Its influence on the economy is profound and lasting. But for the first time, the world's biggest retailer is having a tough time providing what consumers want.

By The Wall Street Journal


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

Using a combination of low prices and relentless expansion, Wal-Mart Stores (WMT, news, msgs) emerged from rural Arkansas in the 1970s to reshape the world's largest economy. Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company. His company helped boost America's overall productivity, lowered the inflation rate and strengthened the buying power for millions of people.

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


Today, though, Wal-Mart's influence over the retail universe is slipping. In fact, the industry's titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions in the United States to $4. But success is no longer guaranteed.
Convenience, selection and quality
Rival retailers lured Americans away from Wal-Mart's low-price promise by offering greater convenience, more selection, higher quality or better service. Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image while other discounters pitched themselves as more upscale and more palatable alternatives.

The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers. As a result, American shoppers are increasingly looking for qualities that Wal-Mart has trouble providing.

"For the first time in a long time, quality has a chance to gain on price," says Lee Peterson, a vice president at WD Partners, an Ohio brand-consulting firm.

Now, the big-name brands that fueled Wal-Mart's climb to the top are forging exclusive distribution deals with other retailers or working to reduce their reliance on its stores.

PepsiCo (PEP, news, msgs), which favored mass-market campaigns a decade ago, recently skipped Wal-Mart when launching a new energy drink in favor of Whole Foods Market (WFMI, news, msgs). Consumer-products giant Procter & Gamble (PG, news, msgs) gets 15% of its revenue from Wal-Mart, down 3 percentage points from 2003. Wal-Mart's effort to expand internationally has had mixed success in affluent markets. Last year it exited South Korea and Germany after failing to adapt to local tastes and achieve economies of scale. In Japan, the company's low-price, high-volume approach has struggled in a country where low prices often equate to low quality.

Wal-Mart remains an enormous force in retailing, of course. Its worldwide sales are almost three times those of France's Carrefour, the world's second-largest publicly traded retailer. Wal-Mart's U.S. revenue is four and a half times that of discount-store rival Target and four times that of the second-largest U.S. food retailer, Kroger. Wal-Mart's clothing and shoe sales last year alone exceeded the total revenue of Macy's, the parent of Macy's and Bloomingdale's department stores.

The company's unquenchable thirst for scale has been the secret to its market-changing power. "What we are is a supercenter with one-stop shopping," said Wal-Mart Vice Chairman John Menzer at an investors conference last month.

The company expects each year to build an additional 170 to 190 of the 18,000-square-meter supercenters that are its hallmark and convert 500 smaller discount stores to the bigger format over the next five years.

"We would love to wave a magic wand and (make) every one of our discount stores a supercenter," Menzer says.

But that very focus on scale is now a weakness, for the world has changed on Wal-Mart. The big-box retailing formula that drove Wal-Mart's success is making it difficult for the retailer to evolve.

Consumers are demanding more freshness and choice, which means foods and new clothing designs must appear on shelves more frequently. They also are demanding more-personalized service. Making such changes is difficult for Wal-Mart's supercenters, which ascended 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 can with that formula," says Love Goel, a former Fingerhut executive and now the chairman and CEO of Growth Ventures, a Minnesota private-equity firm that invests in retail businesses.
Affluent consumers aren't wooed
Wal-Mart has outgrown its supercenter recipe, but efforts to win growth from more affluent consumers have fallen flat, he says. "They have hit the wall."

The company declined to make an executive available for an interview and declined to respond to written questions, citing a coming meeting with Wall Street analysts.

Business history is littered with companies that grew to enormous size and used their girth to rearrange the world to fit their strengths. Think IBM Corp. (IBM, news, msgs) in the mainframe business, General Motors (GM, news, msgs) in autos or Microsoft (MSFT, news, msgs) in personal computers. (Microsoft owns and publishes MSN Money.) For a time, their success bred an ecosystem that sustained their status. In the 1970s, independent software companies piggybacked on IBM's mainframes, resulting in greater demand for mainframe computers.

Such orchestration can produce solid growth for decades. But it can also produce corporate blinders.

Over time, IBM's grip on the corporate data center left it unable to anticipate the decentralizing effects of personal computing. GM's knack at brand creation and frequent model changes left it vulnerable to the incremental quality approach of Japanese automakers. Microsoft was so busy cramming features into its Windows operating software that it lagged behind others in the shift to the Internet. Each remains among the top in its industry; yet each has relinquished the role of industry definer -- IBM to Intel, GM to Toyota Motor, Microsoft to Google.

Wal-Mart's great insight was perfecting the so-called value loop in retailing. At its most basic, the system works like this: Lower prices generate healthy sales gains and profits. Some of those profits went into further price cuts, generating more sales. The lower the price, the more consumers flocked to
Wal-Mart. But the value loop is beginning to unravel.

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

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

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

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

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

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

* Video: Wal-Mart in the news

At the same time, the cost of creating and sustaining a national brand is rising because of media fragmentation. Niche brands, created by Internet word of mouth, are winning shelf space and sapping profits required to fund big brands' advertising. Manufacturers such as Apple (AAPL, news, msgs) and Phillips-Van Heusen, lacking the retail distribution or presentation they crave, are opening their own stores. One result is that retail giants hold less sway over their customers -- and over their suppliers.

And across the landscape, numerous rivals are using a form of competitive jujitsu to keep the Arkansas behemoth off-balance.
Frugal shoppers flock online
Grocery-store chains such as Kroger are resurging on sales of prepared or semicooked meals, which people can grab on their way home. Kroger, based in Cincinnati, projects sales at stores open at least a year will climb between 4% and 5% this year, on top of a 5.3% increase last year.

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

When Wal-Mart pushed heavily into consumer electronics earlier this decade, many industry observers expected it to flatten electronics chains. But five years ago, Best Buy began aggressively marketing installation and other services alongside flat-panel TVs and PCs. Last year, Best Buy's total sales rose 16%. Wal-Mart, which has struggled to sell big-ticket HDTVs, has only recently begun selling installation services at a few stores using an outside supplier.

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

Best Buy and specialty retailer PetSmart, which touts pet grooming and kennel stays, put hard-to-copy services at the forefront of their pitch, says Howard N. Jackson, the president of retail advisers HSA Consulting in Knoxville, Tenn. "They realize the best way to 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 business in 1978. But national drug chains CVS Caremark and Walgreen reacted by redefining their role and selling basic health services, such as school physicals, diagnostic tests and flu treatment alongside drugstore wares. CVS and Walgreen each acquired in-store clinic operations, redefining the pharmacy business as basic health-care centers.

Same-store sales at CVS and Walgreen are running about double that of Wal-Mart this year. Wal-Mart has begun offering leases to clinic operators.

Then there is the host of new entrants. In apparel, smaller retailers with niche market appeal like Hennes & Mauritz's (HNNMY, news, msgs) H&M, Inditex's Zara and Forever 21 are growing by offering consumers rapid style changes.

Outside the U.S., Britain's Tesco (TESO, news, msgs) is challenging Wal-Mart by cultivating the Tesco brand across five formats, including convenience stores and urban stores as well as supercenters. This fall, Tesco will open its first U.S. outlets, stores that will offer fresh and prepared foods and staples.

As Wal-Mart's influence erodes, so does its allure to manufacturers.

Burt P. Flickinger III, the managing director of retail-consulting firm Strategy Resource, says Wal-Mart now takes a back seat to regional grocery and national drug chains when it comes to striking deals.

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

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

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

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

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

Wal-Mart quietly dropped the mandate earlier this year and refocused its development after suppliers complained of the high costs and lack of a return on their investment in the new technology. Though the company says it is pushing ahead, Wal-Mart says it realigned efforts to focus on areas where the technology offered the most promise, such as assuring vendors' promotional displays are properly deployed in its stores.

Wal-Mart wasn't able to demand big suppliers continue investing in a technology that was raising their operating costs, says Ken Rohleder, the president of Rohleder Group, a Louisville, Ky., supply-chain-consulting firm. "There was a time when they could have dictated anything," he says.

This article was reported and written by Gary McWilliams for The Wall Street Journal.

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[9121Ho]

Recently, I've been walking out of WalMart with just a few items because they are substituting name brands that work with junk that don't. A while back, I was buying all kinds of good stuff from WalMart, cheap. Now? I go there first and get what's priced right and then I go elsewhere for the stuff they don't stock anymore, or I get the same thing cheaper elsewhere now.

WalMart better shape up now or go bye-bye!

...did you know their "travelers" slogan was a secret reference to their Masonic and Eastern Star patrons??? The star in their logo is a pentagram. The travelers are the secret society people.

[Crohnie]

I refuse to shop at Walmart and Starbucks. They both suck.

[mariathelion9]

Originally Posted by 9121Ho

Recently, I've been walking out of Wal-lMart with just a few items because they are substituting name brands that work with junk that don't. A while back, I was buying all kinds of good stuff from Wa-lMart, cheap. Now? I go there first and get what's priced right and then I go elsewhere for the stuff they don't stock anymore, or I get the same thing cheaper elsewhere now.

WalMart better shape up now or go bye-bye!

...did you know their "travelers" slogan was a secret reference to their Masonic and Eastern Star patrons??? The star in their logo is a pentagram. The travelers are the secret society people.

You can thank Wal-Mart for the massive job losses (especially the export to China) substitution of quality & safety for profit and eventually choices in purchasing goods. They are good with the carrot, however, soon everyone else will go under because they can't either compete with their unfair demands or lower their quality and still provide customer satisfaction.

We NEED to stop shopping and buying Cheap CHINESE, as we are building up their military and aiding the GENOCIDE in places such as DArfur. The Problem? OIL. Sudanese are banking China won't say or DO didly- and for the last41/2 years they have been right.

BOYCOTT THE GENOCIDE OLYMPICS IN CHINA 2008.

Shame on Americans who want their cheap products while women get raped, children get slaughtered and men get their eyes gouged out. Their crime? Being born TUSTI.

A fitting song regarding Western (especially US and communist? CHINA)

http://profile.myspace.com/index.cfm...1-972749ad5ea6

"Capitalism Stole My Virginity" By The International Noise Conspiracy

Nowhere is untouched by the shame
Who said we could get by with our childhood games
Days of innocence are all long gone
Avoid the shock honey and try to live on

Woke up all paralyzed
All dreams corrupted in front of our eyes
Cause on every forehead of every little whore
There's a sign that says, 'baby don't come back no more'

Distasteful ugly and cheap
That is how you make me feel, I said
Capitalism stole my virginity
Capitalism stole, capitalism stole
Capitalism stole my virginity

Robbed out of our bleeding hearts
Smashed our illusions, tore them all apart
Now we are unsentimental and unafraid
To destroy this culture that we hate

Sort of tired of being nothing
When, when we should be everything
On every forehead of every little whore
There's a sign that says, 'baby we're all born to die'

We're ALL SLUTS! Cheap products, in someone else's notebook!
Capatalism stole my virginity!

[BLUNTMAN2000]

Remember when Walmart convinced the American public that they would only buy American Manufactured products?
That didn't last long.
In a dramaticlly expanding retain market,Walmart better get there shit together or they'll end up like K-Mart.

[weedtracker]

i saw on the news yesterday that some lady got in an car accident and was seriously injured and she worked for walmart. now she recently won a 700,000 settlement with the person who hit her and now walmart wants 460,000 of it to pay them back for the healthcare they provided for her. thats so fucked up. walmart is a horrible company. i dont shop there and never will again.

[weedtracker]

Originally Posted by BLUNTMAN2000

Remember when Walmart convinced the American public that they would only buy American Manufactured products?
That didn't last long.
In a dramaticlly expanding retain market,Walmart better get there shit together or they'll end up like K-Mart.

walmart wont even talk to you about doing business unless your products are made in china.

[savage]

i have never shopped at walmart.

[Mindfury]

Even the dog treats come from china are at wallmart. I've been slowly weening myself off the "need" for wallmart, as i have noticed a lack in quality specifically everything pretty much they sell is made in china.
Good thread

Peace