Jack Neff of AdAge has a good piece on WalMart’s woes in the new (bad) economy, which suggests a couple reasons why the retailer has been so determined to move into large urban markets like Chicago, something they’ve been trying to do for years. First, there’s the idea that WalMart’s business model requires not just size, but constant growth:
A secret ingredient in the productivity loop was rapid store growth in prior decades, which boosted sales and efficiency so much that prices could stay lower. But Walmart has slowed expansion as existing markets got saturated and big urban coastal markets resisted stores. Last year, Walmart added only about a quarter the square footage it did in fiscal 2007.
The bigger a size advantage Walmart has over the competition, the more it can demand out of its suppliers—including just doing their own damn shipping—which pushes prices down. But they also have to worry about their biggest customers:
As growth slowed, Walmart let prices rise relative to competition to please investors with fatter margins.
But there’s another interesting reason why the urban market is so appealing to Walmart, one that didn’t occur to me:
Mr. Simon noted on the retailer’s Aug. 16 earnings call that Walmart’s 189 supermarket-size Neighborhood Market stores have had positive same-store sales for 15 straight quarters, with sales up 3% last quarter. Trouble is, that wasn’t enough to overcome falloff from nearly 3,000 supercenters, which are 86% of Walmart’s U.S. square footage. And the better relative performance of the small stores supports Mr. Nicholas’ theory that the supercenter heyday is over as boomers age out of child-rearing years, millennials delay having kids and big stock-up trips decline.
I can think of other reasons, too: the urbanization of America; rising gas prices; stagnating incomes and massive household deleveraging that forces consumers to live more week-to-week than month-to-month; the effect of the housing collapse on the exurbs; the fact that in this economy people are being priced out of Walmart and into dollar stores.
That last one has Walmart legitimately worried:
Bill Simon, Wal-Mart U.S. chief executive, said the company remained concerned about economic pressure on shopping behavior.
“Customers are still consolidating trips due to higher year-over-year gas prices. The swings in sales due to paycheck cycles remain pronounced,” he said. “We also have seen an increase in the number of customers relying on government assistance for food and necessities for their family.”
In recent months, Wal-Mart has been adopting a series of initiatives to try to turn around its domestic sales numbers. Among them: opening smaller locations to increase competition with dollar stores, offering more grocery options and shaking up its online management team as it looks to boost Internet sales.
With the economy in regression, Walmart is as well; now that being the supplier of the suburban home doesn’t have the margins it once did, the store is shrinking back to its roots as a five-and-dime.