wal-Mart in a different light.”

Wal-Mart is also finding new alliances. It teamed up with Discover Financial Services to issue a new credit card to Wal-Mart customers. Discover, a unit of New York-based investment bank Morgan Stanley, said the new Wal-Mart Discover cards will be issued by GE Consumer Finance, a unit of the General Electric Co.

In addition, for a bureaucratic behemoth, it's learned to turn on a dime. Within hours of the door's opening on Black Friday, executives figured their no discount plan was a failure. In a few hours, “For Sale,” signs were going up around the globe. The quick turnaround on discounting saved Christmas.

Some familiar with Wal-Mart say it is getting better at managing the challenges. It is now willing to spend money to influence public debate, and the company is famous for its tenacity in defending against lawsuits.

“It would have been great if they had started managing [opposition] from the get-go. They could have curtailed some of it,” says Joe Pilotta, vice president of research for BIGresearch, an Ohio retail consulting firm that has done work for Wal-Mart. “But they are managing it better these days. They're creating jobs, especially in smaller communities, and they're creating contractor work and paying taxes. A lot of small towns, while they may decry the loss of mom-and-pop stores and smaller chains, they don't want their taxes to go up and they need the jobs.”

Then there's the China card. Wal-Mart has developed close ties with China through its supply network, and stands to benefit now that the Chinese have eliminated restrictions on foreign retailing as part of its entry into the World Trade Organization.

Wal-Mart opened its first store in China in 1996. Steve Spiwak, an economist with Retail Forward, says Wal-Mart plans to open about 60 more in the next three to five years.

Overseas, Wal-Mart is active in Mexico (694 stores), the U.K. (278), Canada (248), Brazil (149), Germany (91), China (43), South Korea (16) and Argentina (11). It wants to enter Japan as well.

In the end, though, how important are the controversies when it comes to the bottom line? “Some of its growth will be hard won,” says Sandra Scrovan, vice president of Retail Forward and manager of the consulting firm's Wal-Mart World program, which advises clients on dealing with the retailer. “When you open more stores, it gets more difficult to keep growing at a fast pace. But that doesn't mean Wal-Mart won't be able to continue growing at a reasonable rate.”

The Good News (for Wal-Mart) Is…

The debate about Wal-Mart's growth sometimes obscures an important fact: For many communities, snaring the giant retailer is a dream come true.

Birmingham, Ala., offered $10 million three years ago to lure a 230,000-square-foot Supercenter to a former Kmart store in the Roebuck area. It used its power of condemnation to acquire 30 more needed parcels.

The economic pump-priming worked. Area land prices quadrupled to nearly $20 a square foot and the store has spawned new retail development, including a strip center being built on a Wal-Mart outparcel.

Now the city is prepared to offer another $10 million in economic development funds to bring a Supercenter and a Sam's Club to a site occupied by the Eastwood Mall, the first enclosed center in the South. Wal-Mart has taken an option to buy the nearly empty mall, which would be razed.

In both cases, Birmingham officials saw Wal-Mart as an important economic development tool — and in paying for that privilege, they were not alone. A study last year by Good Jobs First, a research group funded by union opponents of the nonunion Wal-Mart, found 244 examples of Wal-Marts or distribution centers built with public subsidies, including free land, tax-increment financing, property tax reductions and the granting of enterprise zone status.

The group put the total public cost at more than $1 billion. The average subsidy was about $4 million; the largest, for a distribution center in Olney, Ill., was $48.7 million. Good Jobs First maintains that a profitable company like Wal-Mart shouldn't be collecting public subsidies. Moreover, it claims that attracting a Wal-Mart destroys more jobs than it creates.

That's not how a lot of local people see it. To them, Wal-Mart is a phenomenon — an enterprise capable of creating traffic were there was none and encouraging others to reinvest in the community. “At the end of the day they add a lot of value to these communities,” says Rich Walter, president of Faris Lee Investment, an Irvine, Calif., brokerage.

In Roebuck, Wal-Mart “took a blighted property off the market and replaced it with one that is now doing $85 to $100 million a year in gross revenue,” says Bryan Holt, a principal of Retail Specialists Inc. in Birmingham and a partner developer of Roebuck Crossings, the center being built on the Wal-Mart outparcel. The soon-to-open center is getting rents of $22 a square foot Holt says; a power center nearby is getting $14 to $16.

Holt expects the same thing to happen across town at the Eastwood Mall site once the Supercenter and Sam's Club are built. “You will see some more million dollar out-parcels,” he says.
Curt Hazlett

TAGS: Retail
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