Tuesday, September 20, 2005

Wal-Mart and the Wheel of Retailing

Did you read the piece about Wal-Mart in the Wall Street Journal’s first weekend issue on Saturday? Am I the only person who doesn’t understand why Wal-Mart thinks it can trade-up from being the nation’s largest purveyor of cheap, bulk provisions to the masses to being a destination for those seeking fashion, style and upscale wares?

Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.

In the 1920s in hard goods, it was Sears. In the 1930s, in groceries, it was The Atlantic & Pacific Tea Company, a/k/a A&P. In fact, so virulent was A&P’s impact on the world of small, neighborhood grocers that the Robinson-Patman Act of 1934 was informally known as “the anti-A&P Act.”

That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.

What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.

So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade.

If Wal-Mart really wants to move up-market, they should do what Les Wexner did with The Limited. He employed a strategy of buying different brands to move out of the original retail niche in which The Limited succeeded. Wal-Mart could probably employ its size and legendary logistics acumen to vault some existing fashion brands into the big leagues, and at the same time, bring better financial management to them. And attract the more upscale consumers it now seeks, albeit through doors with other brand names on them.

Whether they do or not, at least they would have a fighting chance with both customer segments- the current Wal-Mart shopper, and the fashion-conscious shoppers who now move up to Target and Kohls. It’s not like Wal-Mart is aiming at uncharted, nor vacant, product/market territory.

1 comment:

swellis@patmedia.net said...

This is a nice piece. I thought the same thing when I saw that WSJ Weekend piece. Maybe the WSJ needed filler for is new Sat. distribution pipe and lowered is quality standard? Wouldn't be the first time...