EconSouth (Second Quarter 2002)
The Race for Retail Market Share in the Southeast
Winning the business of the retail consumer is not a game for the fainthearted, especially during a period of economic hesitation. Despite retailers’ friendly claims of customer service and good value at low prices, retail competition is as fierce and unforgiving as a stock car race at Daytona International Speedway.
n today’s retail race Wal-Mart decidedly leads the pack by several laps in volume of sales, posting revenues of $191.3 billion and earnings of just under $6.3 billion in 2000. The lesser giants like Kroger, Home Depot, Sears, Target and JCPenney, each with sales in the $15 billion to $50 billion range, jostle for position to stay among the front-runners. Occasionally a contender like Kmart, which ranked as the fifth-largest retailer last year, is unexpectedly thrown from the race altogether in some markets.
Specialty chain stores like Best Buy, Gap, Circuit City, Office Depot and Toys“R”Us — not exactly small fry in the world of sales, each with receipts in the $10 billion to $15 billion range — must be especially nimble to keep pace with the pack, scooting amid the behemoths that dominate the retail contest. Lagging competitors are consumed, front-runners are constantly angling for the edge and leaders watch their backs for unexpected challenges from behind.
According to trade industry data and Atlanta Fed research, wholesale and retail trade provide roughly 23 percent of nonfarm jobs in the Sixth Federal Reserve District, which encompasses much of the Southeast. Retail trade alone accounts for about 17 percent of the Sixth District’s total employment. Nationally, retail trade is the second-largest industry, accounting for 19.5 percent of all establishments and 18 percent of all employees. Reflecting the same ailing flatness that afflicted the U.S. economy as a whole during the first three months of 2002, wholesale and retail trade employment in Tennessee, Florida and Louisiana saw slight drops of under 1 percent from the previous year. Mississippi, Alabama and Georgia posted somewhat larger dips in the number of retail trade jobs, averaging 1.2 percent, 1.6 percent and 2.8 percent respectively. This contraction in retail trade jobs is consistent with losses of total jobs in each state, suggesting that the retail economy is not experiencing a disproportionate downturn.
But the distribution of sales across the various types of retailers has been changing, according to John Robertson, assistant vice president of the regional research group of the Federal Reserve Bank of Atlanta, who observes that discount retailers fared much better than department stores and upscale retailers in 2001.
“The fact that discount retailers still performed reasonably well in 2001 suggests that a solid level of consumer demand remains, but shoppers are increasingly price conscious,” he says. In a time of halting recovery, the lure of low prices continues to be a big factor in consumer preferences, and, as competitive pressures intensify, it’s changing the way retailers do business.
The Wal-Mart effect
Wal-Mart’s supremacy in merchandising for the last decade has, according to many analysts, reinvented the retail game, and the composition of the industry is changing in keeping with the new rules. So-called big box stores like Wal-Mart have apparently won the hearts — or at least the pocketbooks — of American consumers. Online businesses, while not yet very profitable, have carved out a chunk of traditional retail sales as well. As a result, department stores, specialty stores and locally owned businesses have had to move fast to stay in the race (see the sidebar). While they cannot afford to ignore the “Wal-Mart effect” and what it says about the needs and preferences of consumers, these more traditional retailers are adopting strategies to maintain unique retail identities apart from and coexisting with the likes of Wal-Mart and the online purveyors in hopes of winning new customers and keeping old ones coming back.
Analysts across the board agree that the American consumer is, above all, extremely busy. Gone are the days of regular recreational excursions to the mall or all-day family shopping trips. “Customers want to get in and get out fast,” says Susan Reda, a senior editor with the National Retail Foundation. If a shopper can pick up dinner, a bicycle pump, soccer socks, lawn fertilizer and a birthday present for Aunt Jenn in one relatively quick stop, that stop is likely to be quite appealing to the time-starved consumer.
Wal-Mart’s much-discussed, analyzed and emulated success rests on several pillars of retailing expertise that have changed the way goods are manufactured, distributed, marketed, inventoried and purchased. According to Charles Roe, who has been Wal-Mart’s store manager in the Jackson, Miss., area for 15 years, the basis of Wal-Mart’s success with consumers is that the store provides a wide variety of products at reliably low prices.
Economic uncertainty may work in Wal-Mart’s favor as well. According to Roe, the seven stores in his territory have done exceptionally well in the last six months, boasting increases in the “high single digits” while other area stores have felt the pinch of recession and the adverse effects on shoppers’ confidence of the Sept. 11 terrorist attacks. “When things get tough, people come back to Wal-Mart,” Roe says. According to a study for the McKinsey Global Institute by consultant Brad Johnson, “Wal-Mart’s productivity growth, as measured by real value added per hour, jumped from 2 percent (1987–95) to 6.3 percent (1995–99), explaining nearly one-quarter of the economywide acceleration in productivity.”
Although Wal-Mart claimed only a 9 percent share of the retail market in 1987, it was 40 percent more productive than comparable retailers as measured by real sales per employee, according to the McKinsey study. By 1995, when it had grown to dominate 27 percent of the market, it boasted productivity figures 48 percent higher than those of its competitors.
Rivals struggling to keep pace with Wal-Mart’s productivity prowess, states Johnson, improved their productivity by 28 percent from 1995 to 1999, but Wal-Mart continued to outdo them, increasing its own output by an additional 22 percent.
Strategies for keeping pace
Retailers seeking to keep pace with Wal-Mart have scrambled to follow suit by installing new technologies, increasing labor productivity and keeping labor costs low. Many retailers have been moving ahead with the implementation of new technology despite the impact of the economic downturn. Spending on technological enhancements at Sears, for example, was up 4.5 percent for 2001. One of its innovations allows shoppers to choose their purchases online and pick them up at a local store. Sears’ role as an online retailer will be further enhanced by its purchase of giant online catalogue retailer Lands’ End. Other retailers like Office Depot are beefing up their technology as well to improve supply chain logistics. Prior to the chain’s January 2002 bankruptcy filing, Kmart committed $1.4 billion to overhauling its technological infrastructure in 2001.
In addition to making optimal use of technologies, retailers are re-thinking their product lines. Wal-Mart pioneered the sale of groceries together with other general merchandise, and now other retailers like Target are following its lead in an effort to provide customers with an assortment of goods and services. Grocery stores, on the other hand, have added banking services, fuel and fast food. Kmart’s failure to make a good grocery match, however, was a cause for concern among retail analysts prior to the company’s collapse.
Malls and traditional department stores have particularly felt the impact of changing patterns in retail sales as customers turn increasingly toward shopping venues they believe will be quicker and less expensive. This shopping pattern has given rise to the discount or outlet mall in all its manifestations, from those with amenities like food courts and luxury retailers such as Coach, Nautica, Polo and Brooks Brothers to lower-end discount malls. Research indicates that the number of traditional mall shoppers nationally has been down nearly every week for the last 12 months compared to year-earlier figures. This decline, however, is due in part to the recession. Nevertheless, Reda’s publication, Stores, holds that malls will continue to play an important part in the retail scene.
“People go to malls for different reasons,” she says. “They go for the specialty stores, not the department stores. If a mall can keep a good mix of specialty stores and find ways to entertain people, it will do okay.”
Shopping centers appear to be accepting Wal-Mart and other big box stores as part of their neighborhood scene, and some are figuring out how to make the most of their competitors’ existence. According to Paul Rappaport, who manages the Springdale Mall in Mobile, Ala., the opening of an adjacent Wal-Mart Supercenter will be good for business. “It will be a shot in the arm to our mall,” he said, noting that he was glad Wal-Mart was on his side of the street.
Mike Johnson, regional manager for Coolsprings Galleria in Franklin, Tenn., agrees that hybrid malls combining traditional department stores and big box stores can provide a win-win situation. “Big box stores like to be in a mall setting, even if that means their free-standing store is across the street,” he asserts. Johnson, like other observers of the retail scene, concurs that attending to customers’ time-management issues is crucial. But he also believes that malls can draw consumers by providing new services and improving existing ones. He said his stores are making sure that parking lots are well-lit and nicely landscaped while the mall is providing baby strollers, offering to take packages to peoples’ cars and making reservations for people at local restaurants.
In Valdosta, Ga., Joe Capers, who manages the local JCPenney store, believes that traditional department stores have a different niche from Wal-Mart’s. He points out that JCPenney shares customers with the local Wal-Mart and that people come to JCPenney to enjoy a different kind of shopping environment. “Wal-Mart grew so fast,” he says. “It came out of nowhere. And for a while, JCPenney lost its identity. But now we’re going back to what we do best: offering quality merchandise at affordable prices.”
Clearly, finding an identity and successfully conveying it are problems facing many retailers. While consumers generally understand that Wal-Mart is the undisputed price leader and Target, albeit a low-price store, is a more upscale, higher-quality fashion and home decor leader, the perception of many other retailers’ positioning is less defined. Sears’ acquisition of Lands’ End may be an attempt by the old-line retailer to differentiate itself.
According to Capers, JCPenney puts effort into creating a nice presentation and has taken seriously customers’ needs for faster, more convenient service. For example, the store has widened aisles to accommodate baby strollers. Capers says business at his store has been steady but flat, and he points out that many south Georgia shoppers have felt the financial impact of the drought that has afflicted the region in recent years.
The arrival of a new upscale mall in Orlando, Fla., along with a couple of new Wal-Mart Supercenters, is adding to already fierce competition among local shopping venues there. In addition to maintaining tight ties with their local communities, adding amenities and undergoing face-lifts, some malls like Orlando’s Fashion Square are seeking out unique local retailers to distinguish themselves from other malls. However, as Fashion Square’s marketing director Susan Plourde points out, “Obviously, everybody gets hurt to some extent when the pie gets sliced thinner.”
Stores that specialize in particular product lines, such as Toys“R”Us, Circuit City, Office Depot and Gap, count on keeping customers by knowing their product lines thoroughly, reacting quickly in response to new trends, and staying in touch with their customers’ preferences. However, when the megastores decide to move into a particular product line, specialty store sales and their profits are at risk. For example, a few years ago Wal-Mart moved aggressively into toy marketing and outsold Toys“R”Us, causing the toys-only retailer to experience a major slump in profits and a wave of concern among its investors. Though Toys“R”Us still ranks sixth in sales volume among specialty stores and the firm recouped some of its losses with exceptional earnings in 2000, it slipped from first place in 1998, and its sales volume remains flat today.
The retail giants are currently vying for supremacy in the area of home goods, with Wal-Mart, Target and Kmart each seeking to form exclusive alliances with suppliers. In the meantime, stores like Lechters and HomePlace of America Inc. are operating under bankruptcy court protection, while Linens ’n Things and Bed Bath & Beyond each saw their stock prices fall. Now Office Depot, Staples and Office Max are bracing themselves in the wake of decisions by key discount chains to offer an expanded selection of office supplies.
In addition to battling the big guns in retail, specialty stores are increasingly feeling the impact of online buying. Both Borders and Barnes & Noble booksellers have suffered as a result of Amazon’s incursion into the book market even though Amazon has just begun to register a profit. However, many observers believe that the trend in online shopping may in fact help to bolster retail store sales. According to Reda, consumers often use the Internet to research products but prefer to do their buying in the store where they can actually see what they are getting. Both Johnson and Capers agree that their customers tend to go a store’s Web pages to see what’s available rather than to make online purchases. In this way, these retailers believe, the Internet can become an effective marketing tool for brick-and-mortar stores.
Not like it used to be
Until the economic recovery is clearly established, consumers are likely to continue monitoring their spending, giving discount entities an edge over upscale retail stores. Even when consumer confidence returns, retailers will have to keep catering to the time-strapped American shopper’s need for convenience. Fierce rivalry for profits has tightened retail operations, and the resulting increases in productivity continue to make a contribution to the jump in national productivity overall.
In this atmosphere of intense competition, consolidation will continue, and consumers can expect ongoing shifts in the retail landscape, especially among second-tier entities. Small, independent local retailers may survive because of their high degree of specialization and the personalized service that’s possible only on a local basis.
For example, Bon Marche, an upscale retail department store, is testing a branch that will seem more like a discount outlet, with checkout counters at the front. Wal-Mart is testing “neighborhood markets” that are smaller and more like ordinary supermarkets than department stores. Malls in Florida and Alabama are exploring the concept of “lifestyle centers” that feature an open-air design and outdoor cafes. Parking arrangements allow customers to pull right to the front door of a shop if they have a single stop they want to make. Everyone is interested in a new style of customer service, which, as Reda notes, means more than simply asking people if they need help and greeting them at the front door.
All of this innovation should keep customers interested if somewhat bewildered by the shifting array of shopping options. At the same time, competition from the big box retailers will help keep prices low. While the shakeout in the retail marketplace is far from over, ultimately, in the Southeast at least, the consumer may be the big winner in the retail race.