- Payoff from online and smaller stores could be years away
- Shares fall most in one day since 1988 after profit projection
After decades of expansion, Wal-Mart Stores Inc. appears to be bumping up against the limits of the supercenter model that’s made it the world’s largest retailer.
Pressure from Amazon.com Inc. and a growing cast of smaller retailers, from regional grocery-store chains to dollar stores, have put pressure on the big-box model Sam Walton practically invented back in the early 1960s.
The challenges were driven home Wednesday when a historic drop in projected profit for next year sent Wal-Mart shares into their biggest one-day free fall since 1988.
Wal-Mart Chief Executive Officer Doug McMillon is sending a clear signal to Wall Street: near-term profits will take a hit to make the massive investments needed to reinvent the retailing giant at a critical juncture in its history. In that sense, he’s taking a page right out of the book of his rival, Jeff Bezos. Like Amazon in its earlier days, Wal-Mart is sacrificing short-term investor love in a bid to leap forward.
"For us to deliver for shareholders, we have to first win with customers and win with the associates, and that’s what we’re choosing to do," McMillon said.
The company plans to invest heavily in its online offerings as it opens fewer of its massive supercenters, focusing on smaller format locations called Neighborhood Markets. And it is spending $1.5 billion next year on higher wages for its workers and better training to help improve the quality of its more than 4,000 U.S. stores. It’s a gamble, but one that Wal-Mart says is already showing signs of paying off.
"This company is now over 50 years old, and retail has changed, " McMillon said.
But that change will take several years, and it isn’t going to be cheap, he warned. Rather than continuing its relentless focus on meeting profit expectations, even at the expense of its stores and quality, McMillon is putting money back into the company in the form of higher wages for workers and improving its online offerings. Wal-Mart is expanding a service to allow customers to order groceries online and pick them up in the store and adding to its network of distribution centers to speed shipping times for web purchases.
Investors aren’t convinced, at least not yet. They see competitors everywhere -- J.C. Penney Co. in apparel, Target Corp. in home goods, Best Buy Co. in electronics, a host of regional grocery stores, and Amazon as the king of online.
“It’s not just one thing, they’re getting pressured on all fronts, which makes fixing the brand more challenging,” said Allen Adamson, North American chairman of the branding firm Landor.
Wal-Mart is also fighting economic headwinds. Disposable income is shrinking, said Craig Johnson, president of Customer Growth Partners LLC. Wages have been stagnant or shrinking for most Americans. With the extra cash they do have, shoppers are shifting their spending away from traditional retailers and instead spending their money on cell phone service, health care or new cars, he said. Wal-Mart benefited during the economic downturn, when customers couldn’t afford to shop at slightly higher-end retailers. Now, as consumer confidence improves, shoppers are moving up market.
The biggest challenge of all, though, is the changing nature of shopping thanks to the Internet and the success of Amazon, which had more than $80 billion in sales of online merchandise.
“If we’re getting toothpaste and toilet paper from Amazon, then Wal-Mart has lost,” said Liz Dunn, chief executive of consulting firm Talmage Advisors.
Wal-Mart has been spending more than $1 billion trying to improve its online offerings, hiring thousands of workers in Silicon Valley. The company is trying to bridge the divide between digital and physical, shipping online orders from its stores and developing mobile apps. Still, online sales growth has been slowing over the past year.
“Wal-Mart put so many companies out of business by competing only on price, and now they have to shift that mindset from price to efficiency and convenience,” Dunn said.
The company is also taking a close look across the business at areas it can
sell off or stores that should be closed, McMillon said. The company has
already exited a restaurant business and banking operation in Mexico and a
property company in Chile.
"It’s more important now than ever that we evaluate our portfolio," he said. "We won’t let the breadth of our business distract us from our most important priorities."
Fortunately for McMillon, as CEO of a family owned company -- Wal-Mart’s majority owner is the Walton family -- he has the luxury of time. He will need it. The transformation he has set in motion will take years -- not quarters -- to pull off.