Wal-Mart's store format strategy -- my how times change

It wasn't more than 15 years ago that the dominant Wal-Mart store format was its tried-and-true discount store. The Supercenter format (combined discount merchandise and grocery) was just taking off as Wal-Mart expanded into the grocery business and would soon invent the term "big box" in terms of retailing. Why did the retail giant do this? Why, to grow of course! Wal-Mart saw a future that included its stores alongside grocery shoppers and wanted to turn its locations into "one stop shops" for customers. The strategy worked -- shoppers would travel to Wal-Mart to shop for tires and movies and would also pick up a few (or a lot) groceries. This scenario worked in reverse as well.

After Sam Walton passed away in the early 1990s, the Supercenter format became the default opening format of choice for new Wal-Mart locations, and more sourcing started coming from Chinese suppliers. It's been said that Mr. Walton is probably spinning in his grave because of his fervent support of the American worker and American companies (The title of his autobiography? Made in America). While that's no longer the case with the majority of Wal-Mart goods, the chain went further down the discount spiral, leaving bankrupt competitors in its wake and seeing its business (and stock price) go crazy. You add grocery shopping (which is a business with razor-thin margins) on top of that to drive foot traffic into its stores, and it's not hard to see why Wal-Mart became a retailer busting at the seams in the late 1990s. Today, it's the largest retailer in the entire world.

Too much of a good thing

Wall Street pundits don't like to hear that growth is slowing down for any company in any industry. Reality, though, can be like a shot of ice-cold coffee -- jarring to the nerves. It's beyond me how financial market makers expect quarter after quarter of growth from most public companies. Sometimes, so much conquering has happened that double-digit growth is no longer feasible at all.

Is Wal-Mart nearing this point? In 2006, it had a quarter where sales growth slowed to the slowest to its lowest point in a decade. Sales slumped as well and same-store monthly sales figures slowed down. The catch is this: at Wal-Mart's competition (especially Target) things were very rosy. Now, to be fair, it's much harder to grow sales 2% when you're a $340 billion (sales) company than it is when you are a $49 billion (sales) company. Remember -- it's all relative. Double-digit sales from companies of two completely different sizes are not really comparable in the overall sense. It's true that growth from a larger company doesn't need to match the same growth rate of a smaller company. That's what being "big" is all about, right? More scale?

Regrouping formats and looking at U.S. strategy

Wal-Mart is now apparently looking at the smaller-store format according to reports. This would make sense, since not every location in every market needs a Wal-Mart Supercenter. Wal-Mart's 2006 strategy to customize the shopping experience to the customer (instead of the "invisible" customer) meant that it would re-arrange stores to fit the geographic and demographic tastes of the area where the store was located. That change won't happen overnight, but it is indicative of something: the big-box format (Supercenter) was not the charm it used to be to continually grow sales at the rate the market (and shareholders) needed.

What to do: Revisit your roots, and possible open more discount stores (20,000 square feet) instead of Supercenters (100,000 square feet). Additionally, install more Wal-Mart Neighborhood Markets (grocery only) in areas that may have been saturated by too many nearby big-box stores. These include Wal-Mart Supercenters, SuperTargets and even Costco locations. After all, some areas can become saturated too easily. Customer experience is also becoming more relevant than it once was: why wait in line in a crowded big-box store to save a few bucks when the experience of buying groceries (or just standard discount items) could be much better a mile down the road in a store that caters to one need only (not all needs)?

What will the next two-and-a-half years hold?

By 2010, I fully expect Wal-Mart to have a firm grasp on the strategy it needs to continue winning business in the U.S. market as it's continually attacked in the mainstream media and by customers who are taking their dollars elsewhere. Cleaner stores, better quality, better presentation, pleasurable experiences and a format count between Discount stores, Neighborhood Markets and Supercenters will have been thought out and changes implemented.

Will this be enough to stem customer defections from Wal-Mart's U.S. market presence (which is its largest)? Maybe so. The retailer is also not standing still internationally. Even after admitting defeat in countries like Germany and South Korea (it pulled out of both last year), Wal-Mart is partnering with established players in China (Trust-Mart) and India (Bharti) to ensure it has a firm foothold in those large markets without making the costly mistake of starting from scratch and then failing (sending billions -- possibly -- down the drain).

Next week, I'll be looking at Wal-Mart's security department. The company has received a bit of a bad rap recently due to some high-profile in its security department -- from unauthorized corporate spying to infiltrating personal privacy of its own shareholders. I'm sure the company needs to protect itself, but is it going too far? Why or why not? Until then, have a great week!