At the end, this article has some interesting thoughts and numbers (but no references) relevant to a recent discussion on Brin-L comparing Costco and Sam's Club.
*** http://news.morningstar.com/doc/document/print/1,3651,117157,00.html Surviving the Wal-Mart Onslaught: Which savvy retailers are coexisting with this powerhouse? by Anthony Chukumba 10-13-04 Dear Analyst, It seems like Wal-Mart just continues to get bigger and stronger every year. Are there any retailers out there that can effectively compete with Wal-Mart long term? Francis C. It's true that over the past decade, Wal-Mart WMT has become the 800-pound gorilla of the retail industry. The company recorded $259 billion in revenue last year, averaging almost $700 million in sales per day--which is more than many companies post in a year. Due to its massive size, Wal-Mart is one of, if not the, largest U.S. retailer of virtually every category of merchandise that it sells. This allows the company to wield an extraordinary amount of leverage over its suppliers, which it uses to keep prices low. Wal-Mart has also used its massive scale to offer its customers a wide range of products and services, including photo developing, online DVD rental, and auto maintenance. The retail graveyard is strewn with companies put out of business by Wal-Mart, including Caldor and Montgomery Ward. And Wal-Mart plans to continue its aggressive store expansion, with 500 new store openings planned for 2005. A perfect example of a retail sector in which Wal-Mart flexed its competitive muscles to the detriment of other industry players is the toy business. In the not-so-distant past, Toys 'R Us TOY was the dominant toy retailer, with KB Toys and Hobby a close second. In addition, niche toy retailers such as FAO Schwartz were also profitable. However, as Wal-Mart continued to expand its store base and undercut other retailers on price, there was not much that the pure-play toy retailers could do to compete. Toys are largely a commodity item, and toy retailers could not offer consumers many compelling reasons to pay more for toys at their stores. Thus, they were forced to stand by and watch their market share steadily erode, eventually forcing many such as KB Toys and Hobby and FAO Schwartz into bankruptcy, and even causing Toys 'R Us to seriously consider exiting the toy business altogether to focus on selling children's clothing. Based on the experience of the toy industry and many others, one might come to the conclusion that Wal-Mart will eventually be the only broadlines retailer left in the United States. However, there are retailers that successfully compete with Wal-Mart. For example, deep-discount retailers such as Dollar General DG have thrived over the last 10 years, in spite of the increasing power of the Wal-Mart juggernaut. The key to Dollar General's success is simple: Offer a limited selection of everyday, consumable items in convenient neighborhood locations. For example, the typical Dollar General store averages just 6,800 square feet--less than one thirtieth the size of the average Wal-Mart Supercenter. Thus, a time-starved consumer looking to pick up a few food and household items may be more likely to shop at the Dollar General down the street, to avoid making a several-mile trek to the nearest Wal-Mart, where they would have to park in a gargantuan parking lot, spend a fair amount of time locating their desired items, and wait several minutes in a checkout line. This focus on convenience has enabled Dollar General to increase its sales at an average annual rate of 16% over the last five years, due to a combination of expansion (by opening about 600 stores a year) and consistent comparable-store sales, or comps (sales at stores open at least a year). Another example of a retailer that has thrived in the face of the Wal-Mart powerhouse is Costco Wholesale COST. Costco's performance is far superior to that of Sam's Club, Wal-Mart's wholesale retailing division. Costco's stores generate more than 50% more annual sales on average than Sam's Club stores, and its comps usually outpace its peer's. How does Costco do it? By matching Sam's Club on price, while offering far superior customer service. Costco store employees earn much higher wages and have better benefits than their Sam's Club counterparts, which leads to a more motivated employee base and lower turnover--both of which directly lead to a better customer experience in the stores. For example, Costco cashiers start out making $10 per hour, and within four or five years, can make $40,000 a year or more--compensation levels that most Sam's Club staffers can only dream about. What do Dollar General and Costco have in common that has allowed them to survive--even thrive--in the face of the Wal-Mart assault, where others have failed miserably? Simply put, they have created competitive differentiation from Wal-Mart that is valued by consumers. Dollar General has differentiated itself from Wal-Mart by providing a quicker, more convenient shopping experience; Costco, by providing far superior customer service. Thus, when evaluating a retailer's chances of long-term survival versus Wal-Mart, ask yourself whether the company has a way to distinguish itself from the behemoth in a way that consumers value--such as differentiated products, better customer service, or a superior shopping experience. If a retailer possesses one or more of these traits, it may stand a fighting chance of coexisting with the Wal-Mart machine. *** Ask the Analyst is an educational column that features Morningstar analysts' answers to our readers' questions about funds, stocks, and portfolio issues. If you have a question you'd like us to address, send an e-mail to [EMAIL PROTECTED] We'll select two questions per week to cover in our columns. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l