The Consumer Trends That Are Slowly Killing Walmart

Walmart storeWalmart (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.

Want proof?

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.




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maxine darden

If you go to Walmart at 12 oclock at night thinking you can run in and out. Forget it. There is only one cashier working and 25 people in line. There will be at least 10 people with a loaded shopping cart. Somebody is going to have to have an item checked. Walmart started off good. They ran all the other businesses away so there would be no where else to shop. Then they went up on the prices. They don't have enough workers. They pay the workers minimum wages with no benifits even though they have made huge profits. And last but not least their products are not all made in America.

July 31 2012 at 1:29 AM Report abuse rate up rate down Reply
thebear3566

i wish walmart would do double on coupons like the other stores do

April 09 2012 at 1:30 PM Report abuse rate up rate down Reply
mo2bee

would it been not more fair to compare Sams club with Costcos, than Walmart? I am just asking

April 03 2012 at 6:04 PM Report abuse rate up rate down Reply
lesla814

just what we need, more jobs lost by shopping on line. wake UP.

April 03 2012 at 2:31 PM Report abuse rate up rate down Reply
lesla814

its clear this guy has stock in costco, I no longer shop there, you find a product you like, the next week its no longer there, and who does there food shopping at amazon?

April 03 2012 at 2:25 PM Report abuse rate up rate down Reply
lostinwonderart

I think two consumer trends that are really driving some businesses are COMPLETELY ignored by Walmart. Those are products not made in China and fresh products (fruits, vegetables). The two local super Walmarts near me carry so few fruits and vegetables, that it's impossible to rely on them for your grocery shopping. And, most of the time fruit is rotting, pototoes and onions are sprouting, and whole patches of mold and decay. I also would like to buy things not made in China. Often in some categories, Walmart offers no alternative to made in China crap.

And, I must also complain about the carts and such. At the closest walmart to me, I shopped using a basket. When I was done checking out, the cashier ORDERED me to return to the basket to the front of the store, as it was the ONLY basket that the store owned. This was rude and unbelievable. A week or so later, I went to shop, and I asked the greeter for a basket. She said that the basket was being used by another customer. I said, "THE basket?" She also said that there was only one. I shopped with just carrying things, but then I ended up waiting in line for so long, that my hands cramped and I couldn't uncramp them to pay (I had recently had a nerve injury in my hand which made things EVEN worse). I complained to walmart corporate, and the store manager called and didn't seem all that concerned about my discomfort. But, a few months later, they all had new baskets.

March 31 2012 at 9:35 AM Report abuse rate up rate down Reply
Dhubhgaill

Lets be real here. Walmart, not the consumers is killing Walmart. Until they start having better quality merchandise, and until they start treating their employees better than dirt under their feet, Walmart will keep loosing customers. The employee associates at the bottom end of the ladder are really the ones that work the hardest and get the least and are abused by lots of the upper levels. Ask any associate what it is like...when they are not around the store. Pay is lousy, benefits are lousy, the computer generated schedules are lousy, and when the profit margin is not good enough, they cut employee's hours to make up the difference. Now, tell me that Walmart is not killing itself, and blaming everyone else.

March 31 2012 at 1:33 AM Report abuse rate up rate down Reply
jhrochesterny

The closest local Walmart is a miserable shopping experience, I dread going there, but am increasingly less willing to drive a few miles to the next closest, mediocre at best, or to the newest 2 both about 15 miles farther. I get most of my stuff at BJs, ALDI, or the local grocery store. I just wish we had a Costco, I was a member before I moved to NY and it was better than Sams or BJs by far. An IKEA would be good too.

March 30 2012 at 10:29 PM Report abuse rate up rate down Reply
Jean

our local Walmart store has the friendliest personell .... of any type store, plus.....they match other merchant prices.... I for one was very impressed at my latest shopping there.... they are always ready to help....I was so pleased I wanted to give a gold coin for all the help....clerk refused...said thank you .

March 30 2012 at 10:59 AM Report abuse +1 rate up rate down Reply
rjoh959287

When Wal Mart remodeled and it was impossible to find anything I quit goig there,Beside the fashion in clothing was crap.The prices went up the service went down

March 30 2012 at 8:29 AM Report abuse rate up rate down Reply