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Wal-Mart has itself to blame for current woes

Wal-mart Stores Inc., the world's largest retailer, said U.S. same-store sales fell 0.1 percent in November, the worst performance in more than 10 years.
Wal-mart Stores Inc., the world's largest retailer, said U.S. same-store sales fell 0.1 percent in November, the worst performance in more than 10 years.Rob Carr / AP file
/ Source: The Associated Press

Remember when Wal-Mart was talked about as the retailer where America shopped? At least in recent months, it looks like consumers increasingly have taken their money elsewhere.

Wal-Mart Stores Inc. should be a dominant force during the all-important holiday season, but instead it has tallied terrible results. Its same-store sales fell for the first time in a decade in November and it is forecasting anemic growth this month as well.

Blame for such missteps can’t go just to the slowing U.S. economy. Wal-Mart’s reputation as a difficult employer and the growing perception that it doesn’t always offer the lowest prices have led consumers to shop at competitors of the world’s largest retailer.

Given Wal-Mart’s size and power, what it does matters. With more than 6,600 stores worldwide and sales for 2006 estimated to average out to just under $1 billion a day, the Bentonville, Ark., discount chain has long been considered an industry and economic bellwether.

But its recent woes show a vulnerable side to this retailing behemoth. Maybe Wal-Mart’s problems are just Wal-Mart’s problems.

Its November same-store sales dipped 0.1 percent, marking the third consecutive month of disappointing results. Those weak sales came despite Wal-Mart’s price cuts on toys, electronics and other items in an attempt to draw shoppers.

Flat sales expected
For the heart of the holiday season, Wal-Mart is expecting December same-store sales to be flat to no more than 1 percent higher than a year earlier. The company blamed weak sales of apparel and a slump in its home furnishings business.

The initial take on Wall Street earlier in the week — when Wal-Mart tipped its hand that November wasn’t looking good — was that the weakness was symptomatic of a slowdown in overall economic growth. The stock market sold off on the idea that the housing market correction coupled with an uncertain jobs outlook might be spurring consumers to hold off on some spending.

But for that argument to hold up, there should be other warning signs as well — and there aren’t. Consumer spending has picked up in recent months as gas prices have dropped, and new retail sales show strong results from other merchants.

Rival discount chain Target Corp. tallied better-than-expected same-store sales of 5.9 percent in November. Shoppers scooped up its trendy offerings even though they bypassed them at Wal-Mart. The department store chains also fared well, including the 8.9 percent gain at Federated Department Stores Inc., which also boosted its December sales forecast.

“We are beginning to question if its (Wal-Mart’s) sales issues are broader and more secular than we are currently being led to believe,” JPMorgan retail analyst Charles Grom said.

One big issue plaguing Wal-Mart has to do with its prices. Consumers long believed if they shopped at Wal-Mart, they got the best price. And they were willing to put up with dated stores and sloppy displays so long as they were paying less.

But this year, that might not have held true. While the company has started remodeling — which also has turned off shoppers because of the disruption to the stores — most stores haven’t been redone yet. At the same time, Wal-Mart hasn’t always offered the lowest prices.

The discounter failed terribly when it attempted to attract higher-income shoppers by offering more fashionable items such as clothes that were sold at higher price points. It also shifted its advertising away from a low-price focus, but now is emphasizing cost again.

In the meantime, its competitors intensified their price-cutting on the same or similar items sold at Wal-Mart, including food and grocery items. That was especially true over Thanksgiving weekend.

Wal-Mart started discounting toys in October and electronics in early November, hoping to “gain mind share” as the low-price leader over the holiday season, according to Goldman Sachs analyst Adrianne Shapira.

But then it failed to deliver as competitors offered better deals on Black Friday and through last weekend. “The rest of the world caught up in promotions when it mattered and margins were hit across the board,” Shapira said, noting that its biggest declines in customer traffic came during the week of Thanksgiving.

Also at issue is whether Wal-Mart has expanded so much over the last four decades that finding new store locations and capturing additional sales in certain categories are becoming increasingly difficult.

Hitting a 'market-share wall'
As Merrill Lynch’s Virginia Genereux noted, Wal-Mart could have hit a “market-share wall” — since it might not be able to see much more upside to its 30 percent of share of such things as men’s underwear and pet food, or in certain markets like Springfield, Mo.

Then there is Wal-Mart’s publicity problem. Two years ago, a poll of 1,800 shoppers found that 2 percent to 8 percent of respondents said they had stopped shopping at the retailer because of negative press. The findings came in a report to Wal-Mart by consulting firm McKinsey & Co.

That decline was before the recent onslaught of attacks from two union-backed groups, and Wal-Mart Watch, which have gotten lots of media attention for taking on Wal-Mart’s treatment of workers so publicly. Wal-Mart bashing was also popular on the campaign trail during this election season.

Wal-Mart has fought back through its own intensified public relations effort. “We continue to create jobs, advance careers and enhance communities across the country,” Wal-Mart CEO Lee Scott said during the Nov. 14 third-quarter earnings call.

Of course, no one should write off Wal-Mart yet. It is big. It is strong. It is resilient. It is in many of the nation’s neighborhoods, catering to many of the nation’s shoppers. No other chain comes even close to the sway that it has over American consumers.

A year from now a different Wal-Mart story could be told, one of better times ahead. For that to really happen, though, the retailer might want to review how it got where it is today, and what shoppers have long looked for in its stores.