Why Wal-Mart's Retail Dominance May Be in Danger

Wal-Mart's core customer base is really hurting right now, which threatens its position as top dog in deep-discount retail.

May 18, 2014 at 11:00AM


Source: Wikimedia Commons

For decades, Wal-Mart Stores (NYSE:WMT) has been the unquestioned king of retail. Wal-Mart is a company of truly staggering size and scale. In fiscal 2014, Wal-Mart racked up $473 billion in sales. If it were its own country, Wal-Mart would be the 27th biggest in the world by gross domestic product, larger than Austria, according to the International Monetary Fund.

Wal-Mart grew from humble beginnings to a retail juggernaut with almost 11,000 stores under 71 banners across 27 countries worldwide. It did this with a laser-like focus on everyday low prices and an ironclad grip over its suppliers and distribution.

However, there are some serious cracks starting to form in Wal-Mart's armor. A wave of negative PR about how Wal-Mart treats its employees is taking a real bite out of the company. In response, consumers are increasingly flocking to Wal-Mart's chief rival, Costco Wholesale (NASDAQ:COST).

Even worse, Wal-Mart's core customer base is getting hit where it hurts. Cuts to the federal food stamp program are forcing Wal-Mart's customers to pinch pennies even more than usual. While Wal-Mart is still the biggest retailer in the world and likely will be for a long time to come, there are some dark storm clouds forming overhead.

When in doubt, blame the weather?
Wal-Mart continued a recurring trend for retailers after releasing poor first-quarter earnings, which is to blame lagging sales on the poor weather in the United States. In all, Wal-Mart's earnings per share clocked in at $1.10, representing a 3.5% decline year over year. Wal-Mart specifically cited the harsh weather as the primary culprit. However, it's worth noting that even excluding the impact from the weather, Wal-Mart's profits still would have fallen.

Blaming the weather is an all too frequent occurrence for retailers these days, but it amounts to a poor excuse for underperformance. Some retailers, such as Costco, are actually doing quite well, and Costco has to deal with the same weather conditions as Wal-Mart. To that end, Costco's U.S. same-store sales, which measure sales at locations open for at least one year, rose 4% through the past six months.

Furthermore, Costco's total same-store sales increased 3% over this period, which doesn't seem spectacular but looks better when you exclude gas price fluctuations and foreign currency effects. Adjusting for those items reveals that Costco's total same-store sales increased 5% in the most recent quarter and over the past six months. As a result, it's clear that Costco is doing just fine, even with the harsh weather conditions.

The real problem for Wal-Mart
What really seems to be hurting Wal-Mart and its customer base are the ongoing cuts to food stamps. Wal-Mart management has repeatedly stressed the importance of the Supplemental Nutrition Assistance Program, or SNAP, for its business. That's because roughly 20% of Wal-Mart's customers rely on the SNAP to pay for food, and Wal-Mart derives more than half of its sales from groceries. When you connect those dots, it's plain to see what's happening.

This also explains why Wal-Mart and Costco are performing so differently right now. Whereas Wal-Mart's customer base is heavily reliant on federal assistance programs, Costco's core demographic earns higher income on average. That provides some crucial insulation for Costco against the budget cuts that are putting such a strain on low-income households.

These conditions are likely to persist for some time, which is why Wal-Mart expects current-quarter earnings of $1.20 per share. That's more than 6% below the average analyst estimate.

The bottom line
Wal-Mart is still the unquestioned king of discount retailing. But that doesn't mean it can get too comfortable. There are several forces combining to threaten Wal-Mart's status as the industry juggernaut. Its customer base is under duress, it's facing a severe swing in public opinion for its employment practices that is pushing shoppers toward Costco, and its attempts to expand in the emerging markets aren't working out. If Wal-Mart isn't careful, it might just lose the top spot in the retailing space sooner rather than later.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers