MARKETING: Case Study
Wal-Mart Makes Rare Retreat on Home Turf
Closing of 269 stores includes all 102 U.S. Walmart Express stores, affects 16,000 jobs
Faced with slow-growing sales and a shift to online shopping, Wal-Mart has been investing in e-commerce activities and store wages to spur sales growth. Above, a Wal-Mart opens in Florida. PHOTO: HANDOUT/ZUMA PRESS
Wal-Mart is closing more than 150 stores in the U.S., a rare retreat for the behemoth on its home turf, capping what has been a difficult year for retailers as shoppers slowed their spending pace and accelerated their shift to the Internet.
Economic data released on Friday showed the U.S. economy entered 2016 with little momentum from one of its key sectors. U.S. retail sales fell 0.1% in December, and were up just 2.1% for all of 2015, compared with a 3.9% annual gain the previous year, the Commerce Department said on Friday. That was the weakest year for sales growth since the end of the recession in 2009.
"The exceptionally weak December sales figure is a bit of a head scratcher," J.P. Morgan Chief U.S. Economist Michael Feroli said. "Job growth was booming last month, gas prices were down, sentiment measures were up, and warmer-than-normal winter temperatures prevailed last month-which historically tends to boost retail sales."
Faced with slow-growing sales and the shift to online shopping, Wal-Mart Stores Inc. has been pouring money into e-commerce activities and store employee wages, moves that have depressed profits and its share price. Now, the world's largest retailer by sales is joining smaller chains, including Macy's Inc. and Gap Inc., in shrinking its U.S. footprint.
Wal-Mart said it would close 269 stores around the world, including all 102 Walmart Express stores, a smaller format created in recent years as the company searched for growth beyond its massive Supercenters. The retreat is a blow to the retailer's long-time goal of boosting sales more quickly by blanketing the country with smaller stores. The closings would eliminate 16,000 jobs, including 10,000 in the U.S.
The closures are "necessary to keep the company strong and positioned for the future," said Wal-Mart Chief Executive Doug McMillon. The retailer will open more than 300 stores globally next year, he said, though Wal-Mart is slowing its new-store growth in the U.S., where it operates about 4,600 stores.
The retrenchment is another sign that Wal-Mart and other retailers with large physical stores are struggling to find the right mix of store formats and investments to compete against small neighborhood retailers like dollar stores and with online retailers likeAmazon.com Inc.
On Friday, the National Retail Federation said sales for the holiday period increased 3%over a year earlier to $626 billion, less than the 3.7% the trade group had predicted. Online sales rose 9% to $105 billion in the period.
"It's good to see that management is willing to close stores because in the past we haven't had that," said Brian Yarbrough, an equity analyst for brokerage house Edward Jones. "With that being said, it probably isn't enough."
Many of the U.S. stores marked for closing will do so as early as Sunday, and all 154 will be shutting their doors before Jan. 31, the end of Wal-Mart's fiscal year. Restructuring costs could cause the company's fourth-quarter earnings to fall as much as 14% below Wall Street's targets, analysts estimate.
The retailer's stock fell nearly 2% on Friday to $61.97 and is down nearly 29% in the last 52 weeks.
Walmart Express stores first appeared in 2011 as a way for the company to set up shop in more convenient locations to better compete with then-ascendant dollar stores. The stores, about the size of a drug store but with more groceries, often are located closer to shopper's homes than Supercenters on the outskirts of town. The average Supercenter is about 178,000 square feet.
But Wal-Mart has struggled to make small-format stores as profitable as Supercenters, in part because a small store can't carry as many high margin items like clothes, appliances and lawn furniture.
Adding to Wal-Mart's woes, consumers expect the same low prices at a Walmart Express as a Supercenter, while they might expect higher prices from a drug store chain.
Wal-Mart is sticking with its Neighborhood Markets, slightly larger models that look like a typical grocery store at about 40,000 square feet. But those stores face similar challenges.
In October, Wal-Mart's U.S. CEO, Greg Foran, said the company would pull back such store openings to improve profitability. "We're working to make them more inviting and to get them in the right locations relative to Supercenters," he said.
Wal-Mart warned last fall that its profits could fall by as much as 12% next fiscal year, and Mr. McMillon sparked speculation the company would close some locations, saying "we will continue reviewing our fleet in a disciplined way and we'll close the stores that should be closed."
From the Archives
Wal-Mart is preparing to cut hundreds of jobs at its Arkansas headquarters as part of the retailer's efforts to reduce costs. Photo: Carlos Barria/ Reuters. (Originally published Oct. 1, 2015)
While Wal-Mart has closed collections of stores in other countries-in 2006 it sold 101 stores in a retreat from Germany and Korea-it typically closes just a handful of underperforming U.S. stores a year. Employees who lose their jobs will be given priority to fill positions at others stores, 60 days' pay and some will qualify for severance, a company spokesman said.
Wal-Mart warehouse chain Sam's Club laid off about 120 non-store employees Friday, including about 70 at its Bentonville, Ark., headquarters, according to a spokesman. In October Wal-Mart cut 450 jobs at its headquarters in Bentonville.
As part of Friday's move, Wal-Mart is closing 115 stores in Latin America. That includes 60 stores already shuttered in Brazil, a market where the company has long struggled to grow sales and strained to leverage its size to squeeze profit out of its supply chain.
Wal-Mart operates about 11,600 stores globally. The company said Friday that the 269 stores it was closing represent 1% of its annual sales, which were $486 billion last fiscal year.
Some investors were hoping for more. Wal-Mart's "moves are a day late and a dollar short," said Craig Johnson, president of Customer Growth Partners, a retail consulting and research firm. "One percent rightsizing is a step in the right direction, but only a baby step. Brazil has been a basket case for years," he said.
Despite the lackluster end to 2015, many economists said they expect the strength of the domestic economy will continue to support growth this year. December wasn't all bad: Payrolls surged last month, as employers added 292,000 new jobs, and estimates for hiring in October and November were revised even higher, the Labor Department reported last week.
"We remain fairly optimistic on the U.S. economy," Barclays U.S. Economist Jesse Hurwitz said Friday. "We base that view off of our belief that labor markets are the most historically reliable signal on where the economy is."
-Suzanne Kapner contributed to this article.
Write to Sarah Nassauer at [email protected]
QUESTIONS:
1. What are the 2-3 primary reasons why Wal-Mart is choosing to close some of its stores around the world?
2. The article also references Wal-Mart's plans to open more than 300 stores globally next year. Why would it be simultaneously closing some stores and opening others?
3. In your estimation, what will be the key to Wal-Mart's success in the next 10 years?
4. What metrics or financial measures are used by analysts and investors to judge the relative success of a retailer? Why are each of these measures relevant?