I’m a bit slow in addressing the big retail story of the past week, which is that Wal-Mart has posted their first drop in quarterly profits since 1996. This wouldn’t be massive news if it was a chain smaller than Wal-Mart (after all, we aren’t talking about a loss, just a drop in profits). But because Wal-Mart is its own microeconomy and an indicator of the economic health of many Americans, it merits attention.
Wal-Mart blames the loss on some disastrous stores in Germany and South Korea that have been divested, and this may be responsible for much of the problem. But with the current high price of gas, it seems like Wal-Mart’s strategy of targeting working class, rural consumers may be hurting them. Because city-dwellers and suburbanites travel relatively short distances to shop, they tend not to think much of the cost of gas when planning shopping trips. For suburbanites, today’s high gas prices are an inconvenience less than a hardship. But Wal-Mart’s core customer base, who may be traveling 50 miles or more to a Wal-Mart store, may find that the economics of Wal-Mart’s savings may not justify the $3/gallon price tag for gas. In effect, people may well be returning to their local Main Streets in the most rural areas.
Similarly, Wal-Mart’s endless pursuit of the cheap means that they’ve built a customer base that is heavily loaded with many of the most vulnerable consumers, people who struggle to make ends meet and who are being squeezed dangerously by the costs of gasoline, electricity, housing, and more factors that have risen dramatically in the last few years. Because there are other chains who cater more heavily to the mid-range consumer–especially Target, Kohl’s, Sears, and JCPenney–these companies are finding comparatively healthy sales while Wal-Mart’s are struggling to keep up.
In essence, Wal-Mart tied their entire business model to economics, and as such, economic shifts hurt them more than they do their competitors. Increases in costs of most necessities suggest that we may be in an inflationary period, yet the price of most consumer goods has remained relatively steady–largely because of Wal-Mart. But Wal-Mart may be stuck, unable to raise prices for fear of losing customers yet at the same time squeezing themselves out of their already thin margins on many products, especially food. Unlike Target, they don’t try and foster loyalty through improved aesthetics of stores and products, and unlike their grocery competitors, they don’t even attempt to achieve a measure of quality. As a result, all that Wal-Mart offers is the Price Rollback, and historically stores with a value proposition as the price leader have proven to be vulnerable (and this has prevented Wal-Mart from expanding into more expensive American markets like California or the Northeast already)… or at least that’s my take. There are many other possible reasons for this (such as overexpansion or bad publicity), and it may not even be indicative of a larger trend. Feel free to start a dialogue in the comments: What do you think is next for Wal-Mart?