Wal-Mart reaches the limits of growth

Posted May 30th 2007 10:36AM by Peter Cohan
Filed under: Bad News, Products and Services, Consumer Experience, Wal-Mart (WMT)

Wal-Mart Stores, Inc. (NYSE: WMT) bet on the middle class. According to the New York Times, that was fine during the 1990s when the middle class was doing well. Since 2001, however, the middle class's wages have fallen behind the rapidly escalating prices of gasoline and food. Thus WMT's middle class customers have been unable to buy enough for WMT to grow fast enough, which leaves its shareholders disappointed.

To its credit, WMT recognizes that this has been the decade of hedge fund managers and LBO kings. So WMT has tried to move upscale. (It's definitely succeeded in moving its political contributions there. According to USA Today, 85% of its $1,014,600 in 2004 political contributions went to Republicans.)

WMT has certainly tried to cater to these wealthy consumers -- introducing contemporary clothing, flat-screen televisions and nine-layer lasagna. Unfortunately, for its shareholders, the upscale don't view WMT as the kind of place where they would shop for these products.

According to GSD&M Advertising's 55-page Positioning Report excerpted in the Times, shoppers who want to purchase a single dress for an evening out or a DVD player to watch a movie, do not want to deal with WMT's time-consuming, one-stop shopping format. The result is that WMT's efforts to appeal to upscale customers have resulted in big investments that did not pay off.

While the Positioning Report cites WMT's bad PR -- a sex discrimination lawsuit filed on behalf of 1.6 million female current and former employees and firings of top executives, like the former vice chairman Thomas M. Coughlin, for stealing company funds -- WMT estimates that it's lost only 0.04% of its customers due to a bad reputation.

So the problem for WMT shareholders is that a company with $355 billion in sales and $12.4 billion in net income simply cannot open enough stores and sell enough additional product to the middle class if it wants to grow EPS at more than its current 6% a year.

WMT has fallen 5.5% in the last year and 28.2% since its December 1999 high of $69.13. Its inability to move upscale limits its growth opportunities to selling more to the middle class. So unless it adds to its product line or middle class wages start growing faster than middle class costs, WMT is dead money.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the Wal-Mart.

Tags: wal-mart, wmt