Wal-Mart's U.S. growth stalls

It's been well-documented in Wal-Mart's recent quarters that the company is growing profits at a rate that would make its investors celebrate. While overall sales for 2006 were up form the previous year, Wal-Mart's overall growth in its largest market (the U.S.) has inched up quarter over quarter. Market pundits (myself included) believe that competitors are taking market share away from Wal-Mart, leaving the world's biggest retailer to continue serving its core customer base -- lower-income shoppers.

Many U.S. customers are demanding a better shopping experience and have left Wal-Mart to find just that. In a year where overall gas prices reached alarming rates, Wal-Mart's premise of slowing growth based on less trips to its stores doesn't really hold water. There are many ways to look at this logically: if customers were curtailing gas expenses, slowing growth would affect most retailers. It hasn't. Are Wal-Mart's shoppers combining trips to its stores in a more efficient manner and not spending more based on higher energy prices? That's a hard argument to make as well. What's left? Is Wal-Mart reaching market saturation in many areas of the country is serves? If so, then store growth slowing down will mean that Wal-Mart needs to organically grow more sales at each store, right?

Outside of the U.S. is in focus, but inside the U.S. still needs work

Based on Wal-Mart's tepid growth in 2006, the retailer began last year to launch an effort to make many of its stores more customizable to the areas which they each serve. Now, in a company known for duplicating the big-box retailing concept all over the country, the thought of differentiating each store to the income and shopping demographics of the areas where most stores are located seems frightening to me. To Wal-Mart, my guess is that its merchandising executives had many sleepless nights last year as this strategy was developed. In a few areas of the country I've visited recently (mostly in the Midwest), the stores look the same to me. What's changed? Well, it takes time, but WMT investors aren't willing to wait for store-level tunraround that should have happened many years ago.

So, Wal-Mart starts looking at International plans by forgoing launch plans of its own and by partnering with established players in the Chinese and Indian markets. Why grow organically when partnering with established companies can give an almost-immediate sales growth affect for international operations? Wal-Mart is not the first company to do this, and hopefully it will work. Until then, the job of growing sales in its U.S. stores is ultra important. How can Wal-Mart do this? By investigating every single option in its Supercenter format to squeeze out every possible penny from every square foot of floor space.

A perspective on Wal-Mart's Supercenter format

Now, I only have Wal-Mart Supercenters in the Midwest part of the U.S. as a reference, so your mileage may vary with the below analysis. When doing research in Wal-Mart Supercenters (since I can't find regular stores any longer), there are certain areas of each store that strike me as odd. I'll list them below and then give you my take on each.

Crafts and Fabric areas

I many cases, the crafts and fabric areas in every Wal-Mart I visit are 1) devoid of Wal-Mart associates, 2) take up an awful lot of space for the products being carried and 3) seem to be merchandised inefficiently. Now, I know there is probably a decent psychological contingent to not having an emotional purchasing areas like crafts and fabric crammed to the gills with as much merchandise presentation as possible.

Nevertheless, it's amazing to me to see so many craft items "spread out" in this department that possibly don't move off the shelves as fast as Wal-Mart would like. I don't have any real, segmented sales details to support this, so it's just my anecdotal observations here. The crafts and fabric department is probably highly profitable, and perhaps Wal-Mart makes more profit per square foot in that department than in others. But if product isn't moving, bigger profit margins are pretty meaningless.

Paint and mixing areas

With the abundance of mega-retailers in the home improvement category now (Lowe's and Home Depot), Wal-Mart's paint and mixing business is probably not what it once was. Yet, the amount of store space dedicated to this area has not changed in way over a decade from what I have seen. Again, my anecdotal evidence speaks for itself: not once in the past year have I seen more than a few customers browsing the paint areas in Wal-Mart Supercenters unless it was for the canned spray paint products.

Have I seen paint being mixed at all? Not a chance -- that mixing machine has been left for dead in every single instance of Wal-Mart shopping research I have done in recent times. On the flip side, I can't go into a Home Depot or Lowe's store without seeing many customers in the paint selection and mixing area looking at samples and having paint mixed. I see it every single time I visit a Lowe's or Home Depot store. Take what you want from that.

These are just two of the areas where I see a retail ghost town developing inside Wal-Mart Supercenters these days. There may be more, however.

Maximizing sales on every square foot of retail floor space

Does Wal-Mart want to maximize sales and profits on every square foot of space inside each Supercenter? Sure it does, and every retailer has this goal (I would think, anyway). The key to balancing high-volume merchandising would be to maximize both: if you have tons of sales but lose money, that's not good. If you make a ton of profit on some items but they sale like stale bricks, that is also bad. Trying to turn products with great margins as fast as possible is the goal -- one that Wal-Mart has succeeded at very admirably in its history. But times change, and they can change fast.

Perhaps items that are featured in the crafts and fabric areas are meant to bring in the female demographic who spend the most at discount retailers anyway (directly or with purchasing influence). Wal-Mart, like any good retailer, knows that half the battle is just getting feet in the door. Once it has you inside, getting you to spend as much as possible is the next goal.

There is a reason the fabrics and crafts areas I've seen are in the very rear of the store. Shoppers for those product has to pass almost everything just to make their way back to that department. with each step, a possible sale from some impulse, aisle or endcap display beckons. This strategy works, folks. so maybe Wal-Mart has data that breaks down how many fabric and craft sales are combined on the same ticket with items from other areas. If products from those "other areas" are found on the path from the front of a Wal-Mart Supercenter to the fabrics and crafts area, there's your data. Does this happen? You can bet it does, at least at Wal-Mart.

Still, are shoppers spending their dollars these days at specialty craft stores (Hobby Lobby, Michael's, Hancock Fabrics, etc.) instead of at Wal-Mart? Are customers having their paint mixed and purchased at Lowe's and Home Depot stores instead of Wal-Mart? If so, Wal-Mart has some thinking to do in order to shelve lower-performing store departments and goose sales from other areas, while even expanding some areas (like consumer electronics). Are there changes coming to Wal-Mart Supercenters soon? Who knows.

Next week I'll be looking at Wal-Mart's store count across the U.S. and how it may be spreading itself too thin. In some areas, Wal-Mart's "conquer by numerous locations" works, but in some it litters the landscape more than anything, annoying customers. Until then, have a great week!