While the story is about Wal-Mart, the interesting point is that failure comes very, very quickly in retail.
Wal-Mart recently reported that it will be laying off 2,300 workers at its Sam’s Club subsidiary, reportedly to cut the fat of middle management. Layoffs in and of themselves aren’t uncommon at any large company — competitor Target (NYSE: TGT ) also recently said it would lay off nearly 500 employees and keep hundreds more positions vacant — but such personnel reductions also aren’t something a growing company does very often.
What’s worth keeping an eye on is whether the Sam’s Club layoffs are a symptom of much larger problems at Wal-Mart. The company has been a giant of retail for decades, but there are signs that its reign is coming to an end.
Retail is a tough business to be in.
It doesn’t take long for a retailer to go from the top of the world to bankrupt. Kmart lost just $22 million in the second quarter of 2001, but was bankrupt by Jan. 22, 2002. In the four months leading up to bankruptcy, same-store sales fell 1.8%, 4.4%, 2.6%, and 1%, respectively, from a year earlier. You don’t need a big decline in sales to suck up all of your profits in retail.
Circuit City reported a 4.2% rise in same-store sales as late as December 2006, even raising its fiscal-year guidance to growth of 7%-8% in U.S. stores. But by December 2007, same-store sales were down 11% for the month and the company would be out of business by November 2008. From optimism to bust in less than two years.
The reason that retailers are sensitive to declines in sales is that there is a lot of overhead that goes into selling in brick-and-mortar stores. Wal-Mart spent $89.2 billion on overhead over the past year, and based on current margins and overhead spending, it would only take a 13.6% decline in sales to eat up all of Wal-Mart’s profits.
Amazon is Wal-Mart’s biggest competitor
What makes Amazon a bigger threat today is the company’s sheer size. It’s now bigger than Target, and every percentage point of growth takes growth away from Wal-Mart. In fact, Wal-Mart’s budget-conscious consumers are probably more likely to shop on Amazon than Target’s consumers.
According to a former CEO
Mark Cohen, an American who ran the department store operations north of the border between 2001 and 2004, lambasted the CEO and majority owner of the U.S. operation during a Tuesday interview with Bloomberg News.
“Sears is slowly and steadily failing at the hands of a ruthless, methodical asset-stripper,” Cohen said of Eddie Lampert, who has been widely lambasted for his management style, including restructuring moves likened to a losing game of Jenga.
“Lampert will come up with some cash every quarter or two to make sure the balance sheet is still viable,” added Cohen. “It’s a tragedy because Sears is a legacy brand that needed to be and could’ve been repositioned.”
The retail operations in Canada — a public company with 51 per cent of shares owned by Sears Holdings — were in a relatively unflattering spotlight last week as northern CEO Calvin McDonald confirmed that it would sell back its leases for anchor locations in Yorkdale Shopping Centre in Toronto and Square One Shopping Centre in Mississauga and close them by next spring.
An option for a similar deal was signed with Toronto’s Scarborough Town Centre.
The arrangement promised a cash infusion for the company and has also boosted its stock. But the prevailing assumption was that Sears was no longer the kind of big-box tenant that these malls were looking for when other retailers are eager to take the space.
Nordstrom, the higher-end U.S. department store which will move into former Sears spaces at the Pacific Centre in Vancouver, Chinook Centre in Calgary and the Rideau Centre in Ottawa, was expected to make a bid to take over at least part of the vacated Yorkdale and Square One locations.
A couple of years ago we were in Sears 10 days before Christmas. We were the only ones on the second floor and all of these staff were chatting with our kids. I was looking for something and there was not another shopper in the store. The sales looked like Boxing Day with big 75% off signs everywhere.
I walked back to Wendy and said, “we need to leave before the creditors lock all of the doors”.
I can’t see the chain lasting much longer.
CBC has a story on the changing landscape that Best Buy and Future Shop is facing today
Brick-and-mortar outlets “have become less relevant,” he said, and as a result “the handwriting’s on the wall” when it comes to selling electronics in a big-box format.
Another factor is that electronics are being “downsized” as technology advances, making it less necessary to maintain huge stores, and cheaper for retailers to sell goods online and ship them to customers, Williams said.
While a big box is good for things like television, there really isn’t an advantage when it comes to other items. The Source is every bit as compitive on a lot of items. Even today I went to Best Buy and then actually found what I was looking for at The Source for a lower price. That happens quite a bit. It’s especially a big deal with The Source having locations all over the city. I often find it really easy to wander in and find what I am looking for on a break or while I am out and about.
The other issue is especially with Apple products is that I can buy direct from Apple and if it is over $50, I get free shipping and I don’t have to pay tax. I am looking at replacing my iPod with a new iPod Nano and it’s cheaper to buy direct from Apple than it is from anywhere in the city. The same thing when I buy from MEC. Expect others like Microsoft and even brands like Dr. Dre to do the same thing. Even if they don’t, shopping from Amazon is so easy and with Amazon’s low margins, it’s almost the same thing for an established brand.
In the end the big box stores use the format to compete on price and if they can’t compete on price, they bring very little else to the table (unless they can create an in-store experience like Cabelas) As online retail continues to grow, look for smaller stores with better customer service, and easy access to make a comeback. It isn’t just electronics. Stores like Rona are asking the same questions about how easy is it to compete with Home Depot and Lowes on a large scale when they may have the supply chain efficiencies and infrastructure to do it.
The other part of the retail discussion is Sears laying off 700 people in Canada. I wasn’t surprised. Several times I have been the only customer I could see in a Sears store and when I walk through it I have to dodge rack after rack of discounted goods. While The Bay has rallied around the voice and leadership of Bonnie Brooks, Sears seems to just be drifting with empty stores, an aging demographic, and no real leadership. I can’t see them being around in five years time.