Black Friday aftermath: Is mighty Wal-Mart vulnerable?

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Tongues were wagging the morning of Black Friday in Vendorville-the encampment of suppliers surrounding Wal-Mart Stores' Bentonville, Ark., headquarters. The line at the nearby Fayetteville Target turned out to be longer than at the surrounding Wal-Mart Supercenters.

By the following Monday, after Wal-Mart disclosed a disappointing Thanksgiving weekend, the vendors had even more to talk about. They were getting called into meetings, said one supplier sales executive, by worried Wal-Mart executives asking, "What are you going to do about this?"

Two-thirds of retailers were disappointed with their November results, but few disappointments were bigger or more surprising than Wal-Mart's, whose 0.7% same-store sales growth broadly missed its 2% to 4% projection. If it were just Black Friday, or just Fayetteville, such a miss might be easy to forget. But both are signs of deeper problems for a retailer that, after largely defining the competitive landscape for marketers who supply it for the past decade, is showing surprising signs of slowing growth and impact.

Even before November, when sales at the U.S. Wal-Mart Stores division rose an anemic-for-Wal-Mart 6%, the division's growth rate has been slipping each quarter. What had been regular double-digit growth dropped in the third quarter to low single-digits on a same-store basis.

A year ago, Wal-Mart not only dwarfed its top competitors, but also was outgrowing almost all. This year, Target, Home Depot, Costco, Best Buy, Walgreens, Dollar General, Family Dollar and JCPenney are among the key retailers growing faster than Wal-Mart in the U.S. Combined, they still aren't as big as Wal-Mart. But the new development is that individually and collectively, they've started to catch up.

slipping clout

Perhaps more surprisingly, Wal-Mart's statistical clout with some of its biggest suppliers has started to wane for the first time. Take two of Wal-Mart's big suppliers in its core household and personal products categories-Procter & Gamble Co. and Clorox Co. Each year for at least a decade, they could count on Wal-Mart accounting for an additional percentage or two of their overall business. But in the fiscal year ended June 30, P&G saw Wal-Mart's share of its business slip to 17% from 18%. Wal-Mart's share of Clorox business stayed flat at 25%.

The slippage at P&G is logical. Its acquisition of Germany's Wella added more than $2 billion of largely Wal-Mart-free sales. And P&G's growth in mostly Wal-Mart-free developing and emerging countries was nearly twice the rate in the Wal-Mart-heavy U.S. In an analyst conference last week, P&G Chief Financial Officer Clayton Daley pointed to the flattening of Wal-Mart's share of P&G business as evidence of his company's growing diversification.

Clorox's flattened Wal-Mart curve is harder to explain. A spokesman attributed it to Clorox's improvement in computer systems that helped it do a better job of tracking sales by country and retail customer. But Clorox's international, domestic and Wal-Mart sales all grew at the same rate, noted Deutsche Bank analyst Andrew Shore.

A more likely explanation may be that Clorox has significantly stepped up marketing with other retailers in the past year. For the first time in six years, Clorox was among the top 10 package-goods marketers in the annual "power rankings" by WPP Group's Cannondale Associates, and among the smallest marketers on the list, said Ken Harris, managing director. Since it's a popular vote where size doesn't factor in, Clorox's rapid ascent is a sign that it has stepped up efforts to woo retailers besides Wal-Mart, Mr. Harris said.

One reason, he believes, is that Clorox is among the marketers closest to the 30%-of-business threshold beyond which Wal-Mart doesn't want suppliers to go. And as growing numbers of domestic marketers near that threshold look elsewhere to fuel growth, Mr. Harris believes that could affect Wal-Mart's growth in categories it has long dominated. Mr. Shore said Clorox executives privately have conceded the company derived nearly 100% of its growth in years past from Wal-Mart and had to diversify.

Capitalizing on the situation, Target has made household products a bigger priority. The No. 2 mass merchant-known more for cheap chic than household chemicals-has brought prices of cleaning supplies to or near parity with Wal-Mart in the past year, while also giving the business unprecedented support. Target placed a "Good Clean Fun" display at store entrances earlier this year, directly lifting a theme from P&G's tie-in with Universal Studios' "Cat in the Hat" months after it concluded.

Concept One, Westport, Conn., originally created the slogan deployed at Target.

"We continue to grow with Wal-Mart," said a P&G spokeswoman, adding that P&G's sales and market share at Wal-Mart were up last year. "We are working to grow business with all of our customers," she added.

Still, P&G is quietly putting eggs in other baskets, even beyond Wella and developing markets. Among recent projects in the company's Futureworks skunkworks unit has been exploration of direct-selling initiatives, with one goal being diversifying the company's distribution and marketing model away from domination by Wal-Mart, according to executives familiar with the effort.

still gaining

Some see no slackening of Wal-Mart's growth or influence. "Wal-Mart is still gaining shares in our categories and our brands are gaining share at Wal-Mart," said an executive for one personal care marketer.

But many manufacturers have been moving more resources to marketing at dollar stores, which have been growing faster than Wal-Mart, Mr. Harris said. One advantage is that while Wal-Mart increasingly dictates the terms of cooperation, dollar stores are more eager for ideas, whatever they may be. Among other recent national programs is a promotion by Unilever's Suave and Dove brands at Dollar General, offering scholarships and gift-with-purchase deals.

"It's getting harder and harder to make your numbers at Wal-Mart," said a Wal-Mart representative for another marketer. He blames the retailer's effort to roll out low-cost "opening price point" private-label or branded offerings in every category in recent years.

Still, few marketers dare pull back resources from Wal-Mart. "We haven't changed anything," said Don Quigley, VP-customer development for Kimberly-Clark Corp., when asked about the impact of Wal-Mart's recent slowing sales.

If anything, a tougher environment is making Wal-Mart push harder for promotion, product and marketing ideas. "There have been a lot of meetings in Bentonville," Mr. Quigley conceded.

It's easy to dismiss lines at the Fayetteville Target. After all, there are two Supercenters in Fayetteville alone, not to mention six more in greater Bentonville. The nearest Target is three hours away.

rising tolls

Therein, however, lies a problem. All publicity about thwarted building projects aside, Wal-Mart has built more than 240 Supercenters in the U.S. this year and plans to do so again next year. But those openings have exacted a rising toll on existing stores, cutting same-store sales growth by 1.3 percentage points last year-though CEO Lee Scott told analysts in October the cannibalization should decline to just under 1 point in 2004.

Mr. Scott also told analysts the U.S. can accommodate up to 4,000 Supercenters, up from a little more than 1,600 today. That leaves plenty of room for growth-yet only a decade's worth at Wal-Mart's current pace.

That anyone in Northwest Arkansas would venture into Target for reasons other than research may seem heretical. After all, more than one in 10 residents of the area is in the family of a Wal-Mart Stores associate or vendor team member. Sam Walton was known for ripping vendor reps found wearing clothes not purchased at Wal-Mart. Today, says another Fayetteville resident, "a lot of those spouses [of Wal-Mart and vendor employees] are going to Target while they're at work."

Even in Wal-Mart's world, chic is gaining on cheap. Ostentation of any kind was once severely frowned upon at Wal-Mart headquarters. But Cadillac Escalades and Lexuses can now be found in the parking lot. At night those luxury cars head to palatial estates owned by Wal-Mart and vendor executives. "We're all living pretty well here now," Bob Connolly, VP-marketing of Wal-Mart, remarked wistfully in a recent speech.

Growing procrastination and the sales of gift cards are changing the game in holiday retailing, shifting more sales into December and January, said Gary Stibel, managing director of New England Consulting Group. "A lot of [Wal-Mart's] competitors spent ahead of the season," he said. "Wal-Mart may have the last laugh yet. They are spending into the season and may have more to show for it."

As Wal-Mart grows, it also comes up against a smarter competitive set. Larry Aronson, principal of retail analytics firm Cartwheel, sees growing impact from such retailers as Best Buy, which are aggressively segmenting their marketing approach to increase sales among their most profitable consumers, rather than taking on Wal-Mart across the entire mass market.

"They're getting smarter at Wal-Mart," he said, "but so is the competition."

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