Why slowing growth can be a positive strategy

Wall Street is weird -- the market can punish a company for not meeting "expectations" that are not even derived from the company itself. Analysts determine what these "expectations" are and then public companies are held accountable for them. I would argue that the biggest metric public companies are judged on is growth. In many cases, revenue growth is the key metric. Forget about profits -- which is why companies are in business -- but growth rules the day. In general, the better the growth, the better the profit. But not always.

After Wal-Mart opened 281 new stores in the U.S. in 2007, CEO Lee Scott said that the retailer would scale back store openings and growth in 2008. This year, the retailer will open just 180 stores, with only 140 planned for 2009. Is that what the market wants to hear? Probably not -- but it's smart. Wal-Mart is already at the market saturation point in many U.S. communities where it has locations. In Minnesota, Wal-Mart has abandoned plans for thee additional stores, citing the locations as being "cost prohibitive due to required offsite improvements."

Still, Wal-Mart is opening new Supercenter locations and relocating other ones to fit the changing needs of the communities where it needs to serve customers. It's still mixing in standard Wal-Mart stores (which reach 100,000 square feet) with general merchandise/grocery Supercenters (which reach 185,000 square feet).

How slowing Wal-Mart store growth can impact other retailers

The problem with Wal-Mart's growth in recent years is that it's built too many stores too close together and too many big stores in small markets in recent years. Dave Brennan, co-director of the Center for Retailing Excellence, said that he expects Wal-Mart to look at the "low-hanging fruit." That is, focus in on better stores in bigger markets and increase past success in those markets by more focus on them instead of opening stores for the sake of growth in store count.

The effect on communities where Wal-Mart has existing Supercenters and where it would like to eventually locate Supercenters can be huge, however. Wal-Mart locations are often anchors for an entire retail complex, and the retailers that are part of that retail ecosystem can see traffic dwindle sharply if Wal-Mart relocates an existing location or chooses not to anchor inside one of those complexes for any reason. All the other large and small retailers can be impacted, even though many of them compete in some way with Wal-Mart anyway. Wal-Mart can't carry every single product for every since need, even though it tries to.

But, a Gamestop Corp. (NYSE: GME) location in a retail ecosystem with a Wal-Mart Supercenter anchor can compete by having more games available for sale. The Gap (NYSE: GPS) can compete by having more extravagant specialty apparel available that go beyond Wal-Mart's apparel offerings. This is how retailers have figured out to compete, even just a hundred yards from a Wal-Mart location: find a niche that Wal-Mart isn't supplying and fill that need for the customer in a superb way (and price is not the main consideration). If this theory didn't work, then Wal-Mart would be anchoring itself in these retail complexes -- it wouldn't be drawing legions of other retailers who want to peacefully co-exist with the world's largest retailer right outside its doors.

Wal-Mart isn't the only one slowing down

In tough times -- and 2008 qualifies -- retailers best beat back market "growth" strategies and scale back to a place that satisfies the overall operating landscape, but that doesn't have the goal of opening stores and generating sales just for the sake of it. Generating incremental sales at existing locations and better utilizing existing location inventory is the name of the game.

Home Depot Inc. (NYSE: HD), for example, plans on opening about 55 stores in 2008 -- down from twice that in 2007. Is this a sign that many retailers have overshot where they needed to be in terms of "location growth," which is most likely meant to feed "revenue growth?" Probably. It's the natural expansion/contraction theory we all know about. In a down economy with scared customers, rising energy prices and tightening credit, some purchases are deferrable and some are not. Food, clothing, and gas are not deferrable -- but in a sense, everything else is. Growth slows when the economy is being reported as shaky (although many companies are doing quite well), and hence, growing store count won't lead to larger sales.

When it comes to Wal-Mart not growing stores at such a rapid clip, there's a reason for that. For over a decade, all the retailer has been doing is growing U.S. stores as fast as possible and taking over the retail landscape in America at the same time. With international markets being Wal-Mart's focus at this time to make up for slowing U.S. growth, it can afford to slow store openings here in the U.S. -- and it is doing just that.

Stay tuned right here next week for another edition of The Wal-Mart Weekly. Until then, have a safe and prosperous week.