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Last year, while its peers struggled to cope with faltering consumer spending, Wal-Mart (WMT ) kept charging ahead. The world's largest retailer reported a 20% increase in earnings, to $8.2 billion, on revenue that grew 12%, to $245 billion, for the fiscal year ended Jan. 31. This year could be even more difficult for the retailing industry if fallout from the Iraq war takes its toll.
For Wal-Mart, however, what may prove a major obstacle to rivals should be no more than a bump in the road. Analysts think the Bentonville (Ark.) discounter can grow at its current pace for years to come, as it expands in the U.S. and beyond. Within the next decade, if you buy this scenario, Wal-Mart's revenues could exceed the gross domestic product of the Philippines, whose $350 billion economy grew 4.6% in 2002.
This success stands in stark contrast to the recent troubles of other consumer giants, particularly Home Depot (HD ) and McDonald's (MCD ), which many on the Street believe have hit their peak and are now slowing -- perhaps even fading. And it also raises two intriguing questions: What is Wal-Mart doing that Home Depot and McDonald's aren't? And what, if anything, might conceivably cause Wal-Mart to stumble? Those riddles will become even more intriguing as Wal-Mart continues its march to dominate retailing -- and perhaps finds itself confronting antitrust troubles.
FALLING STOCKS. McDonald's and Home Depot are finding that maintaining a lead is harder than building one. The luster of the Golden Arches has dulled as the No. 1 burger chain, with $15.4 billion in annual sales, has come late to the trend toward healthier eating -- a movement that seems to have buoyed waves of new competitors, most notably Wendy's and Subway. Yes, McDonald's has held onto its 43% slice of burger-chain sales -- but beef-patties' share of the fast-food market is shrinking.
Home Depot, which sells roughly 30% of U.S. home-improvement supplies, is losing some of its momentum to Lowe's (LOW ), where earnings and sales growth in 2003 should be about 18%, analysts predict, vs. 8% for Home Depot. Both McDonald's and Home Depot are overhauling operations, but their stocks have plummeted about 50% over the past 12 months, both hitting multiyear lows. At McDonald's, in the fourth quarter of 2002, the downward trend produced the first-ever quarterly loss.
"What has happened with both of these companies is that they lost sight of the customer," insists David Szymanski, associate professor of marketing at Texas A&M University, who blames a combination of declining service and run-down stores. "If the customer experience diminishes, people will go elsewhere," he adds. The reverse appears to be the case for Wal-Mart, whose customer base has grown as it has added more stores in suburban markets and lured shoppers from malls and traditional supermarkets.
ROOM TO GROW. In large part, that's because Wal-Mart has pulled off a difficult balancing act: On the one hand, it continues to woo large numbers of customers who respond to new concepts, things like Sam's Club and the chain's Supercenters. At the same time, while avoiding market saturation, it has been improving and expanding its roster of core Wal-Mart stores. Even though Sam Walton's creation seems omnipresent, it isn't. The U.S. has "only" 2,826 Wal-Mart discount or combined grocery and general merchandise Supercenters, plus 525 Sam's Club warehouse stores.
While those are some awesome numbers, Wal-Mart has plenty of room for expansion. Current plans see an additional 245 domestic outlets by January, 2004 -- at least 200 of which will be Supercenters. That should still leave a potential for 2,000 more stores in the U.S. by 2011, figures Mark Miller, an analyst at William Blair & Co. Miller thinks Wal-Mart can hit $660 billion in sales by then, an expectation that's evident in Wal-Mart's stock price: It has dropped over the past 12 months, but by only about 12%, to around $54.
By contrast, McDonald's, which plans to shut 600 underperforming stores in 2003, seems to have overpopulated the world, with 30,000 outlets in 119 countries. And Home Depot could be falling into the McDonald's trap, at least according to some analysts. Its answer to Lowe's is to add 200 additional stores to its 1,550 existing outlets in 2003. Many analysts fear that this will push Home Depot perilously close to market saturation. One skeptic, Federated Investors retail analyst Eric Meyers, says a better new-store figure would be "something south of a 100," adding that he would "feel a lot better" about the stock if that were the case.
THE NEXT WAVE. Wal-Mart can still expand largely because it has come up with successful variations on its discount model. When its core business began to mature in the 1990s, Wal-Mart started to build combined grocery and general-merchandise superstores -- 180,000-square-foot behemoths that now account for 54% of revenues from Wal-Mart-branded locations in the U.S., according to Emme Kozloff, an analyst at Bernstein Research.
As the growth of superstores slows over the next several years, Wal-Mart will look to its much smaller Neighborhood Markets for the next wave of expansion. It now has 50 such stores, which represent very little of total revenues. Miller expects to see a further 1,350 by 2011, when he believes they should account for 5% of revenues.
That outlook contrasts sharply with expectations for McDonald's and Home Depot, which have failed to find new, growth-sustaining formats. McDonald's efforts to diversify by buying nonburger businesses such as Donato's Pizza have fizzled, and Home Depot has experienced similar problems with its specialty stores, Expo Design centers. While they target higher-income consumers, their sales remain small against warehouse-store revenues.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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