Wal-Mart’s Urban Push Includes Helping Retailers
By George Anderson
Wal-Mart has been faced with opposition every step of the way in its attempts to gain a foothold in large urban centers around the U.S.
Now, the world’s largest retailer has developed a plan that it hopes will help overcome much of the opposition so that it can reach its goal of opening 50 new stores in urban neighborhoods over the next two years.
Wal-Mart has been long criticized for driving smaller local competitors out of business. As part of its new urban initiative, the retailer attempts to address those concerns by offering local businesses financial grants, training on how to survive with the retail giant and free advertising in its stores.
“We see we can be better for communities than we have been in the past if we are willing to stretch ourselves and our resources,” said Lee Scott, chief executive of Wal-Mart, in a conference call earlier in the week.
Wal-Mart plans to establish what it calls “jobs and opportunity zones” in 10 cities where it is looking to build stores. According to a company release, Wal-Mart will look to build stores “with high crime or unemployment rates, on sites that are environmentally contaminated, or in vacant buildings or malls in need of revitalization.” The company estimates it will create up to 25,000 new jobs and generate more than $100 million in state and local tax revenues from these locations.
The first location identified as a “Wal-Mart jobs and opportunity zone” is located on the West Side of Chicago.
Among the initiatives Wal-Mart plans is to identify up to five local businesses on a quarterly basis that the retailer will feature in its print ads as well as its in-store radio network.
The company will create what it calls development teams to hold seminars with local businesses on how to use Wal-Mart’s presence as a means to improve their own results.
“Wal-Mart has never been afraid to invest in communities that are overlooked by other retailers. Where those businesses see difficulty, we see opportunity. That is who Wal-Mart has always been, and that is who we remain today,” said Mr. Scott. “This is a commitment to reach beyond our stores, to further engage the community, and to offer an even greater economic boost to people and neighborhoods that need Wal-Mart the most.”
Not everyone was as sanguine about Wal-Mart’s announcement. Chris Kofinis, a spokesperson for Wake-Up Wal-Mart, a union-supported organization that often criticizes the retailer for its treatment of workers, told The New York Times, called the program “another P.R. stunt in a litany of P.R. stunts.”
Moderator’s Comment: Will local communities in depressed urban areas benefit from Wal-Mart’s jobs and opportunity zones initiative? Is there a lesson
here for other large retailers looking to move into inner city neighborhoods? –
George Anderson – Moderator
There is a some opportunity in the inner city as it is under-stored. Part of the reason is that operating costs are higher. Much of this cost is in shrink. Regional chains are uncomfortable with instituting a price zone that is high enough to give them an acceptable ROI, although they might enter if the occupancy costs are low enough. Independents charge more. Inner city customers believe that they are being overcharged and also believe that they have a right to shop any store they choose; hence the success of the Wal-Mart in Evergreen Park. Wal-Mart will open inner city stores but their costs will be higher and their profits lower. That is a philanthropic service.
God bless them.
Wal-Mart needs political cover to locate stores in places where local politics make it difficult. This program gives Wal-Mart some of the cover they need. The degree of sincerity? The budget for local chamber of commerce help is $500,000. How does that compare with Wal-Mart’s pr spending or their lobbyist bills? Regardless of the pr campaign or the worthlessness of their assistance to small neighborhood businesses, Wal-Mart stores will save ghetto shoppers money. And small retailers in ghetto neighborhoods are not known for their employee benefit plans, anyway. So even if the little guys go out of business, their employees can get jobs at Wal-Mart with the same low pay and minimal benefits.
Wal-Mart shareholders should think twice, though. These locations tend to have higher operating costs than traditional Wal-Mart locations, so their financial performance may not be optimal. It’s a symptom: Wal-Mart may be running out of the best profitable locations to grow domestic profits. Wal-Mart has to step up its investment in profitable foreign locations or raise its dividends. Otherwise, the shareholders’ capital may be spent more and more on less and less lucrative enterprises.
This is a very smart move for more than one reason. If successful, Wal-Mart will be able to penetrate the so-far impregnable urban walls. It’s possible success will make life even tougher for mainstream grocers. The latter group will have to come up with even more creative ideas to stay in the game. Tired but true: “Differentiate” is still the logical answer for the non-Wal-Mart grocer.
There is a reason why urban inner cities are graveyards for large retailers and, just because Wal-Mart wants to do this, does not mean anything different for other large retailers.
If Wal-Mart does decide to help smaller retailers, it will mean one of two things. First, they will probably help businesses that would have survived anyway (i.e. pizza parlors mentioned earlier) or simply string marginal retailers along, allowing them to stay in business longer. Other cash grants might simply turn into payments to just go away quicker – especially if a small retailer knows he will eventually go out of business anyway. The bottom line is Wal-Mart will not lose on this, it will help their PR, and I doubt we will hear any stories 5 years from now about small retailers thriving because Wal-Mart tossed them a few bones.
Wal-Mart continues to take action based on its core principles and the plan will be a success.
Service companies in particular will thrive from the increased consumer traffic. For instance, although Wal-Mart sells tires, batteries, and oil changes, they’re typically NOT fast and they DON’T do alignments, tune-ups, or car washes and only a few stores in and around Arkansas sell gasoline. Companies near the store that fill these niches will thrive.
True, the mom & pop hardware store can’t go head-to-head with Wal-Mart’s hardware department selling WD-40 and masking tape, but they can thrive if their assortment goes beyond Wal-Mart’s basics. (Try getting paint mixed on a Saturday…) The same for dress shops, shoe stores, electronics shops and so on.
Wal-Mart operates on the 80/20 rule. In essence, they stock 20% of the items that do 80% of the volume. The volume threshold for an item to survive is extremely high. The other 80% of items that do the other 20% of volume in a category can support of lot of other families, businesses and, ultimately, healthier communities that in turn have more money to spend…at Wal-Mart.
Wal-Mart never ceases to amaze me! They are always re-inventing themselves and are never satisfied with the status quo. While these latest efforts are undoubtedly very self-serving, I am impressed with their presentation. If they can’t win in the courts, they will try to win with PR, but they never give up. Sam would be pleased.
Is there a role for an intuitive or ‘gut response’ to this whole Wal-Mart strategy? Does your heart really say, “Oh, what a self-less act! Wal-Mart must really want to help its competition, regardless of the cost to itself. God bless us everyone.”
When I read: “…so that it can reach its goal of opening 50 new stores in urban neighborhoods over the next two years,” I’m sorry but my eyes don’t mist over in appreciation.
Ryan, nothing “cynical” about your gut reaction at all. You know what’s going on. We all know what’s going on.
The best test to know a person’s – or an organization’s – heart and integrity is to look at how they go about what they do. As the ancient scriptures say: if you’re going to do a generous and self-less act, do it quietly so not even your neighbor (or competitor) knows it’s you. When it’s part of a loud PR campaign, we’re back to business as usual.
Shades of Miracle on 34th Street. So let me get this straight. Wal-Mart is going to go to the smaller retailers and tell them: “I’m from Wal-Mart and I’m going to tell you how to compete with me.” Wouldn’t every business wish for the opportunity to tell their competitors how to compete with them? Count me among the cynical. If this works, it will be in the sense of a public relations coup similar to the fictional movie referenced above.
I remember reading once that the businesses that were most successful around a Wal-Mart were pizza shops. I can see it now. Wal-Mart as an anchor with 5 pizza shops on one side and 5 check cashing businesses on the other.
I applaud their move. In the past, they tried to muscle their way into these locations and they were beat back by community activists. Offering to invest in and help the community is a much better approach. Just like everything Wal-Mart does though, there will be some to praise the move but more will be critical. I think this approach makes much more sense than muscling in.
Certain businesses do and will have a symbiotic relationship with Wal-Mart. Yes, there will be certain local businesses that benefit from a Wal-Mart in their neighborhood but the odds are against local businesses competing directly with the giant.
Wal-Mart can offer money to local chambers of commerce, work with local businesses on best practices, and produce annual trend reports to share with small business, but this will do nothing to change the fact that businesses competing directly with the giant will likely fail.
How can Wal-Mart offer to help their competition and honestly say they are not doing this to save face?
Mark makes a good point. Urban stores were Kmart’s grand plan right before they filed for bankruptcy. In theory, it sounds great —- lots of people and no competition. But it rarely works and the stores end up being turned into a church or flea market.
Not to be too cynical, but it seems just a tad too politically correct. I’m sure it’s just a coincidence that Wal-Mart has struck on this scheme as it tries to extend its reach into urban centers where resistance from unions and existing competition are both the strongest. Will they help those neighborhoods? There’s no reason to believe they won’t help some people. Will it be more than token aid? We’ll have to wait and see how it plays out. Are urban centers the best place for Wal-Mart to open stores? Yes and no. The market is there, often with constrained mobility, but it’s a much more demanding and jaded consumer cohort — one that strongly objects to being used as a pawn in a political game.
This will be a net positive, but as Ryan points out, exactly how positive it is remains to be seen. The larger problem here in the U.S. is that a rising tide doesn’t lift all boats. From the plethora of gated communities to the unequal results of urban renewal, we seem to be in an era where million dollar condos exist side by side with tenements. Just yesterday, another step was taken towards approval of a new $800 MM Yankee Stadium in the Bronx, with fewer regular seats but many more luxury boxes (of course), and all of this in an almost unbelievably blighted neighborhood. Point being that private initiatives in poor areas are great, but they yield uneven results. Not that I have a better idea.
Wal-Mart has made some big mistakes, but arguments that they are not a benefit to economically depressed regions hold no water with me.
Wal-Mart brings “starter jobs” to the community which may turn into careers at Wal-Mart or may become a stepping stone to other opportunities. It is true that a single mom with 3 kids will have trouble supporting her family on the wages she makes as a full-time cashier at Wal-Mart, but we can’t blame Wal-Mart for the circumstances people place or find themselves in.
Wal-Mart recently lobbied for a higher minimum wage and this was seen by independent retailers as self-serving, and it probably was. What does that say about the opportunity to build a career at the local Hallmark shop?
Arguments that Wal-Mart is “the worst” because “more people are assaulted in Wal-Mart parking lots than of any other retailer” or “more Wal-Mart employees receive government subsidies than employees of any other retailer” (Wal-Mart: The High Cost of Low Prices “WMHCLP”) look at raw numbers. Given that Wal-Mart is 4 times larger than the second largest retailer in the country, they are also “the best” at most of what they do, albeit by default.
If there is a grocer in the neighborhood such as the IGA in WMHCLP, they may go out of business because the residents of the community choose to shop at Wal-Mart. This is not a new story. That same IGA no doubt put a few corner grocers out of business when it opened in the 1950’s. Note that in many low-income areas the affected retailers are likely to be liquor/convenience stores that tend to line the streets of these neighborhoods that charge higher prices than Wal-Mart and the chain stores.
Finally, and most importantly, Global Insight’s estimated savings of $2300+ per year for every family in America presumably affects low-income families disproportionately in a positive way (when they have the opportunity to be affected). Even if this number is on the high side, I’m sure it is four figures and has a plus sign after it. And critics must remember that 296MM of the 297MM of us who experience these savings are not “oppressed Wal-Mart employees.”
I live and work in Long Beach, CA which claims to be the most economically and ethnically diverse big city in America. Our 2 Wal-Marts opened 3 years ago, both in new shopping areas, both of which are thriving, and activity among other retailers has increased in that time as well. In fact, I have actually had to leave Long Beach Towne Center because I could not find a parking place when trying to buy a book at Barnes & Noble. I think most of us, regardless of our economic status, see Wal-Mart as a big plus.
Good move by Wal-Mart in terms of trying to turn the PR machine around, although their naysayers are so vocal this will probably only give them more of a platform to scream about Wal-Mart. A big concern about building inner city stores is going to be transportation. Certainly, they will have to be located on bus lines, but bus lines in and of themselves will not suffice due to the fact that the consumer will still have to traverse the parking lot and then have to hand-carry all of their purchases. In the end, this move by Wal-Mart will help create positive PR and gain some incremental sales but it will be far less of a sales opportunity than their traditional store locations.
Depressed urban areas are economic ravages of our society.
Wal-Mart wants – and needs – to grow and it is willing to try to assist in improving the economic situation by creating new jobs while operating in economically-ravaged urban areas under structured circumstances. That seems to create new beneficial potential for such areas. Union chieftains find fault with Wal-Mart’s plan, yet they do not appear to have a better solution for aiding depressed areas itself.
I find myself on the side of applauding Wal-Mart’s plans, but in a larger sense it’s only step one. Other economic projects must be cultivated by the city leaders to create solid economic transformations that this Wal-Mart project could initiate. Otherwise, Wal-Mart could become both an economic blessing while concurrently a target of social, political and other groups. It is my hope, therefore, that the city fathers will encourage other companies to join Wal-Mart in opening new businesses and broadening the employment opportunities. Within the depressed areas, there are many untapped workers and consumers.
Everyone out there is out to make some money…So is Wal-Mart. It would be wrong from our point of view if we say that this is just another PR litany. Wal-Mart has identified this opportunity and would definitely like to cash on it. It’s commendable the way they have given this approach a whole new scenario. They have given a social cause to their expansion strategy, and why shouldn’t they? They would definitely like to cash in on the fact that no other retail player has done it in such a risky place where business profitability is a question.
With this early entry into this untapped market, I am sure Wal-Mart would be making a huge amount of profit in return, giving an opportunity for people to earn a living, which should be appreciated.
This story brings out the cliches in me –
1. talk is cheap
2. the proof of the pudding is in the eating
3. show me the money OR
4. put your money where your mouth is
I’m sure others can easily add to this list. Unsurprisingly, you can colour me skeptical on this one. It will take several years, at least, before anyone can measure the success of Lee Scott’s promises. It sure does sound good on paper and I strongly believe that with help and support some small businesses can survive against the elephant in their neighbourhood but I reserve judgement on whether or not Wal-Mart will help it happen.
The shrink rates in many urban Kmarts were disgustingly high, in some stores as high as 3 or 4 percent of sales. Furthermore, a lack of disposable income is present in many of these areas, which means that those shopping in the stores are likely to buy low ticket, low margin consumable and personals, which seems to draw Wal-Mart AWAY from where it wants to head: towards selling an increased number of higher margin items (George, Home Trends, Metro, No Boundaries).
Sure, there is no doubt that these Wal-Marts will be successful in terms of customer counts, but how about the average basket amount? And gross margins? Will there be strong resistance on the higher margin items?