Wal-Mart hits a wall

With more than 4,400 sprawling stores in the United States and its pledge to provide “everyday low prices,” retail giant Wal-Mart Stores Inc. would appear perfectly positioned to weather the tough economic times south of the border. Indeed, Wal-Mart has long been the destination for price-conscious shoppers searching for everything from US$3.50 packs of 16 “Frosted Blueberry” Pop Tarts to a US$119 flat-panel television.

But while the world’s biggest retailer is credited with single-handedly transforming the retail landscape by using its clout to demand low prices from suppliers, which are then passed along to customers, sales at U.S. stores have nevertheless slumped badly over the past few years. Meanwhile, some of its biggest competitors, including “cheap chic” rival Target Corp., have still managed to grow sales in the same tough environment.

Wal-Mart has placed most of the blame on a bad economy, which it argues has a disproportionate impact on its less affluent customers. But those outside the company are increasingly wondering whether there’s more to the story. Just as chains like McDonald’s and Starbucks were forced to retool after years of expansion, Wal-Mart appears to be heading toward a similar fate in the U.S. as its stores start to look increasingly bland compared to rivals. More importantly, it’s no longer clear whether Wal-Mart’s reputation for low prices continues to be a meaningful advantage in a world where everyone, from local supermarkets to daily deal websites like Groupon, are perceived to be offering huge savings—and without the need to drive to the outskirts of town and fight the crowds inside one of Wal-Mart’s blindingly-lit big box stores.

“As a result of the recession in the U.S., every retailer was screaming ‘low prices,’ ” says Candace Corlett, the president of New York-based consulting firm WSL Strategic Retail. She says a recent survey by her firm suggested only 14 per cent of Wal-Mart shoppers still believe Wal-Mart offers the lowest prices, raising a troubling existential question for the Bentonville, Ark.-based giant. “If Wal-Mart doesn’t stand for everyday low prices anymore,” says Corlett, “what, exactly, do they stand for?”

Wal-Mart last month revealed that U.S. stores open for more than a year posted a 0.9 per cent drop in same-quarter sales, marking the ninth quarter in a row of declines. It’s a serious problem, since Wal-Mart generates more than half of its US$419 billion in annual revenue from its home market. In a message to investors, Wal-Mart CEO Mike Duke blamed high jobless numbers among Americans. “They’re trading down to stretch their budgets, buying a lower-priced brand of detergent, moving from branded canned goods to private label and purchasing half-gallons of milk instead of gallons,” he said.

Missteps by management have further aggravated the situation. Beginning in 2009, at the height of the recession, Wal-Mart began removing many items from its shelves in the U.S. to clean up cluttered stores and focus on more popular products. Cash-strapped customers, meanwhile, were more interested in unearthing as many deals as possible and didn’t necessarily appreciate the less-is-more strategy. The missing items—including Hellmann’s mayonnaise and Febreeze products—are slowly being replaced.

Analysts, however, say a far bigger concern is Wal-Mart’s crumbling reputation as the low price leader. While studies show that, overall, Wal-Mart remains cheaper than most competitors, the recession resulted in an avalanche of value-oriented ads from retailers of all stripes, making it difficult for Wal-Mart to stand out. In addition to big box operators, dollar stores have expanded their offerings in the U.S. while consumers are scouring the Internet for bargains. “What’s happening is the extreme value end of the market is getting redefined somewhat,” says Ed Strapagiel, the executive vice-president of KubasPrimedia, a Toronto consulting firm. “Throw on top of that the coupons and daily-deal websites, and it means you don’t necessarily need to go to Wal-Mart to get big discounts.”

David Tovar, a spokesperson for Wal-Mart’s U.S. operations, says Wal-Mart may have inadvertently muddled its message by getting caught up in a recession-era trend toward big sales events in a bid to drive traffic. “We got into this high-low pricing game and got away from everyday low pricing, which is fundamental to the business,” he says. “All the data we get from customers is that prices are key.”

Some observers, however, have argued that there may be a limit to how low Wal-Mart can go. One of the keys to Wal-Mart’s success has been its constant expansion. The more stores the company opened, the more sway it had over suppliers to lower prices, which, in turn, attracted more customers. But now that Wal-Mart appears to be reaching a saturation point in the U.S., the loop is breaking down. Tovar, on the other hand, suggests Wal-Mart still has lots of room to grow, and points to experiments with smaller Wal-Mart Express concept stores, which are designed for urban centres and meant to work in conjunction with the company’s online shopping portal by giving customers a place to pick up their Internet orders.

In Canada, the situation is brighter—at least for now. Same-store sales were up 1.2 per cent in the second quarter and the company, with more than 325 stores across the country, is expanding rapidly, opening or expanding an average of about 40 grocery-stocked supercentres every year. Andrew Pelletier, the vice-president of corporate affairs and sustainability at Wal-Mart Canada, says the company is benefiting from both a relatively healthy Canadian economy and growing interest in Wal-Mart’s offerings. “One area where we are seeing particular strength in Canada is our apparel business,” he says. Last year, Wal-Mart Canada dumped many of its fashion brands to focus on its affordable George line, which competes with Loblaw’s Joe Fresh line and others.

Wal-Mart Canada’s move coincides with Target’s plans to open 135 stores in Canada, starting next year. In the U.S., Target has a reputation for being a quirkier and more stylish place to shop than Wal-Mart, which has recently become the butt of online jokes on the Web. (One YouTube music video, viewed by some 3.9 million users, depicts dozens of photos of funny-looking people while singers croon, “These are the people of Wal-Mart.”) Meanwhile, Target only gets saddled with a fake French accent on its name (Tar-jay) to highlight its supposedly higher-brow appeal. “It’s going to have a huge impact,” says Strapagiel of Target’s arrival. According to a recent study by his firm, 61 per cent of Canadians said they would be interested in shopping at Target, whereas only 50 per cent expressed interest when asked about Wal-Mart before its Canadian launch in 1994.

For Wal-Mart, convincing consumers that its stores are both a cheap and desirable place to shop is key on both sides of the border. “They certainly need to be laser-focused on price and be lowest price on the things people compare,” says Corlett. “Bounty paper towels. Toilet paper. Hellmann’s mayonnaise.” But can Wal-Mart also be a destination for fashionable clothes and accessories? Corlett isn’t so sure. “What Wal-Mart has in its favour,” she says, “is a lot of opportunities to grow throughout the rest of the world while they figure it out.”