The Consumer Trends That Are Slowly Killing Walmart
Mar 26th 2012 6:00AM
Updated Mar 27th 2012 12:16PM
Walmart (WMT) revolutionized consumers' lives for decades. It built a successful retail empire across the country, powered by its low prices.
But Walmart has failed to keep up with the innovation, and now other companies are successfully changing consumers' behaviors in a way that is slowly killing the world's most famous retailer.
Look no further than its most recent quarterly earnings report. Although it marked its second full quarter of positive same-store sales growth (albeit a measly 1.5%) after nine consecutive quarters of declining same-store sales, overall earnings still declined 13%.
So what's happening?
It's Not Them, It's You
Shopping behavior has changed. And even though the recession forced many Americans to "trade down" to cheaper items like the ones Walmart is famous for, consumers sought out new ways to do so. In many cases they traded even further down and headed right for the Dollar Generals (DG) of the world.
More frightening for the company is that even Walmart's core customer base of low-income households is now a significant part of this epic shift in shopping behavior.
The change, of course, is that traffic has shifted from physical stores to online stores. In fact, a startling 50% of Walmart's customers now shop on Amazon.com (AMZN), versus just 25% five years ago.
Amazon's low prices (thanks to its low overhead expenses and no sales tax in most states) and unbeatable selection (thanks to the acquisition of companies like Diapers.com and Zappos), combined with the convenience of online shopping, have attracted a growing fan base of customers -- stealing more and more customers away from Walmart.
Even Jeremy King, the chief technology officer of Walmart, admits Walmart.com is "playing a catch-up game" with Amazon. And yet it's pretty clear that any attempts to compete with Amazon online will be futile.
That's because Amazon's reach will only continue to expand as it builds out its Kindle platform. The ease of purchasing with just one click from virtually whatever device you choose (your computer, phone, Kindle, or even Apple's iPad) will continue to attract a growing number of consumers -- again, spelling bad news for Walmart.
It's Not Just Web Retailers Eating Walmart's Lunch
On the physical front, the most revolutionary Walmart killer is Costco (COST).
Costco, a members-only warehouse chain, targets a more affluent demographic than Walmart but similarly prides itself in offering heavily discounted items. Even though Walmart has a similar arm of its business, Costco is light years ahead of Walmart's Sam's Club.
Costco's charm permeates many levels.
- Markups on products are heavily controlled. Items can never be sold for more than 15% of cost (whereas supermarkets will mark up items by 25%, and department stores mark items up by as much as 50%). This means consumers always know they'll find unbeatable bargains. And that keeps them coming back for the majority of their shopping needs.
- Stores require little upkeep. They are bare bones in design, meaning they require less maintenance capital than its more posh (by comparison) competitors. Plus, Costco only stocks around 4,000 items. Walmart's stores, by contrast, often carry more than 100,000 different items, which constantly need shelf attention.
- Shopping is easier. The smaller scope of products makes the purchase decision easier for customers. But it also generates higher sales volumes, which enables Costco to sell items quicker than they have to pay their suppliers for them -- and allows them to negotiate even lower deals with these suppliers.
- Costco has a secret ingredient. The stores have an additional element that Walmart will likely never be able to replicate: the "treasure hunt." Costco constantly stocks shelves with new items available for just a short time. Customers return excited to see new offerings, and they often leave with items they hadn't intended to purchase.
- Returns are never a problem. Even if shoppers later decide their impulse buys were unwise, Costco has the most consumer-friendly return policy out there, accepting returns on most products without a receipt and with an infinite timeframe.
Given all this, it's little surprise that Costco's retention rate for members hovers around 90%. This means that once a customer gets a taste for the savings -- and experience -- Costco offers, he or she will likely be a customer for life. Again, bad news for Walmart.
So How Much Is Walmart Hurting?
It is unlikely Walmart will completely disappear anytime soon. But as more of its customers switch to Amazon for online purchasing and Costco for physically purchasing cheap items in bulk, it will become increasingly difficult for Walmart to grow -- and survive.
Which brings me to an important point for investors in the retail sector: Even though Walmart is often touted as an all-weather stock -- capable of gaining in both boom and bust economies -- the real all-weather stocks of today are Amazon and Costco.
Better yet, Amazon and Costco are a fraction of the size of Walmart, meaning their stocks have much more potential to double and triple, especially as an ever-growing number of consumers continue to kill Walmart with their shifting spending habits.
This article was written by Motley Fool analyst Adam J. Wiederman. Adam owns shares of Costco. For more information on these two "cash kings" changing the face of retail, click here for a completely free copy of The Motley Fool's research report on this trend. The Motley Fool owns shares of Apple, Walmart Stores, and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Apple, Walmart Stores, Costco Wholesale, and Amazon.com. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores.