Expansion Always In Wal-Mart's Future
Last updated Saturday, January 7, 2006 11:09 PM CST in Business
By Anita French
The Morning News
You don't need a crystal ball to predict one thing Wal-Mart Stores Inc. will do next year -- expand. It's the only predictable move the Bentonville-based retailer makes every year.
"In 2006, Wal-Mart will continue to grow largely with the Supercenter format," said Art Turock, who heads a retail advisory firm in Seattle. "In pursuing a more upscale customer, they will need to make major changes in products and improve on their in-store merchandising and marketing efforts and secure new products in apparel, consumer electronics and household goods."
Wal-Mart has said it plans to open as many as 600 new stores in 2006 -- 370 in the United States and 230 around the world. The company operates more than 5,400 stores.
In October, the retailer forecast it would add more than 60 million square feet of gross retail space for the fiscal year beginning Feb. 1, 2006, up 8 percent from its estimated fiscal year-end square footage.
New Shoppers
Wal-Mart also hopes that some of its shoppers in future and current stores will include those in the upper income level, as the company began to reach out to them in 2005 by starting a new clothing line called Metro 7 and advertising in fashion magazines.
President and CEO Lee Scott said Wal-Mart is not trying to drive away its core customers -- those who make $35,000 a year or less -- but just attract more purchases from higher-income shoppers who usually buy only basic items at Wal-Mart.
"The more money you have, the more likely you are to buy your consumables at Wal-Mart and buy other products outside of Wal-Mart," Scott told Business Week in September.
"This dollar that we capture on the consumable side is the lowest margin that you have in the store. Home, apparel -- all of those things have significantly higher margins."
Scott said Wal-Mart doesn't plan to compete with Neiman Marcus or Saks, but wants consumers to buy more than just staples at Wal-Mart. It could mean billions of dollars in added sales for the company, he said.
Turock said Wal-Mart can probably reach upper-income customers in its Sam's Clubs or online, but the Supercenters "will be challenged to deliver to this new demographic."
International Growth
As for Wal-Mart's 2006 financial picture, Don Gher, retail analyst with Coldstream Capital Management, said the company's sales may continue to be pressured by higher energy prices, but "the bottom line could show an upturn from (2005's) growth level."
Coldstream owns Wal-Mart stock, but Gher doesn't, he said.
Kurt Barnard of Barnard's Retail Consulting Group in New Jersey said he believed that Wal-Mart this year will focus less on gross margins.
"They will continue in this new reality throughout the year when they find that gross margins are not the key to earnings but one of the avenues to travel to get good earnings," he said.
Internationally, Wal-Mart said it will expand three of its stores in Ontario, Canada, in late 2006. Wal-Mart runs 257 Wal-Mart stores and six Sam's Clubs in Canada.
Wal-Mart also purchased hypermarket operator Sonae SGPS SA in Brazil for $757 million in December, which will boost Wal-Mart's Brazil presence to 295 units in the country.
The company also said it had plans to acquire majority ownership of Carcho, a supermarket chain in Central America.
More RFID
Wal-Mart also will focus on expanding the use of radio frequency identification -- or RFID -- tags by its suppliers. The company's top 100 suppliers met a January 2005 deadline of having the tags in use on approximately 39,000 tagged pallets and more than 1 million tagged cases, said Linda Dillman, Wal-Mart's chief information officer, in April.
RFID uses a decoder, a radio frequency tag and an antenna that emits radio signals to activate the tag and read and write data to it. It is expected to eventually replace the bar code.
Wal-Mart has led the way in using RFID at the retail level. The company, along with eight of its top suppliers, began testing RFID in 2004 at select stores and a distribution center in Dallas.
Another 200 suppliers were to come on board the RFID train this month. As if to show how important the technology is to Wal-Mart, Dillman recently said that the company won't invest any more time in those suppliers who drag their feet in complying with the RFID program.
Wal-Mart and other companies are interested in the technology because it has the possibility of speeding up the supply chain and reducing costs.
Bank Of Wal-Mart
You also don't need a crystal ball to know that, no matter where Wal-Mart goes, so go its critics. For instance, the company may expand another way by opening its own bank this year, something the banking industry opposes.
Wal-Mart applied for an industrial loan bank charter in July, prompting so many hundreds of letters against it that the Federal Deposit Insurance Corporation in Washington delayed a ruling on the issue.
Industrial loan companies and industrial banks are FDIC-supervised financial institutions whose distinct features include the fact that they can be owned by commercial firms that are not regulated by a federal banking agency. These type of financial facilities do not offer checking accounts and are typically used to process credit-card transactions.
Those who oppose Wal-Mart's application said they feared the company's charter would eventually lead it to competing unfairly against banks and financial institutions by offering every day services such as check-cashing and loans at lower cost.
Wal-Mart says in its application that the industrial loan bank would not be open to the public or have branch offices.
Turock said, depending on what the FDIC rules, Wal-Mart will continue to enlarge its financial services in 2006.
"Right now, they do wire transfers, payroll check cashing and money orders. In the future, they may do checking, mortgages, auto loans for the 20 percent of their customers who don't have bank accounts or are under-banked," Turock said.
Continued Attacks
Wal-Mart's most persistent critics, Wal-Mart Watch and Wake-Up Wal-Mart, also no doubt will continue their campaign of attacking the company over its wages and benefits.
Wal-Mart Watch spokesman Nu Wexler said his organization will be focusing on the health care debate, starting with a bill in the Maryland State House that has been called the Wal-Mart bill because it requires corporations with more than 10,000 workers to set aside a percentage of their payroll to provide health benefits.
Wal-Mart is the only company in Maryland that would be affected by the measure, but Wal-Mart Watch is hoping that its passage will lead to similar legislation in other states.
Wexler said "only time will tell" if the campaigns by Wal-Mart Watch and Wake-Up Wal-Mart will change the world's largest retailer.
"I think Wal-Mart's PR effort was the wrong kind of change, but it's certainly change," he said.
Wal-Mart stepped up its campaign in 2005 to improve the company's image and answer its critics by hiring several top players in the public relations field. In December, the company announced the formation of a group called Working Families for Wal-Mart which plans to speak up for the company and launch counter-attacks in response to what it sees as unfair criticism.
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