The Rise of The “Super Discounters”

Say what you want about Wal-Mart, everybody has. They are either the best thing to happen to capitalism since the creation of the stock option or a heartless cancer destroying the Global economy. Love it or hate it, Wal-Mart has had a significant impact on how retail operates.

They have also changed they way consumers shop.

This may ultimately be their downfall.

Their newest slogan, “Save Money, Live Better”, is a far cry from the original; “We Sell For Less”. It’s part of an overall attempt, the success of which is still undermined, to put the Low Price Genie back into the bottle. Wal-Mart has taught a generation of consumers that the most important thing in making a buying decision is finding the lowest price. It’s a strategy that has served them well, but it has given ammunition to the latest retailing trend designed to knock them off of their throne as the king of all retail.

Low prices are a powerful consumer motivator, but once your sales growth slows, along with increases in your stock price, you need to manage for profit. That’s why Wal-Mart is trying to wean it’s customers off of the low price addiction. Wal-Mart’s return to investors over the last 5 years is somewhere in the negative 25% range. A far cry from their heyday where the stock price was doubling ever five years and Sam was dancing on the floor of the NY stock exchange in a grass skirt.

The problem is that Wal-Mart has no customers. All they have is legions of shoppers looking for the lowest possible price. The average Wal-Mart shopper is loyal to only one thing, spending as little money as possible when buying the things they need to live a modest modern life.

Enter the Super Discounters.

These retail operators, some of which are not retailers at all, are re-defining low prices by driving down operational costs and offering just about anything they can get their hands on at prices dependant on factors other than volume. As an example, look at the genre known as the 99¢ store.

These operators set up shop in declining strip malls where overhead is as low as you can get without violating local zoning laws. The stores are small and minimally merchandised. They offer any merchandise they can buy, or rather scrounge, for less than a dollar. The merchandise mix will include products with mistakes in the packaging, products originally developed for export and what can only be described as rejects or from other retailers. Think of the Island Of Misfit Toys on steroids. For a great example of their merchandise mix, just watch Jay Leno. He has a famous bit where he goes shopping in a local 99¢ store and brings his more hilarious finds back to the studio.

But the proliferation of these types of stores is no laughing matter. They are positioned both geographically and pricewise to capture what has traditionally been the bread and butter customer for Wal-Mart. The shopper interested in nothing but low prices. Due to their reliance on cheap real estate, they tend to closer to where these shoppers live and their prices can not be beat using the traditional method of driving down costs by using huge volume.

They don’t rely on volume to get lower costs, they use opportunistic buying. This is a skill that Wal-Mart and other traditional retailers can’t copy. Their volume precludes buying what in the parlance of the business are known as “odd lots”. On the other hand, most of the operational advantages that helped Wal-Mart grow, such as computerized demand management and tight inventory controls are now standard in the industry and available to everybody at a fraction of the cost Wal-Mart incurred to develop them from scratch.

Then there are the non-retailers, the Good Will shops, thrift stores and the largest online non-retailers out there, E-bay and Craig’s List. These non retailers are taking money from Wal-Mart consumers in record numbers as the American population takes frugality to the level of sainthood. Garage Sale Chic is the new black. It’s hip to display how much you save rather than how much you spent.

And these retailers pay nothing for the merchandise they sell, it’s mostly donated. The workers? Well a majority of them are volunteers. How do you compete against a retailer who has no inventory or employee costs?

Traditional retailers can’t easily compete with the super discounters and the non-retail retailers without incurring huge operational expenses. They have to sit back as the Frankenstein monster that they created, known as the price conscious consumer, slowly bleeds out of their sales base. Trying to upgrade Wal-Mart is a herculean task that history has shown is highly likely to be a failure. Think of Kressge, Ames, the original K-mart and Woolworths, Once the customer gets it in his head that low prices is all that matters, they are difficult to un-educate.

With stores closing across the country, there is a nearly unlimited supply of “B” grade retail locations that can easily support a Family Dollar, Dollar General or 99¢ store. Some of them directly in the backyard of huge Wal-Mart’s, since they are the skeletons of the very retailers Wal-Mart put out of business. To the best of my knowledge, no one is organizing to keep a retailer from taking over a vacant building on the grounds that it will disturb the local area.

Add to that the fact that these stores can be run with no more than three employees at a time, some of which draw no salary and that they sell products picked up for pennies on the dollar, or given to them for free as donations, and you a have a recipe that is sure to give Wal-Mart nightmares.

Ricochet Recession

There is no doubt that things are beginning to improve in the retail environment.

This Labor Day I saw a huge increase in sales in my store. It kind of reminded everyone of the good old days when consumers spent more than they made and used their homes like ATM machines.

But it’s not the good old days; it’s still the bad current days. A reduction in the rate of decline in unemployment is just not the same as an increase in employment.

Sales have continued to be strong this past week and with any luck we should hit budget for the first time in close to a year, but it’s not time to pull out the Champagne.

Continued good news on the economic front is reason for hope, and I for one would love to see some life step back into the retail marketplace, it’s just that things will never be like they were because…well mostly because, they never are.

What we are witnessing now is the release of a great deal of pent up demand on the part of those 85% of consumers who have not lost their jobs, who have not had their homes foreclosed on and who did not loose a bundle in the stock market.

People can only put off spending for so long, some because they really need things like water heaters and washing machines, and others because the habit of spending is so addictive that they have been jonesing for a fix since January.

So while sales have improved and the pundits will soon start cautiously calling for an end to the recession, don’t be too quick to believe the next round of hype. Things are going to dip again real soon and the level of dip will depend on how strung out consumers get living it up on this pseudo-recovery spike in good economic news.

Anyone who has every driven the 405 in Orange County California knows about “Ricochet Accidents”. They are as common to the daily commuter as the infamous “SigAlert”.

As rush hour traffic, (or any hour traffic since the 405 through Orange County is always heavy) slows to a crawl, you will inevitably see people craning their heads out of car windows to see where the accident is. As people approach the accident, they instinctively slow down to look at it. In Orange County the rubberneckers are not just looking for gory details, they honestly think it might be somebody famous who is crying over the crumpled front end of the Escalade stuck sideways in the fourth of the seven lanes.

As soon as they clear the accident site, Cali drivers immediately accelerate to 85 MPH to make up for the time they lost seeing if Brittney would be appearing on the cover of People with a neck brace. Since everybody is going 85 MPH and changing lanes like Hollywood couples change spouses, there is sure to be another traffic accident no less than one and a half miles down the road. Hence the name “Ricochet Accident”.

That’s what we are about to experience in retail sales, a “Ricochet Recession”. Anyone who builds up inventory or adds too much staff right now will be in a world of hurt by the end of the year. This surge in spending might make it into the beginning of the holiday season and it will be hard to determine exactly if lower Christmas sales are result of the drop in pent up demand or of lackluster holiday performance, but the fundamentals of the recession are still too strong to allow for any real recovery until the second quarter of 2010.

This is not the end of the recession, not even close. Things are going to get bad again before they get better. The only question is how bad and for how long. The answer will vary from retailer to retailer depending on how individual retailers react to the current economic uptick and how well they prepare for the “Ricochet Recession”. Any attempt to back off of aggressive pricing and marketing to regain valuable margin dollars will be met with disastrous results.

In fact, I don’t see how big name retailers are ever going to get back the margins they have lost. I also don’t know how they are going to keep shareholders from revolting. I don’t see how the current model of big box retail can hope to increase shareholder value in a slow-grow to no-grow economic environment.

In addition, we can’t loose sight of the fact that consumers are going to school right now. They are learning exactly just how far retailers are willing to go to get sales in tough economic times. Just because they may start coming back into the stores after the first quarter of 2010 doesn’t mean that they will accept businesses going back to 2004 practices.

It’s going to be a whole new ball game when the economy “recovers”. The old way of retailing is entering an age of decline and new retailing models are rising from the economic ashes to challenge everything current retail mavens believe about how to make money.

It’s going to be very, very interesting.