By Rick Moss
"Growth, growth, growth" continues to be Wal-Mart's mantra for success, even when expansion results in eating into its own sales, according to a Wall Street Journal piece by Kris Hudson. In fact, cannibalization is all factored into the strategy, to the disapproval of many on Wall Street.
Tom Schoewe, the company's CFO, summed the company growth philosophy this way at last June's annual meeting: "We would much prefer to increase growth rather than increase already very high -- way higher than acceptable -- returns. And, in fact, if those returns were to come down a bit and we could grow faster, that would be just fine by me and...for our investors."
Many analysts are questioning Wal-Mart's relentless expansion strategy that calls for adding another 8 percent to existing square footage globally this year. That's pretty much on pace with its aggressive pace in years past. Nationwide in the U.S., since the only retail space left is in markets where it's already operating -- or in higher cost areas like California and the Northeast -- expansion is resulting in cannibalization of one percentage point from same-store sales growth. But Wal-Mart execs look at overall gains and say they are content.
In a given market with two Wal-Marts, each store might be expected to generate $100 million a year. While the introduction of a third could siphon away $20 million from each existing unit, the three-store result would still gross $40 million more for the market, and that's the kind of logic that fuels Wal-Mart's engine.
However, analysts tend to look seriously at ROI and their disappointment is reflected in Wal-Mart's cooling stock price. Early in the decade, the chain's growth in operating cash flow exceeded capital spending. But from 2003 to 2005, growth in operating cash flow ($1.6 billion) fell far short of increases in capital spending ($4.3 billion).
Home Depot, to use an analogous situation, has conscientiously slowed its pace of expansion in recent years, having reached a point during the 2002 - 2003 period when it was seeing four percentage point cannibalization in same-store sales due to the opening of nearly 200 new stores per year. After taking a dive in 2002, the company's stock has bounced back considerably, doubling its share price in the last 3 years.
Wal-Mart's financials tell the story. Its net income has risen 68 percent in the last five years, but compared to Target, that is enjoying 5.6 percent same-store sales growth, Wal-Mart saw that figure drop to 3.4 percent in the year ended Jan. 31st from a hot 9 percent late in the last decade. And it's apparent how Wall Street regards the strategy, as Wal-Mart's stock is currently down nearly 30 percent from its five-year high in early 2002.
Moderator's Comment: At what point will Wal-Mart ease back on the throttle with its expansion plans? Will they be forced to bow to pressure from Wall Street to improve same-store sales growth?
Mr. Schoewe's turn of phrase..."way higher than acceptable returns" pretty much says it all. It's hard to argue with a 68 percent increase in net income, even if the sacred same-store sales numbers are fading a bit. But it's also hard to shake the runaway train metaphor. The growth gene is so dominant in Wal-Mart's DNA, one has to wonder if corporate is capable of making the transition to a mature company with (dare I say it) "plateauing" growth. Wal-Mart's already broken the rules of retailing so many times that no one can be certain it is governed by one as simple as "a market can only support so many of the same stores." Perhaps they'll surprise us and defy the laws of business evolution as well. - Rick Moss - Moderator