February, 2016

Fruits of Thought

'Message' Sent By Wal-Mart's Store Closings

Retailers close stores all the time without making a big deal. When Wal-Mart made a prominent decree that it was closing 269 stores globally, of which 154 were in the U.S. and Puerto Rico, the interesting question was not so much why it was closing those stores — after all, the same announcement included reassurance that Wal-Mart is growing, and it would open more than 300 stores in the next year. The interesting question was why make a big deal of it?

Of course, there are SEC regulations that require releases of certain “material” information. However, Wal-Mart has more than 11,000 stores in the world, plus online sales operations, so these closings were not likely to be deemed material. Alternatively, minor changes in approach — for example, announcing a few closings each day, week, month or quarter — would certainly have made this a non-event.

Perhaps an announcement that it was closing its Wal-Mart Express experiment (accounting for 102 closings) would have been appropriate. But Wal-Mart already signaled the end of this small store experiment when the company started rebranding them as Neighborhood Markets.

The choice to announce this decision in this way grew out of a desire to send a message. But what is the message, and to whom was it being sent?

One of the big changes Wal-Mart underwent during the past few decades was from being a retailer focused on sales and profitability to some kind of geopolitical entity so large that getting along with governments and non-governmental organizations (NGOs) sometimes seemed to take priority over making a buck.

By declaring these announcements and other related statements (such as a decision not to proceed with opening two stores in poor areas of Washington, D.C. whose opening had been negotiated as part of a deal to gain access to the D.C. market), Wal-Mart wanted the word to get out to many constituencies.

It wanted Wall Street and shareholders to know that Wal-Mart executives were prepared to take the heat that bad publicity engenders. These store closings could cost 10,000 workers their jobs and leave many towns without a viable large retail operation. Wal-Mart anticipated it would be attacked on every basis from its allegedly breaking agreements to abandoning communities and employees. The retailer wanted to express a recommitment to profitable operation.

It wanted consumers to begin thinking about Wal-Mart as an online operation. The closures were portrayed as a strategic re-positioning and got the words “online operations and Wal-Mart” on news programs and articles around the world.

It wanted governments to realize that policies would impact investment. Wal-Mart announced it included 60 stores it had already closed in Brazil, where the economy is collapsing. It also included several Wal-Mart stores and Sam’s Club stores in Puerto Rico, another economic basket case.

Wal-Mart also announced it wouldn’t be opening several stores, including some it had committed to opening as part of a deal with D.C. politicians. The D.C. situation is especially telling. The Washington Post ran a piece explaining what happened during the meeting with Council member Jack Evans (D-Ward 2), head of the council’s finance committee, and Wal-Mart officials: “… behind closed doors, Walmart officials were more frank about the reasons the company was downsizing. He [Evans] said the company cited the District’s rising minimum wage, now at $11.50 an hour and possibly going to $15 an hour if a proposed ballot measure is successful in November. He also said a proposal for legislation requiring D.C. employers to pay into a fund for family and medical leave for employees, and another effort to require a minimum amount of hours for hourly workers were compounding costs and concerns for the retailer.”

Wal-Mart was sending another message: Whether in Brazil, Puerto Rico or Washington, D.C., politicians — and the citizenry — can’t view Wal-Mart as some kind of fixed resource, guaranteed to always be there to make jobs and pay taxes regardless of the burdens thrown on the retailer or the quality of overall economic management.

It is not certain that Wal-Mart did itself a favor with these actions. One big obstacle to Wal-Mart’s expansion has always been its image as a “Main Street killer.” Now those looking to oppose Wal-Mart’s expansion can remind communities of what happens after a Main Street is destroyed, and then Wal-Mart decides to leave.

Abandoning the Express format may be a short-term win, but there is a place for small-format retailing (e.g. Trader Joe’s, Aldi and soon, Lidl). We suspect Wal-Mart will regret not investing to get this right. In Washington D.C., Wal-Mart walked away from a deal, and that undermines its credibility.

The retailer could have made the deal contingent on formalities such as the minimum wage and family-leave legislation being to its satisfaction, but it did not. This may outrage local politicians without much affect, but it reduces Wal-Mart’s credibility as a negotiating partner. This will probably cost the chain big time in years to come. It would have been cheaper to build the two stores in the bad locations of D.C., and then close them if they lose money.

But the whole situation shows the degree to which retailers, such as Wal-Mart, have to do things beyond simply buying and selling. Producers ought to remember this before they complain about excessive margins at retail. Those margins pay for a lot more than the product. Even a lot more than the stores and the advertising. pb