Growing Pains : Wal-Mart Sees L.A. as Way to Maintain No. 1 Retailer Status
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 likely topped $45 billion during its fiscal year 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 it reflects the evolution of Wal-Mart’s nationwide strategy in which the chain is expanding beyond its old blueprint of picking small-town locations.
That evolution in turn could cause headaches for Kmart Corp., the Target chain of Dayton Hudson Corp. and other discount retailers in Los Angeles that already are grappling with the sluggish economy.
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 claims “there’s no way to answer” the question because “there’s no way to single out one variable like that,” said Wal-Mart spokeswoman Jane Arend.
“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.
Indeed, Wal-Mart’s rivals predictably said they are unfazed by the prospect of taking on Sam Walton. “We’re ready,” said Kmart spokeswoman Mary Lorencz. “We don’t surrender any market share to anyone if we can help it.”
But Edward A. Weller, an analyst with Montgomery Securities in San Francisco, said Wal-Mart’s profit margins hold up in cities big and small. Although there’s more competition in major cities, there are 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.
