Development of retailing in the US (ll): discount stores and the internet


About the same time as the first specialty retailers were emerging on the retail scene, a second new type of store, the discount superstore, was also showing up.  The most famous and successful are Wal-Mart, Target and K-Mart. As with any other form of endeavor, there were many other competitors who couldn’t survive competitively.  Look at almost any moribund, half-filled strip mall of a certain minimum size and you are likely to see the remains of one of these.

The discount stores were originally intended to serve more or less the same function among the array of choices available to the consumer as the department store, only in areas that didn’t have the population density or affluence necessary to support the higher-end merchandise that a department store would typically carry.

Wal-Mart had a very straightforward development strategy.  It initially focused on places with a population of 250,000 or so.   It would open a superstore on low-cost real estate on the outskirts of town.  Its low prices would win it lots of business that had previously gone to local downtown merchants.

When the US market began to approach saturation (local retail interests have pretty much kept it out of California; that opposition plus the scarcity of sites big enough have done the same for most of the Northeast), Wal-Mart expended internationally and opened Sam’s Warehouse Clubs. Its next big move, followed by Target, was to create much larger stores to sell a full line of groceries as well as general merchandise.   This brought both into direct competition with the major supermarket chains in the US.

Important effects of their prominence

The discounters have risen to be the biggest factors in size in the entire retail industry in the US.  This prominence has had (at least) two important indirect effects on the retailing industry:

1.  Unlike traditional department stores, discounters vary the size of their “departments,” often dramatically, by season.  And because they carry such a wide array of merchandise, they can heavily discount some items–even sell them at no profit or a loss–just to build traffic (in the old days, this was foot traffic; in today’s world it means website traffic as well).  Two recent examples:  Wal-Mart is discounting a group of video games for the holiday season, as well as selling a group of popular hardback books at below their cost.  This latter decision has drawn loud cries of protest from mom and pop booksellers.

For many years, during the yearend holiday season the discounters have expanded tremendously the shelf space they devote to toys.  They also offer “hot” toys at deeply discounted prices.  What has this done to Toys R US? Pretty much the same thing that the drug stores did to Fotomat years ago (see my first retailing post for the story).  Toys are a highly seasonal business, with most of the profits made in the fourth quarter.  During the Eighties, when WMT, TGT and Toys were all taking market share from small independent toy stores, Toys could afford to keep its stores open all year long but make all its money at Christmas.  By the mid-Nineties, however, when the independents were a spent force, Toys began to feel the full brunt of competition from WMT and TGT.

2.  The discounters’ decision to sell a full line of groceries in their biggest stores continues to send waves of disruption through the traditional supermarket industry.  I was at a retailing conference a few years ago where a number of supermarkets presented.  A lot of the discussion revolved around WMT.  One firm said that although his stores would lose something like 20% of sales when a WMT superstore opened in the vicinity, within two years the supermarket revenues were back to where they were pre-WMT.  “What about profits?” asked someone in the audience.  It turned out they only bounced back to half their prior level.

This probably explains why local merchants are so vehement in their opposition to allowing WMT stores into their markets.  The major WMT advantages vs. the supermarkets, as I see them, are:  the WMT stores are very efficiently run and the company; WMT’s supply and inventory control systems are state of the art; and WMT has a very strong brand (standing for good quality and cheap prices), while the US supermarkets have names over the doors but very weak brand significance.

Here in the Northeast, it has been interesting to see recent WMT commercials with the somewhat startling message that in communities where a WMT store opens, the average family’s annual bill for WMT-sold things goes down by $3000+, whether the family becomes WMT customers or not. It will be interesting to see if the message that you’re being wildly overcharged by your current retailers sinks in.

The internet

This is a complex, still-evolving topic.  So far, with the notable exception of AMZN, the stock market is more filled with losers to changes the internet has brought than with winners who have benefitted tremendously from internet presence.  I have only a couple of (mostly very obvious, sorry) observations:

1.  distribution. In the old world, the most daunting problem faced by an entrepreneur with a new product to sell was how to get it into a place where potential buyers would become aware of it.  This would involve persuading some firm that already had a distribution network–that is, a brand name established through years of advertising, and a bricks-and-mortar presence where consumers went to make purchases–to take the product on.  The price for getting distribution would likely have been for the entrepreneur to cede most of the profits to the distributor.

Today, you can set up a generic on-line store and start buying keywords for next to nothing.

2.  marketing and the blogosphere. In the old world, you had to purchase advertising in newspapers, magazines , TV or radio; do a public relations campaign;  hire someone who could get you on Oprah or the Today Show.

Today you may get the same publicity from a website, a Facebook page, and cultivation of some high-profile bloggers.  I was surprised recently, although I probably shouldn’t have been, when Secretary of the Treasury Geithner invited twenty economic bloggers to Washington for a private briefing on government policy.  Just shows how deeply the new media has penetrated into even the stodgiest of activities.

3.  information as a product Yes, we do have online iterations of magazines, newspapers and Consumer Reports. But we also have new things, too–like the coupon sites, the price comparison sites, and the advertising-driven retail-oriented blogs.

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