Wal-Mart is expanding in Chicago: a big plus?

The original, very successful, Wal-mart concept was to open general merchandise stores on the outskirts of towns with a population of 250,000 or less.  These Wal-Marts offered a combination of one-stop shopping and low prices that small local merchants found impossible to match, let alone beat.

As the small town market matured, Wal-Mart gradually shifted to opening supercenters, which combined a supermarket with the general merchandise store and put Wal-Mart in direct competition with the big domestic grocery store chains for the first time.  The supercenters have been as dramatically successful as the original Wal-Marts were in their day, both in terms of increased profits for WMT and forced restructuring for the supermarkets.

I remember attending a retail conference some years ago where a major supermarket chain was talking about its successful adaptation to Wal-Mart’s entry into its markets.  The spokesman admitted that his stores experienced a dramatic drop in revenues in the initial years.  But, he said, by resigning the store layout and refocusing the merchandise mix toward more upscale and specialty items his company was able to restore revenues to the pre-Wal-Mart level within about three years.  A hand in the audience went up immediately.  “What about profits?”  (I’m not sure whether the questioned was short the supermarket stock or just annoyed at what he considered the speaker’s duplicity.)  The speaker’s reply is that his firm got profits back up to half what they were before Wal-Mart’s arrival.

This dynamic–good for consumers, bad for incumbent supermarkets–is well-known.  Wal-Mart has been unstoppable in most rural or suburban areas, where land is abundant/cheap and people are used to driving to shopping areas.  California, New England and big urban areas like Chicago and New York have been another story.  In New England, there’s the serious issue that store locations are hard to find.  In California and the big cities, on the other hand, supermarkets have been able to muster powerful political support to prevent inroads from Wal-Mart.

In the New York area, where I live, Wal-Mart has recently been running TV ads that say that the average shopper who uses a newly opened Wal-Mart will likely save over $3000 a year on food and general merchandise.  Even shoppers who don’t will lay out more than $1500 less than if there were no Wal-Mart (presumably because increased competition forces other merchants to lower prices).  But that cuts no ice around here.

Chicago is an interesting example.  The first Wal-Mart opened there in 2006.  According to Reuters, after the City Council rejected attempts to saddle Wal-Mart with punitive operating restrictions, “unions helped defeat several pro-Walmart aldermen in Chicago’s 2007 elections.”

Until recently, that’s been the end of the Wal-Mart story in the Windy City.

What’s changed?  The financial crisis-induced recession, for one thing.  WMT has also become more flexible in its approach to store formats.  And it has become more politically savvy.  Its current approach is to position itself, along with local community leaders, as bringing jobs to blighted urban areas and fresh food at reasonable prices to neighborhoods abandoned by traditional supermarkets.  WMT has also agreed to use only union labor to build dozens of planned new stores and to pay workers substantially above the minimum wage.

If successful–and I don’t see any reason why it shouldn’t be, WMT’s Chicago expansion will likely prove to be the thin edge of a wedge that opens up New York and Los Angeles to the company.

investment significance?

WMT (I own it) is no longer the dynamic growth stock it was for many years.  It’s just too big.  The Chicago developments are move evidence, though, for the view that the company can continue to grow profits and dividends at a 10%-15% annual rate for years to come.  They also suggest that WMT now realizes that retailing in Munich or London or Tokyo or Chicago or Los Angeles isn’t just like Bentonville but with a different climate–and may require significant cultural adjustment as well as superb operating skills.  That’s probably a bigger positive.

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