Wednesday, June 27, 2007

Wal-Mart slows it down

I need to bring some things up to date, so the next few posts will be updates of ongoing issues – the first being the ongoing questions about what appears to be a floundering Wal-Mart.

The most interesting thing has been Wal-Mart’s recent announcement that they will seriously cut back on their rate of expansion.

At Wal-Mart’s annual shareholder meeting here this morning, executives surprised investors by announcing that they would reduce the number of new supercenters to be opened this year by 35 percent, or roughly 70 stores, to hold down the chain’s mounting expenses.

It was the second such cutback in the past year and suggested that Wal-Mart, whose staggering growth has produced hundreds of new stores a year, is at a turning point in its 40-year history.

The first thing to note about this is that, even with the reductions, Wal-Mart will still be growing at a rate faster than the total size of all but a few other chains in the world. Wal-Mart will open about 200 new stores this year, instead of the planned 265-270. At about $100 million per store, that’s growth of $20 billion (about equal to the total sales of J.C. Penney). In the next few years they plan about 170 stores per year.

But the change does reflect an awareness that the chain has matured and needs to emphasize growing profits over volume.

Opening fewer stores will also ease some of the criticism about “comp store” figures – part of the reason Wal-Mart has done poorly in this measure is that all those new store openings were cannibalizing sales at the existing outlets.

The change in Wal-Mart’s direction raises a difficult question for their suppliers, however – they are going to have to look elsewhere to get their own sales increases, rather than depending on riding Wal-Mart’s growth.

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