Wal-Mart to Test Profitable Tactics in L.A. Market : * Retailing: The national chain, which built its success on stores near small cities, is negotiating with Burbank officials to build on Lockheed Corp. site.
Over the past 30 years Sam M. Walton has built the biggest retail chain in the nation--without the help of Los Angeles. But now he needs the city’s business to keep Wal-Mart Stores Inc. growing, and he’s on his way here.
Wal-Mart is a high-volume discounter of clothing, food and general merchandise with 1,700 stores in 41 states and sales that very likely topped $45 billion during its fiscal year that ended Friday. The company is proposing to build a store and accompanying shopping center in Burbank on 89 acres being vacated by Lockheed Corp., according to city officials.
Wal-Mart is negotiating with the Burbank City Council to buy the land for $71 million, and the center would be anchored by a 110,000-square-foot Wal-Mart store. The center, whose opening is at least two years away, also would include a Sam’s Club office-supplies outlet that is also owned by Wal-Mart.
The Bentonville, Ark.-based chain, founded and still headed by the 73-year-old Walton, first invaded California in 1990 (in Lancaster), and now has 18 stores open in the state.
But the Burbank store would be its first in the immediate Los Angeles area, and reflects the evolution of Wal-Mart’s nationwide strategy in which the chain is expanding beyond its old blueprint of picking small-town locations.
Walton told the company’s annual meeting in 1990 that he hoped that Wal-Mart’s sales could reach $125 billion by 2000--an impossible goal without tapping the nation’s biggest shopping markets. And in recent years the company has opened stores in the heart of such major cities as Chicago, Dallas, Houston and Atlanta.
“As we expanded into more territories, we found that a Wal-Mart store would do just as well in a larger city as in the rural areas we originally operated in,” Wal-Mart spokeswoman Jane Arend said.
That evolution in turn could cause headaches for Kmart Corp., the Target chain of Dayton Hudson Corp., the Thrifty Corp. unit of Pacific Enterprises Corp., and other discount retailers in Los Angeles that already are grappling with weak consumer spending and the sluggish economy in general.
The trade-off, of course, is that Wal-Mart will find the competition a lot stiffer in Los Angeles than in smaller markets, raising the question of whether the fight for market share will put pressure on Wal-Mart’s profit margins.
Over the past five years, Wal-Mart has earned about 4 cents per dollar of sales, which is small by some industries’ standards but enviable in discount retailing, where such chains as Kmart and Dayton Hudson earn only 2.5 to 3 cents per sales dollar.
That extra penny or two of profit on $45 billion of sales adds up for Wal-Mart. But with so many competitors in Los Angeles and the other big cities, would Wal-Mart stores in those areas be forced to cut prices more than they would like, paring their earnings?
Wal-Mart says “there’s no way to answer” the question because “there’s no way to single out one variable like that,” Arend said.
Analysts, meanwhile, are divided on the question.
“It has to affect their margins because there’s more competition in the bigger cities,” said Raymond S. Cowen, who follows Wal-Mart for the Value Line Investment Survey, a securities research firm in New York. Wal-Mart’s rivals, he said, “are going to fight hard, and more emphasis will have to go into getting volume to make up for the lower margins.”
Indeed, Wal-Mart’s rivals predictably said they will give no more quarter to Sam Walton than to any other foe in Los Angeles. “We’re ready,” Kmart spokeswoman Mary Lorencz said. “We don’t surrender any market share to anyone if we can help it.”
Ann Barkelew, spokeswoman for Dayton Hudson, said that about 60% of Target’s U.S. locations already have a Wal-Mart nearby, and that “we’ve never been concerned about good competition.”
But Edward A. Weller, an analyst with Montgomery Securities in San Francisco, said Wal-Mart’s profit margins hold up in big cities and small. Although there’s more competition in major cities, there’s also more shoppers and the added volume makes up for any additional price-discounting that occurs, he said.
“They seem to make the same kind of profit in Dallas as in Dingbat, Tex.,” Weller said.
Walton began by locating Wal-Marts in small towns or rural areas in the South and Midwest. The land could be bought or leased more cheaply, and the stores established Walton’s now-renowned system of overwhelming its rivals by using low prices on brand-name products, bare-bones overhead costs, an efficient distribution network and stellar service that’s strengthened by Wal-Mart’s profit-sharing plan for employees.
That system’s refinement is evident at Wal-Mart’s new Palmdale store. Bright and spacious with clearly marked departments and prices, the store features a worker who greets shoppers at the door, and all employees wear badges that display their names in large letters. Besides the typical departments for apparel, garden equipment, sporting goods, small appliances and toys, the Wal-Mart has a large pharmacy, a sizable arts-and-crafts department and an eat-in cafe.
The remarkable success of Wal-Mart enabled Walton, once a JCPenney trainee after college, to be the nation’s richest man during much of the 1980s, according to Forbes magazine. It was a tag he despised, and in 1989 he lost the title anyway by dividing his family’s estimated $9-billion fortune among himself and his four children.
He began his career after World War II by opening a Ben Franklin five-and-dime store in Newport, Ark., but lost his lease a few years later. Then in 1962, at age 44, he and his brother James opened the first Wal-Mart in Rogers, Ark.
In recent years, Wal-Mart’s expansion has taken on a fever pitch--it opened 31 stores on Nov. 5 alone and plans 160 openings this year--but the chain still approached larger markets cautiously by placing stores in less-populated towns that ringed major cities.
In California, for instance, Wal-Mart has so far set up shop within striking distance of Los Angeles and Sacramento by opening (or announcing plans to open) stores in Palmdale, Riverside, Redlands, Modesto and Elk Grove, among other sites.
But as it chose those sites, Wal-Mart also began experimenting with bigger stores. Early Wal-Marts were only 30,000 or 40,000 square feet, but the recent ones total up to 125,000 square feet. When Wal-Mart found that it could profitably operate stores that large, the chain decided it could now operate within major cities where big stores are a necessity to compete.
But don’t look for Wal-Mart to suddenly blanket Greater Los Angeles with outlets. A key part of Wal-Mart’s success is buying or leasing land for its stores at attractive prices, which enables the chain to keep its costs--and therefore its prices--low. If the land isn’t available at a price Wal-Mart likes, it looks elsewhere.
DISCOUNT STORE PROFITS
Discount department stores as a rule produce skimpy profit margins, but some--such as Wal-Mart Stores Inc.--are more profitable than others. The list below shows several retailers’ net profit margins, that is, the amount of net income they earned on each $1 of sales. Dillard Department Stores: 5.4 Family Dollar Stores: 4.1 Wal-Mart Stores: 3.6 Kmart: 2.4 Dayton Hudson: 2.2 Price Co.: 2.0 Costco Wholesale: 1.6 * Fiscal years for Family Dollar, Price and Costco ended Aug. 31; all others ended Jan. 31, 1992. Some figures are estimates. Source: Value Line Investment Survey
