Is Wal-Mart losing wind?

For nearly five decades, Wal-Mart's signature "everyday low prices" has defined its business model and has made it the largest retailer worldwide. Over the past year and a half, though, Wal-Mart's growth formula has stopped working. In 2006, its US division made a meager 1.9% gain in same-store sales—its worst performance ever. Competitors such as Target, Costco, Kroger, Safeway, Walgreen's, CVS, and Best Buy now are all growing two to five times faster than Wal-Mart.

Is this loss of momentum temporary, or is Wal-Mart doing lasting damage to its low-budget franchise by trying to compete with much hipper, nimbler rivals for the middle-income dollar? Should the retailer redouble its efforts to out-Target Target, or would it be better off going back to basics?

If Wal-Mart seems short of answers at the moment, it might well be because there aren't any good ones. "There are a lot of issues here, but what they add up to is the end of the age of Wal-Mart," contends Richard Hastings, a senior analyst for the retail rating agency Bernard Sands. "The glory days are over." Simple mathematics suggest that a 45-year-old company in an industry growing no faster than the economy as a whole will struggle to sustain the speedy growth rates of its youth. In Wal-Mart's case, this difficulty is exacerbated by its great size and extreme dominance of large swaths of the US retail market. Wal-Mart already controls 20% of dry grocery, 29% of non-food grocery, 30% of health and beauty aids, and 45% of general merchandise sales, according to ACNielsen.

However, the expansion impulse is as deeply embedded in Wal-Mart's DNA as its allegiance to cut-rate pricing. Wal-Mart was able to boost total US revenues by 7.2% last year by opening new stores at the prodigious rate of nearly one a day. According to Wal-Mart CEO H. Lee Scott Jr., the company plans to sustain this pace for at least the next five years. In fact, he is on record saying that room remains in the US for Wal-Mart to add 4,000 Supercenters to the 2,000 it now operates.

Wall Street does not share Scott's bullishness. Wal-Mart shares are trading well below their 2004 high and have dropped 30% in total since Scott was named CEO in 2000, even as the Morgan Stanley retail index has risen 180%. "The stock has been dead money for a long time," says Charles Grom, a JPMorgan Chase & Co. analyst.

One can argue that the deceleration of Wal-Mart's organic growth is a function of the aging of its outlets, given that same-store sales rates slow as stores mature. Outlets five years or older accounted for 17% of all US Supercenters in 2000 and 44% in 2006, and will top 60% in 2010, according to HSBC analyst Mark Husson. "There's an inevitability of bad middle age," he says.

(Source: Business Week)