Wal-Mart: What Will the Next 50 Years Bring?
Jul 9th 2012 6:19PM
Updated Jul 9th 2012 6:26PM
Wal-Mart (NYS: WMT) is as inescapably American as Ford trucks and apple pie. It's only fitting, then, that the company celebrated its anniversary just two days before our nation's own Independence Day, and that the company's eccentric founder drove a red F-150 long into his status as billionaire.
Love or hate the company, you can't help marveling at what it's accomplished. Since opening the doors to its first store on July 2, 1962, the company has become the world's largest retailer, collected nearly half a trillion dollars in revenue last year, and now operates more than 10,000 stores. Given all that it's accomplished in 50 short years, it only makes sense to wonder what the next 50 years will bring.
Retail has gone through paradigm shifts every few decades or so. After benefiting from one such shift, Wal-Mart has become the rare survivor through the others. Modern retail got its start in the early 1900s with companies such as Sears and J.C. Penney (NYS: JCP) , whose catalogs could be found in most homes and created the notion of mail order. Then along came highways, baby boomers, and a corresponding migration toward suburbs. It's here that Wal-Mart thrived. Coupled with a 1962 repeal of fair-trade laws that prohibited discount pricing and a ramp-up in consumer spending, Wal-Mart couldn't be stopped.
Interestingly enough, though, rival discounter Target (NYS: TGT) also opened its doors in 1962 with a nearly identical model, yet it now stands at less than 16% of Wal-Mart's market cap. Target is no retail pushover, either, but the discrepancy just underscores Wal-Mart's dominance.
From the mid-'70s to the end of the century, retail changed again as specialty stores focusing on one genre of category of goods began to boom. These "category killers" were perhaps the biggest threat to discounters like Wal-Mart, but the company deftly maneuvered the environment with its now famous supply-chain efficiencies and ruthless economies of scale.
Most other discounters didn't survive the storm. Of the top 100 discounters operating in 1976, less than a quarter were still operational in 1992.
Despite being the granddaddy of retail today, Wal-Mart won't rest on its laurels and has continued to reinvent itself as necessary. The company has added groceries to its portfolio of goods, a notoriously low-margin product. But the addition has made Wal-Mart a more complete stop for shoppers and has brought it extra foot traffic in the process. Now Wal-Mart collects one out of every four dollars U.S. consumers spend on groceries and has maintained relevance with consumers.
The company is also rolling out the yin to its big-box-store yang and adding smaller "Wal-Mart Express" locations in more densely populated urban areas. The concept has been a surprising success thus far and allows the company to tap previously unavailable markets. It's also following the new trend of individuals to increasingly locate in and around cities, an ironic twist for a company that benefited from the baby boomer move to the suburbs 50 years ago. The problem now is the grocery offerings, which could reduce margins despite other improved retail metrics, such as sales per square foot.
What will be
While it's anyone's guess exactly what the next seismic shift in retail will be over the next 50 years, the rise of the ever-connected consumer will certainly be a key factor. Mobile devices and always-on Internet have created an environment of total price transparency and absolute control for the consumer. Now, instead of being limited to their local mall, consumers have the world's retailers at their fingertips and have become correspondingly price-conscious.
The obvious 800-pound gorilla in the room and the growing thorn in Wal-Mart's side is Amazon.com (NAS: AMZN) . Even crazy-efficient Wal-Mart will have a hard time competing with the low overhead, infinite shelf space, and razor-thin margins that have made Amazon a success.
Wal-Mart won't maintain dominance if it relies on its grocery division, either, nor would it want to. Grocery is a tough game to play when you can't sell higher-margin extras in the store. Instead, the company will have to pursue new strategies such as its smaller store locations, and maybe even consider using other larger stores as mini-grocery distribution centers.
Wal-Mart's pay-with-cash platform, which allows you to purchase online and pay for an item in the store, has been a reasonable success, but its impact will probably fizzle out as consumers become increasingly more able to, and comfortable with, using credit cards online.
Ultimately, Wal-Mart will have to re-envision how to use its immense fixed asset base of 8,000 properties or run the risk of being crushed by them. Many of these properties will have to be remodeled in the coming years and could be a huge cash drain for the company. Over the next 50 years, expect to see many underutilized locations divested to make the company more nimble.
Embracing ever-connected consumers on their terms and marrying online and in-store experiences are going to be absolutely crucial to success. The consumers of tomorrow will demand personalized interactions, low prices, and seamless integration with their lives. Wal-Mart's massive size, supply chain, and manufacturer relationships should help with the prices -- now it just has to work on the other two.
How to play it
As incredible a company as Wal-Mart is, the next 50 years will be markedly more difficult than the last. Many of its best practices are common knowledge, and its immense fixed asset base could become a ball and chain. Recognizing this reality, our top analysts have created a report outlining how to invest for The Death of Wal-Mart. While it may seem unimaginable that the world's largest retailer could falter after such a run, even the biggest of titans can be toppled. Be prepared and know what companies to invest with should Wal-Mart stumble: Read more in our special free report. It's only available for free for a limited time.
At the time this article was published Austin Smith owns shares of Ford. The Motley Fool owns shares of Amazon.com and Ford. Motley Fool newsletter services have recommended buying shares of Amazon.com and Ford, creating a bull call spread position in Wal-Mart, and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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