The Beginning of the End of Wal-Mart?


Posted on April 11, 2008

Wal-Mart, the nation’s largest big box store, has recently been knocked down by a one-two punch of deepening recession and declining sales growth. According to Al Norman, the founder of Sprawl-Busters, Wal-Mart has abandoned 45 superstore projects over the last 10 months, and citizen groups have killed another 19. This loss – 64 stores in all – is unprecedented, and suggests that the retailing giant may have hit a wall in the United States.

Norman notes that same-store sales growth has been steadily dropping over two decades, from 13% in 1987, to 5% in 1997, to an anemic 1.9% in 2007. Perhaps the biggest reason is that new stores are now cannibalizing the sales of existing stores in the same chain.

Here’s what the company has told shareholders: "As we continue to add new stores in the United States, we do so with an understanding that additional stores may take sales away from existing units. We estimate that comparable store sales in fiscal 2007, 2006, and 2005 were negatively impacted by the opening of new stores [...]. We expect that this effect of opening new stores on comparable store sales will continue during fiscal 2008...."

Wal-Mart still sees lots of growth potential internationally, especially in China and India. But public resistance also has spread, according to Norman, to Indonesia, Japan, and Germany.

Wal-Mart’s stock today trades at $55 per share – almost exactly its price five years ago. In other words, if you factor out inflation, the stock has been losing value. The flattening of domestic growth and growing uncertainty surrounding global expansion begins to open up the big-boxer to a knock-out blow from the desertion of its investors.

For more information, see Al Norman’s article, "Wal-Mart Cancels 45 Superstore Projects," published by The Huffington Post.

By Michael H. Shuman


More in "The Atlantic"

Submitted by Michael on April 12, 2008 - 3:23pm.

Just after I posted this piece, I read the following news item in this month's (May 2008) issue of "The Atlantic," which underscores the point of the original blog posting:

"The secret of Wal-Mart's success may also be its Achilles' heel. Thomas J. Holmes, an economist at the University of Minnesota, found that as Wal-Mart started colonizing the U.S. retail market, in the 1960s, it methodically expanded outward from its base in Arkansas, keeping its stores close together. When Holmes measured the effects of this "economy of density," he found that although the strategy was key in boosting Wal-Mart's enormous profits, growth opportunities are now limited, as the company has essentially exhuasted its ability to expand. Building stores in tight clusters saves money by keeping trucking costs down and helping the company respond to shifts in demand. But those stores also tend to cannibalize each other's sales. The author estimates that existing Wal-Marts cut sales at new stores by about 10 percent on average. That overlap hurts, but the costs of spacing stores farther apart is astronomical....If every Wal-Mart store moved 100 miles farther from its distributor, total costs would go up by at least $1 billion a year. The author also points out that Wal-Mart can no longer simply Spread to new turf at will. Its attempts to conquer urban markets have foundered, not only because of higher property costs and stronger unions, but also because greater population density hurts the company's bottom line...."

SOURCE: The Atlantic, May 2008, p. 21.