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Steven Pearlstein

Urban Markets Challenge the Wal-Mart Way

By Steven Pearlstein
Wednesday, September 1, 2004; Page E01

It's too bad that Wal-Mart decided not to go ahead with a new store in the District's Brentwood neighborhood.

That's not only because consumers in Northeast Washington would benefit from the convenient location and low prices. It's also because allowing Wal-Mart into places like Washington will change Wal-Mart more than it will change us.

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Here's the dirty little secret about Wal-Mart: Just when everyone has decided it is an unstoppable monster about to take over the world, the reality is that its much-vaunted business model has pretty much played itself out.

That model, of course, is built on a foundation of low wages, meager benefits, high turnover and legally questionable union-busting strategies.

But the Wal-Mart formula also requires cheap and plentiful land on which to construct identical versions of its large stores, with generous parking lots and loading docks, located hard by interstate exits.

And it has flourished primarily by sticking to low- and middle-income communities that responded eagerly to "everyday low prices" and didn't mind the middling quality and the unevenly staffed aisles.

After decades of impressive double-digit growth, however, Wal-Mart has pretty much saturated the rural and exurban communities where the model made sense. For the past few years, the only way it has been able to maintain even a semblance of the old growth rate has been a successful expansion into the grocery business along with a much-less successful foray into foreign markets. Meanwhile, at the edge of its core markets, Wal-Mart now faces increased competition from the likes of Target and Costco, which have been able to achieve national scale and clout in part by copying many of Wal-Mart's cost-saving efficiencies.

None of this has been lost on Wall Street, which has been marking down Wal-Mart shares since the end of 1999, after hitting a high of nearly $70. They closed yesterday at $52.67.

Now it is that dilemma that has brought Wal-Mart to the gates of urban America -- a place of expensive land, crowded building lots, zoning restrictions, high wages, pesky unions and newspapers that understand that new retail stores don't create jobs and tax revenue, just move them around. To get in, Wal-Mart will not only have to adjust to the geographic, political and economic realities, but adjust as well to the demands of consumers who value quality and selection as much as they do low prices.

All of this will require fundamental changes in the basic Wal-Mart model -- changes that in some cases are well underway.

You see it already in the number of new formats that Wal-Mart has rolled out. These include not only the traditional department store, the Sam's Club and the new superstore, but also the Neighborhood Markets and a slimmed-down superstore that, at 99,000 square feet, manages to get in under the wire of 100,000-square-foot zoning restrictions in many communities. Along with this added flexibility, however, has come the added cost of complexity, which is beginning to show up in less-aggressive price cutting and slower profit growth.

You see it, too, in Wal-Mart's campaign to improve its image as a responsible employer -- not only those TV ads featuring workers talking about their health insurance, but the announcement that executive bonuses will now be based, in part, on how well the company does in promoting women and minorities. Settlements of discrimination and wage-and-hour lawsuits can't be far behind.

Even suppliers are noticing a letup in the relentless pressure to cut prices every year after a number of them with strong brand equity concluded they could make more money selling fewer units to Wal-Mart's competitors.

The best way to encourage this kinder, gentler Wal-Mart is to lure it deeper into big new urban markets -- a twist on the old Trojan horse story. The reason companies behave differently in Washington than in Bentonville, Ark., isn't because they're run by nicer people but because the realities of the market leave them no choice.

Steven Pearlstein can be reached at pearlsteins@washpost.com.


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