Wal-Mart Profits Drop for First Time in Decade

Wal-Mart
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?

12 Responses to “Wal-Mart Profits Drop for First Time in Decade”

  1. There could be a retail renaissance of with the loss of Wal-Mart. Ma and Pa stores with quality items and good service might once again rule main street.
    Wal-Mart employees may find jobs in other sectors making twice as much and dental insurance.
    Endangered flora and fauna could make a comeback with abandoned mega-marts and parking lots.
    A new urbanism may finally be realized.
    Peace may finally come to the mid-east.
    Scott

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  2. Wal-Mart has peaked. They’ve taken their business model to the limit, and pretty much don’t know where to go from there. The stores are no longer setting trends, but rather following them. They’re opening so many of them that the stores are cannibalizing sales from each other.

    The loss of that industry leadership position starts to show when you see the warmed over store remodels and “me too” merchandising that the company has started in the past few years. Beige walls and Metro 7 sportswear aren’t really making people want to shop at Wal-Mart more. In fact, I think it may be scaring off the once-solid core of rural, conservative shoppers.

    The attempt with the newest merchandsisng is to convince the consumer that Wal-Mart is hip and modern, but it only serves as evidence that stores like Target and Costco can do Wal-Mart style mass with competitive prices, a more upscale presentation, and with more “treasure hunt”-style excitement.

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  3. I agree that I don’t really see this as a huge sign of trouble, nor is it a harbinger of a great sea change (cats and dogs playing together!), but I do get the impression that Wal-Mart may have stretched the bounds of their business model. If they expect to continue to be successful, they will have to adapt. They may yet, but it remains to be seen.

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  4. nothing would make me happier than to see wal-mart croak…they have moved into numerous hometowns(including my hometown of Carrollton GA and have a hard stranglehold on their market…and where i live now in Kansas City they seem to be popping up everywhere…Down with the Big Blue Box

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  5. History predicts that Wal-Mart will not last forever. It makes sense, since no retailer has lasted “forever”.

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  6. Wal MArt SUCKS!!! I hate it, I used to love my K Mart, TG&Y, Woolco, & Woolworths. I miss all my fun old discount stores. They move in and put all the cool stores out of business, ruin small town business districts and have a large percentage of the population suckered real good into thinking they are getting a good deal. Milk at Kroger’s here in Houston, Texas is a whole dollar cheaper then their inflated price. Their clothes are junk and hardly hold up to a 1st washing, Woolco had a better clothing quality. I remember as a young teen I used to get great jeans and boots at Woolco and they held up a lot longer than Wal Mart Crap. I even seem to remember that K Mart used to Sponser the Ms. Teen America Contest and every fall in the August issue of Teen, & Seventeen they would show off their fall clothing line, which was much more stylish and trendy than Wal Mart. I remember getting all my back to school clothes one year at K Mart and JC Pennny.

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  7. Even when Wal-mart moved into my town (Fond Du Lac WI) in 1992, myself and my mom still shopped at Prange-Way until they went bust in 1996. Wal-Marts are always too busy, too nosiy, too LARGE, and frankly their prices are NOT always the lowest possible on many items. Quality of food items is crap (ie: meat, produce), and I won’t be caught buying clothes from them either. (Penneys, Kohls and ShopKo for my clothes, thanks)

    That reason among others, is why I try to patronize my local ShopKo store for general merchandise, and will be hitting a grocery chain called Festival Foods for grocery items when they open next month. Both chains are Wisconsin-based, and both kick Wally-World in the behind IMO.

    The towns I feel the most for are the little ones where Wal-mart all but wiped out the central business districts and killed off any other outlying retail.

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  8. I just hate to say it, but Walmart will probably never die. Most people I talk to don’t say they are going shopping, they say,”I am going to Walmart”, ie, for groceries (especially for groceries!!), health/beauty, hardware/tools, electronics large and small, fans, towels, toilet paper, aspirin, shampoo and on and on, blah blah blah, you get the picture. Then they come back and complain about empty shelves, bad service, and sometimes high prices, and yet they go back again in a few days for all the stuff I mentioned above. I don’t think that walmart is all bad, but I think too many people think it is the only store for anything, period. and it seems to be more and more people’s only shopping outlet. and they never go to any other type of store or store at all!! “Oh I will just get it at walmart” they say. It is so pathetic how they are being suckered into thinking it is the greatest store on the planet and the only place you can find good prices and quality product (rolls eyes). And as far as for saying the word Kmart, well that is a dirty word now. When I mention I shop at Kmart, most people say they have not been to one in years. I know they have closed over half there stores with all there troubles, but it was like that before the huge round of store closures began

    But in the retail world now, it reigns supreme and probably will for many generations. Children of today are being raised not to go shopping, but to go to Walmart, all those other stores you pass on the street on the way are just there if you can’t find it at walmart first is what they probably think, who knows?

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  9. Well, in K-mart’s case, their problem was, throughout all the 1990s decade, the corporate heads seemed to forget that over half their stores were old and some hadn’t been remodeled at all. (Not that I’ve ever seen discount stores get full-blown renovations anyways….new paint jobs, new lighting, yeah, but not a full ‘rip everything out and rebuild’ affair). A simple rebranding (switching from the old ‘red “K’ / blue ‘mart’ to the ‘big red K with the ‘mart’ inside’ logo) isn’t enough.

    Not to mention their faltering Builders Square chain, and ridiculous spending to acquire the OfficeMax and Waldenbooks chains, both of which they dumped within a mere 2-3 years anyways.

    Give it a few more years…I’ll bet K-mart will be another name joining the likes of Caldor, Woolworth, Ames, Zayre, Prange Way, Bradlees, etc, anchoring that big megamall in the sky.

    Oh, and in my neck of the woods, I mention P-way around here…everyone I’ve brought it up with so far has said that they miss the stores, as do I.

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  10. K-Mart has been adrift since the 80s. They had a great prototype for remodels in the mid-80s and, instead, started investing in non-core chains. They started building stores that didn’t suck in the 80s, too, but not enough of them. Other stores basically were neglected for literally decades. If they can survive under these circumstances, Wal-Mart will, too. OTOH, Wal-Mart has undermined their basic business model. They are the cheapest on a very small number of items and otherwise are only comparable to the competition. They survive on people who lack options–those in small towns and those who lack the resources or desire to see what else is available. Their ever shrinking range of merchandise in many categories, the continually deteriorating service and obvious shortcomings in store management have driven out many of the middle class customers who once viewed Wal-Mart as the anti-KMart. Now, they go to Target, which is mch smarter at finding new ways for these people to spend their relatively healthy discretionary income. Wal-Mart has really failed to develop new high margin merchandise and has relied on low margin items like food and books to drive volume. Their profits increasingly come from check cashing fees and the like, They have failed even when they succeeded—they did well with new clothing lines for urban areas, but these tanked when they made the mistake of trying to sell them to small town & exurban folks.

    Wal-Mart isn’t going away, but like K-Mart in the 80s, they’ve lost their rudder. They’ve put themselves into a position where they are stuck with low margin lines and a lack of new ones that can raise the bottomline. There aren’t many more places to cut costs–their “flexible” labor scheduling was a pr disaster and probably would just accelerate the deteriorating service and stociking of the stores. The remaining markets for them are more expensive to enter and less politically friendly. Even in places like metro Atlanta, where developers routinely are allowed to build anything, Wal-Mart has run into public opposition.

    So, Wal-Mart will stick around, but they’re stuck in a model that no longer works. Look for them to bumble along like Sears or K-Mart for many years, continuing to bleed customers and sources of profit. Wall Street is already interfering with their management, recommending smaller stores. Wall Street usually wrecks retailers (think most of the mainline department store chains)–they push selling assets and cutting labor, which is the kiss of death for a service business. The Waltons are a bunch of greedheads with no interest in the nuts & bolts of the company. They and the institutional investors will soon be wanting ways to plump up the stock and the dividends. Between them & Wall Street, we’ll probably see the sale of Sam’s Club (a relative failure) and some of the foreign operations–probably the the money losing Japanese stores. None of these moves will help the core business model. Unless, Wal-Mart can find real sources of new profit, they will continue on a long slide.

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  11. If Wal-Mart went back to Sam Walton’s original concept….things ALWAYS made in America, then Wal-Mart could estabilish a niche for itself. But greed always controls people and…well…tough luck for them.

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  12. Admittedly, I rather do my shopping at Target. Any day.

    Most of the time, it’s quiet (the humming of their A/C system and lack of stale music makes you feel aboard mothershiply terrain – even on weekends), clean, organized, and they’ve always got original, “hip” line of product at great prices that attracts younger people. What can I say? They’ve got creative ideas each season that really click with a modern generation – it’s always fun to see what they’ve got each week over there.

    Now I’m often the one defending Wal-Mart in my circle (mainly for their perceived ills in business practices) but I will avoid shopping them at every opportunity even if means driving the extra mile(s) to find one. I have to say I can’t stand the mess at my local Wal-Mart(s), the home goods and clothing are mostly ugly and undesirable. Plus, even if you walk in there to buy a few things, you’re likely bound to stand in long lines. If you ask me, even if Wal-Mart saves you a few dimes, the crowd and mental anguish are taxing enough.

    Luckilly, Target’s on the build to areas without stores around to combat Wal-Mart’s domination on the landscape.

    Friends of mine know just how much I cheerlead Target as a pleasurable shopping experience. In no way do I wish Wal-Mart ill nor am I celebrating their loses. I think they’ve just got some work to do before they make my wandering eye look apart the bullseye. They may (debatable) have the best prices, but their selection is terribly ordinary and stores need some help.

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