Man with bullseye

Related topics: Wal-Mart, Target, Costco, retail, economy

The battle for shoppers is playing out in the New York suburb of Saddle Brook, N.J.: Wal-Mart Stores (WMT) versus everyone else.

Dollar stores beckon, their small size ideal for quick shopping. Target (TGT) offers 5% off if you pay with its store-branded card. Costco (COST) tempts with high-end, brand-name food and designer clothes at competitive prices.

Bernadette Clark used to visit Wal-Mart here twice a week. Now it's twice a month. She got fed up last year when Wal-Mart stopped stocking some of her favorite brands and she couldn't count on low prices.

"It gave me the opportunity to look elsewhere," she says. "I shop around more."

Three years ago, Wal-Mart ruled for convenience, selection and price. But today it is losing customers and revenue, and smarting from decisions that backfired.

Wal-Mart is not in danger of ceding its place atop the retail world. But competitors have begun to chip away at its dominance.

Over the last year, revenue at Wal-Mart stores open at least a year has fallen by an average of 0.75% each quarter, according to the International Council of Shopping Centers. Revenue rose by an average of nearly 1.7% at Target, 8% at Costco and 5.9% at Family Dollar Stores (FDO).

The comeback plan

To fight back, Wal-Mart is again emphasizing low prices and adding back thousands of products it had culled in an overzealous bid to clean up stores. It's also plotting an expansion into cities, even neighborhoods where others dare not go.

"We are running a better business because our competitors cause us to raise our own game," Wal-Mart CEO Mike Duke says. Wal-Mart says it expects to halt the decline in revenue when it reports results from its fourth quarter this month.

Unlike most stores, Wal-Mart thrived when the Great Recession struck in late 2007. Its core customers -- households making less than $70,000 a year -- bought more. For many, it became the only place they shopped. Affluent shoppers became price-conscious and discovered Wal-Mart's prices were hard to beat.

All of Wal-Mart's $27 billion in revenue growth for the year ending in January 2009 came from greater demand for basic items -- food, pharmacy and household goods. Shoppers spent 13% more on basics at Wal-Mart that year.

Shoppers also liked that Wal-Mart's stores looked neater. The company was finishing a major renovation to address complaints that its stores were messy. Wal-Mart widened aisles, eliminated clutter, improved lighting and lowered shelves.

Family Dollar and Dollar General (DG) posed little threat. Their stores generally were dingy, and their shelves were filled with low-quality clothing and housewares. The groceries weren't major brands.

Target, meanwhile, struggled with the perception that its prices were high. And stores filled with nonessential items -- think brightly colored, decorative pillows and kitchen accessories -- didn't appeal to shoppers focused on making ends meet.

So Wal-Mart had a competitive edge. It lasted until June 2009, the month that economists would later determine was the end of the Great Recession.

Missteps drove customers away

Around that time, Wal-Mart's renovation started to backfire. As part of its store overhaul, it had removed thousands of products from its shelves. Gone were top-selling toothbrushes and other things that people counted on Wal-Mart to stock, like handkerchiefs. Wal-Mart got rid of 20% of its groceries, about 10,000 items in that area of the store, says Burt Flickinger, who runs the consulting firm Strategic Resource Group.

Shoppers began complaining that Wal-Mart no longer had items they wanted, even some of their favorite brands. Revenue began to decline.

"We cleaned the stores up, but we cleaned them up too much," says Duke, who had become CEO just months before, in February 2009.

Wal-Mart's next mistake was pricing. Over the past year, it had strayed from its "everyday low prices" slogan, the bedrock philosophy of founder and namesake Sam Walton. Wal-Mart was less aggressive about being the low-price leader. Instead, the company slashed prices only on select products, and the deals were temporary. The idea was to draw customers into stores for the bargains and hope they would also pick up other, more profitable items.

Last Memorial Day weekend, Wal-Mart advertised dramatic price cuts on 22 items, including a 40-ounce bottle of Heinz ketchup for $1, less than half price.

But the strategy failed. The economy was still weak. Customers were scrutinizing prices as many had never before. They discovered that Wal-Mart couldn't be counted on to have the lowest.

Wal-Mart's mistakes have had a lasting sting. Shoppers are no longer confident that they can "take care of their shopping list on one trip and get rock-bottom prices," says Robert Buchanan, an independent retail stock analyst.

Revenue at Wal-Mart stores open at least a year, a key measurement of any retailer's health, has fallen for six straight quarters. That is the longest such stretch since at least 1980, when ICSC chief economist Michael Niemira began tracking the figures.

Wal-Mart executives have acknowledged that fewer people have walked into its stores every quarter for the past year compared with the corresponding period a year earlier.

Other retailers pick up the slack

While Wal-Mart has lost shoppers, competitors have gained.

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Dollar stores are winning over customers with convenience. Their parking lots and stores are less than one-tenth the size of those at most Wal-Marts. They stock eggs and milk in coolers up front near the registers. Bread is on a nearby shelf. That makes it easier for shoppers to get in and out quickly. They're carrying more major brands, especially food.

Shoppers spend about the same as they did a year ago at Family Dollar -- about $10 a trip on average -- but they're coming in more often, the company says.

Combined, Family Dollar and Dollar General took in about $20 billion in the last fiscal year, just 5% of Wal-Mart's $408 billion in revenue. But together they have thousands more stores than Wal-Mart, and their revenue is growing at an enviable rate.

"The number of openings of dollar stores, and just the sheer density and convenience has been a (competitive) factor" for Wal-Mart, Duke says. "There's no doubt the customer wants value, but they also want convenience."

Family Dollar's strategy is to blanket a region with stores, clustering them sometimes less than a mile apart and along bus routes. Dollar General has more than 9,000 stores and says it sees 12,000 more in its future, including plans for 625 this year.

In Saddle Brook, Cindy Collins, 50, and her mother, Winnie, 71, could go to Wal-Mart for everything they need. But they favor the nearby Dollar General, which opened a year ago, for their weekly shopping.

"We can get cereal, paper products, cat food or whatever we need here. It's also easy to get in and out," says Cindy Collins, who lives in nearby Elmwood Park.