1/24/2013 3:00 AM ET|
Buy the next Wal-Mart
The retail colossus so big that growth is tough to come by. Any rival in your portfolio would likely be big, too, but with better growth prospects.
Let us begin with the obvious: Wal-Mart Stores (WMT -0.13%, news) is stupendously large. Its revenue for fiscal 2013, which ends Jan. 31, will come in at around $468 billion, a touch under Norway's gross domestic product in 2011. Wal-Mart is also the world's largest private employer.
Wal-Mart is not just the world's largest retailer -- it is larger than the next four combined. Wal-Mart's international business alone would be the world's second-largest retailer. It is also the largest gun retailer in the United States.
So, any company with the moxie to say it will take on Wal-Mart directly has its work cut out for it.
Still, there are a few companies that look like they could mount a challenge to Wal-Mart, including Costco Wholesale (COST), Target (TGT) and Amazon.com (AMZN). But all face serious logistical and marketing head winds. And, with the possible exception of Amazon, they may be content to stick with their existing strategies and continue to dominate their pieces of the retail world. In the cases of Target and Costco, such strategies are working.
That's why, as investments, they look like good alternatives to a stalled Wal-Mart.
At the same time, I have found a few smaller retailers that are growing rapidly despite Wal-Mart and could produce returns that will make investors happy. Here's a look at the current state of Wal-Mart -- and then why these alternatives look attractive.
The wizardry of Wal-Mart
There are a lot of things that make Wal-Mart unusual. It's not just its size or the fantastic wealth it created, astounding for a company based in Bentonville, Ark., in the northwest corner of the state. If you bought 100 shares at $16.50 when Wal-Mart went public in October 1970 and never sold -- through thick and thin and 11 two-for-one splits -- you'd have 204,800 shares today worth $14.2 million. And you'd be receiving about $326,000 a year in dividends.
Wal-Mart is also unusual because, despite its huge presence in the market, the Walton family effectively controls the company. The three surviving children of founder Sam Walton and the estate of Walton's fourth child, the late John Walton, who was killed in a 2005 airplane crash, own about half the stock. That makes them collectively worth at least $104 billion, more than Microsoft's (MSFT) Bill Gates and Berkshire Hathaway's (BRK.A) Warren Buffett combined. (Microsoft is the publisher of MSN Money.)
What gave them this extraordinary wealth was an amazing strategy that worked beautifully for more than 40 years in the United States: big stores located in rural or semirural communities with few competitors; low, low prices; lots of choice; and, most of all, plenty of inventory, sent to Wal-Mart stores from huge distribution centers no more than a day's drive away.
A key innovation was to add groceries to the five-and-dime tradition that Sam Walton came out of. His first stores were Ben Franklin stores. He opened his first Wal-Mart in 1962.
To the basic formula, Wal-Mart has added the Sam's Club chain of warehouse stores, which look like Costco stores. And its international business has become an increasingly important source of growth. The company has operations in 26 countries, including Canada, the United Kingdom, Mexico, Brazil, China, South Africa, Japan and India.
Hitting a wall
But like many giants, Wal-Mart has run into a wall in recent years in the United States. This is in part because of controversy: Critics charge that it doesn't pay workers enough or offer a good health plan -- and that it fights off unionization ruthlessly. Its aggressive expansion into Mexico succeeded because, The New York Times has written, company executives bribed their way to choice locations.
Plus, as retail consultant Burt Flickinger noted, Wal-Mart in the United States has lacked an edge. There have been problems keeping stores adequately stocked. There have been embarrassing problems like tramplings and other violence at after-Thanksgiving sales.
The opening of a Wal-Mart near a small town can often damage local retailers. Whether that invariably happens and how much blame Wal-Mart deserves for it are still a matter of a raging debate.
But Neil Stern, a senior partner at McMillanDoolittle, a Chicago retail consulting firm, sees three more, relatively prosaic, reasons why U.S. sales growth has shrunk in recent years:
- Competition has intensified -- from Costco, Target and Amazon.com for somewhat higher-end customers, and all the dollar discount stores at the lower end.
- It's harder to find enough land to build classic big-box stores, especially near big cities. The nation is "site saturated," Flickinger adds.
- The 2008-2009 recession and the slower-than-usual recovery have squeezed Wal-Mart's primary U.S. audience.
So how does Wal-Mart grow in the United States? The short answer: more slowly.
That may explain why the stock has been range-bound since it hit $70.25 on Dec. 31, 1999. It didn't cross $70 again until the summer of 2012, trading between roughly $42 and $64 in the interim.
That means its international business and Sam's Club will become increasingly important. And here Wal-Mart has had a lot to learn. The Wal-Mart model doesn't always work outside the United States. It didn't work in Germany, for example, where it faced stiff competition from the Aldi chain of discount stores and pulled out after several years of effort. "They weren't bringing anything new," Stern says.
Wal-Mart has had greater success in the United Kingdom, Mexico and Brazil, in part because it bought existing successful operations. Another key test will come in the next few years in Canada. Target plans to open its first stores there this year.
If not Wal-Mart, then what?
As a stock, Wal-Mart has been outperformed since the end of 1999 by its biggest domestic rivals: Amazon.com, Costco and Target. It has been outperformed by the same group in the past 10 years, since the market bottom in March 2009 and the end of 2011.
In fact, it is not a stretch to say Wal-Mart has been dead money so far in the 21st century. That's why it's worth looking for alternatives to the retailing leader.
How about the four other big competitors -- France's Carrefour (FR:CA +0.67%, news); Britain's Tesco (GB:TSCO +0.69%, news); Germany's Metro (DE:MEO +0.48%, news) and Kroger (KR +0.84%, news), the giant supermarket chain that is the world's fifth-largest retailer? Possibly not. The European companies are still struggling with weak economies, which make business tough for the supermarket or hypermarket businesses. And supermarket margins are always thin.
It is, however, worth looking at that trio of big, direct U.S. competitors. Flickinger sees Target and Amazon.com as potential winners against Wal-Mart. Both are as focused on relentlessly pushing prices lower as Sam Walton ever was. But they join the fight from different points of view.
Target believes in offering quality as much as price, and its somewhat more stylish image should help it as the economy recovers. Its apparel business, in particular, is much stronger than Wal-Mart's.
Amazon.com gets cost savings from not having to operate brick-and-mortar stores, and benefits from the move of consumers to the Internet. Amazon has already proved it can dominate the areas it specializes in and put competitors out of business. It won't do that to Wal-Mart, but it can split off key areas, such as electronics.
Both have been better stocks to own that Wal-Mart over the past 10 years; Wal-Mart's stock is up roughly 40%, compared with 106% for Target and more than 1,340% for Amazon. And the prospects for both look brighter right now.
Costco cannot be ignored, either. It is a $100-billion-a-year business; like Target, it also makes a big deal out of the quality of what it sells. Costco's reputation for treating workers well and delivering for its members is also in sharp contrast to Wal-Mart's image woes.
And it, too, has been much better than Wal-Mart long term, with the stock up 260% in a decade. All three also beat Wal-Mart on the one-year and year-to-date charts.
Beyond the giants
Of course, all of these are already sizable companies, so if you're looking for the truly huge gains of buying Wal-Mart in its infancy, you have to seek out small companies and bet they'll grow into giants. It's a big bet, but here are two smaller operations with promise:
- PriceSmart (PSMT) is a San Diego retailer that operates stores in Latin America and the Caribbean. It's modeled after Costco's warehouse stores. In fact, the company was once part of Costco. The stock is up more than 1,400% since hitting a bottom in May 2004. Wal-Mart is up just 25% in that time. If there's a problem with PriceSmart right now, it's that the stock looks pricey based on current profits.
- WinCo is a Boise, Idaho, supermarket chain that's entirely employee-owned. Once known as WareMart, it is expanding rapidly around the West. Since employees are owners, says McMillanDoolittle's Stern, they are passionate about the business and do whatever it takes to help it succeed. The problem for an investor, of course, is that the stock isn't publicly traded. You'll have to wait until that happens or go to work there.
Perhaps the determining factor of what will be the next Wal-Mart, says Stern, is China.
Wal-Mart is there already, but as important to that market is Sun Art, which operates two chains on mainland China: RT-Mart and Auchan. Kantar, a global retailing consulting firm, sees RT-Mart and Wal-Mart battling for dominance on the mainland.
Sun Art, which had $10.8 billion in revenue in China in 2011, is a joint venture of Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan. The shares went public (in Hong Kong) at $7.20 a share in July 2011. The stock is up 62% since, and roughly 19% in the last year. If you can trade in Hong Kong, you can buy it under the ticker 6808.
At the time of publication, Charley Blaine did not own or control shares of any company mentioned in this column.
If the only measure of success is by how a company posts on Wall St then then W/M is truly a sucksess. However, I am not a lover of Wall st and find it a useless and outmoded and untrue reflection of the real economy of the country. The real economy of the country are the the people who don't get paid enough, don't have job security, have too much personal debt, have to use credit to make day to day purchases and are one paycheck away from bankruptcy. Wall st is for the monied elite who have far too much control over too much money to play games with, and when they loose, we the majority suffer,as proved by the latest "oops we got it wrong, but no worries we'll be making millions again" debacle of MBS. The likes of W/M makes millions because of consumers trying to stretch their dollars, having to live on credit, and carrying of a high personal debt (mortgages car loans etc) a job market where wages are held below inflation because of theover supply of labor and lack of job security resulting in consumers having to buy the cheap kind of merchandise sold in places like W/M and made in factories that wouldn't even be allowed to open let alone operate in this country. W/M's "Blistzkrieg" retail does very well for it's shareholders who are probably mostly just figures in some fund portfolio and who could care less about the local impacts to small buisnesses,or employee conditions and all other well documated W/M negatives as long as they get their their fund payouts and folio managers get their bonuses.......Some one to compete with W/M? Even cheaper prices? Can't see that W/M has conered the market on cheap... If I was to compete with W/M ..Having worked in the retail and service biz (i refuse to call it an industry..you aren't making anything.!) I would offer better wages and conditions, any one worth their salt and wanted to work in retail would come and work for me, health benies, days off O/T sick days. a happy staff is an efficient and effective staff and will work for you because they WANT to not because they HAVE to.....A return to genuine customer service with knowlegeable people who want to and know how to sell and know all about what they're selling, how novel... even being able to find someone to talk to instead of looking over racks of clothing listening to crickets or piped music.. The Economy realy does need a rework from the ground up,sod Wall st.. Wall st is just a reflection of some money grubbing hedge funders trying to buy a new porche or keep up with million dollar alimony.The real economy is the consumer and how much real cash you have to spend, not how much can you borrow.....try it for a month, just spend cash, you'll see how poor you realy are, then tell me Wall Street's "doing fine" ,,,,I'm tired of being "trickled"on......
I know in the recent months we on these and other pages have gone over the subject of labor unions.
I have said that public labor unions whether at federal, state or municipal levels is just armed robbery of the already stretched taxpayer dollars.
But after 25 years in labor union working for a huge corporation, I know it's a necessary evil. No I don't condone the a$$ wiping of employees who don't pull their weight being coddled and protected by the union.
However if people would band together and to be assertive in unionizing a corporation like Walmart employees could have a better standard of living. I'm not under the delusion that these people could earn and have the same standards as say a skilled tradesman union because God knows these people have no skills, hence their employment at Walmart.
The benefits for these employees and the general public would be immense. Walmart itself would be forced by shareholders to raise prices to pay said wages and benefits ( God knows the shareholders WILL NOT compromise profits in order to pay benefits) which would mean other retailers would have a better chance to compete causing the inevitable price wars in order to stay competitive.
As usual though people will continue to complain that Walmart ruins communities and lives but do nothing to stand up to this behemoth. The union naysayers will continue their rants, I don't know their reasoning unless it's strictly jealousy of people making union wages or fear of small business owners. I would never condone unions in any business other than large corporations knowing that these employees are the backbone of said business.
I have already made my point of unions in public sector jobs, but I will rehash the subject with this statement. Public employees will argue that government is the a very large employer, bigger than even Walmart. The difference between Walmart and the public sector is we choose to finance Walmart, GM, Apple and others. We do not choose to finance the the government, they just take it.
Promoting junk affluence is ruining the earth.
Most of the people that don't like Walmart seem like the type that don't need to worry about
price and wouldn't shop there under any circumstance. Many products made in foreign countries are no longer manufactured in the U.S.A because unions made the cost prohibitive.I shop at Walmart weekly and find no real problem with the quality of most of the products especially electronics. They are also very liberal in regard to returns and exchanges, etc. I have talked to many store managers and assts. and have not heard of any policies that punish them in regard to benefits. I managed big box stores for many years and give Walmart good marks on most of the things that really count for the consumer. It is obvious that I am not alone based on their success.
IN 2OO6 I HAD BY PASS SURGERY AND WAS LOOKING FOR SOURCE TO BUY MY MEDS
I FINALLY DECIDED TO USE WALMART.THE PHARMACY MANAGER WALKED ME THRU THE INS AND OUTS OF GETTING STARTED.I THOUGHT"GEE,THE REST OF THE STROE MUST BE GOOD.I TRIED TO BUY AS MUCH THERE AS I COULD-PEOPLE ALWAYS HELPFUL-PRODUCT ALWAYS GOOD. UNTIL THIS PAST YEAR.PRICES HAVE GONE UP-WHICH IS EXPECTED IN THIS ECONOMY-BUT THE QUALITY HAS CONTINUALLY LESSENED. EXAMPLES:#1 DELI CHICKENS ARE PRICED AS KING SOOPERS AND SMALLER IN SIZE. COSTCO IS ALMOST $2 CHEAPER FOR A 3# CHICKEN:EXAMPLE #2-LIQUID BODY SOAP-"MILD EXFOLIATING"-I HAVE PURCHASED THIS PRODUCT FOR 2 YEARS OR LONGER-ALWAYS RICH AND HEAVILY CREAMY. THE PRICE HAS STAYED THE SAME,BUT AS OF DEC-JAN IT NOW POURS LIKE WATER AND LITTLE OR NO EXFOLIATING ELEMENT.
I WILL CONTINUE TO USE THE PHARMACY BECAUSE OF THE PEOPLE-OTHER PURCHASES WILL BE MADE ELSEWHERE
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