Shoppers are shaking up the market, and Wal-Mart is winning
THE RETAIL REVOLUTION
Shoppers are shaking up the market, and Wal-Mart is winning
Tom Potter is doing his “daytime in the mall thing.” Today’s stop: a sprawling, new Wal-Mart store in the Toronto district of Scarborough. After a quick stop for some educational software, Potter, a retired teacher and single father of three young boys, makes a beeline for the kids’ clothing section. It is familiar territory by now. Once in a blue moon, says Potter, he heads to Eaton’s or the Bay when his six-year-old and twin fouryear-olds need something dressy. But by and large, it’s Wardrobe by Wal-Mart. “I’m a price buyer,” says Potter, 53. “And I guess I do find the prices here to be a couple of dollars less than other places.” Behind the bargains, a revolution is raging in department store retailing—and people like Tom Potter are the reason. Canadians who grew up on Eaton’s and the Bay have been transformed into supershoppers obsessed with stretching their dollars. Department stores are being forced to reinvent themselves or face the consequences. The most obvious example of the new reality is the hard luck of Eaton’s. Once the undisputed ruler of Canadian retailing, Eaton’s last year accounted for only 7.2 per cent of $17.3 billion in total department store sales. Last week, it announced plans to decentralize management and to cut 200 administrative positions—news that caused its shares to plunge, closing at an all-time low last Friday of $3.74.
In the new retail reality, the biggest winner has been Wal-Mart Canada Inc. of Mississauga, Ont. Only five years after its Bentonville, Ark.-based parent bought Woolco’s chain of 150 discount stores, Wal-Mart Canada has seized a whopping 30 per cent of department store sales. The company’s military-style efficiency has forced its Canadian competitors to change their often antiquated ways. Some players, such as Toronto-based Sears Canada Inc., have flourished in the cutthroat climate. “There’s a war-like attitude,” says Toronto-based retail consultant Wendy Evans. ‘Wal-Mart has acted as a catalyst to speed up the whole evolution of the Canadian retail industry.”
Even with fewer than half the locations of its closest competitor, Zellers Inc. of Brampton, Ont., Wal-Mart Canada led its rivals with an estimated $5.2 billion in sales last year, up from $2 billion when it took over Woolco in 1994. Zellers, a division of the Hudson’s Bay Co., North America’s oldest retailer, rang up a healthy $4.8 billion in revenues in 1998, accounting for about 28 per cent of the market.
Sears Canada followed with 19.4 per cent, while the Bay, also owned by the Hudson’s Bay Co., captured 15.6 per cent.
Some observers say the full force of Wal-Mart’s impact is only beginning to be felt. The 153-store chain plans to roll out 17 new outlets across the country this year and to relocate another eight. A study released last fall by Ryerson Polytechnic University’s Centre for the Study of Commercial Activity estimates that Wal-Mart’s annual sales in Canada could double to $11 billion over the next five to 10 years with the addition of 80 stores, which would still put it well below Zellers’ total of 314. “We will have significant growth over the next few years,” says Dave Ferguson, Wal-Mart Canada’s U.S.-born president and chief executive officer. “I think where it makes sense to have a Wal-Mart, ultimately we’ll have one.”
Wal-Mart’s arrival in early 1994 could not have been better timed. Canada was already three years into its worst economic slump since the 1930s and Canadians were feeling the pinch of eroding disposable incomes and mounting personal debts. Retailers were still reeling from the Goods and Services Tax, which Ottawa introduced in 1991. “The retailers were really on the ropes because consumers were so depressed,” says Len Kubas, a Toronto retail consultant. Shoppers “were receptive at the time to a Wal-Mart message, which is everyday low pricing.”
Evans says there is not much point in competing with Wal-Mart on price alone. “Its competitors have had to think about what else
they can do to gain competitive advantage,” she says. For Zellers, that has meant moving slightly upscale by offering better quality merchandise at an affordable price. Its line of Martha Stewart linens and housewares, launched with great fanfare last year, is an indication of where the chain is going. Analysts say the strategy is modelled after Target stores, a U.S. chain that has successfully competed against Wal-Mart by climbing a rung or two up the fashion ladder. Zellers kicked off an ambitious expansion plan last year that will see many stores grow from an average of 75,000 square feet to between 90,000 and 125,000 square feet, closer to the size of a Wal-Mart outlet. In a two-pronged approach, Zellers is also opening a series of smaller Best Value stores that offer low prices.
Eaton’s has staked its future on fashion since emerging from bankruptcy protection in late 1997. In an appeal to the high-end market, the venerable chain has stocked its stores with profitable designer apparel and has dumped electronics, furniture and appliances. But the strategy has proved no quick fix: Eaton’s has revised its expected earnings for 1998 downward three times in the past eight months, blaming lower than expected sales, inventory snags and steep discounting. Analysts say Eaton’s has not been helped by the fact that the Bay, its closest competitor, has been following a similar fashion strategy for longer. The Bay, too, is altering its methods of merchandising. Last year, it opened a Bed, Bath and More outlet in Newmarket, Ont., and a Hudson’s Bay Co. Outfitters store in downtown Toronto, which sells casual clothing and home decor.
But the Bay’s repositioning process has also been bumpy. Last month, the chain hired a marketing consultant to revamp its image, and announced that it might change its name to HBC. The company dropped the idea after it was
EATON’S: GRIST FOR THE RUMOUR MILL
hey came cascading through the air like the autumn leaves last September: rumours of Eaton’s impending sale. And as profits at the once-mighty retailer headed ever earthward, the gossip just seemed to fly faster. It took on a new intensity last week when Toronto-based T. Eaton Co. Ltd. announced plans to cut 200 administrative jobs, or about a third of its corporate support staff, and to reorganize into five regional divisions. The news came only days after Eaton’s said it expects its losses in 1998 to be significantly higher than the $29 million it predicted in December. This was the third revised forecast since June, when the troubled department store chain called for a $58-million profit for the year. Eaton’s president, Brent Ballantyne, refused to comment on the scuttlebut. “These rumours have been circulating since the 1920s,” he said. “The grapevine seems to be wonderful—it never stops.” Not so wonderful, though, when the share price has lost about two-thirds of its value. Maureen Atkinson, a Toronto-based retail consultant with the J. C. Williams Group, says Eaton’s embattled shareholders would love nothing more than to see the chain sold at even a minor premium on their stock. The problem, she says, is no one wants to buy.
Cincinnati-based Federated Department Stores Inc., which owns the U.S. chains Macy’s and Bloomingdales, is still considered a potential suitor, despite its $2.5-billion takeover in early February of Fingerhut Cos. Inc. of Minneapolis, a leading U.S. catalogue and Internet retailer. Hudson’s Bay Co. and Sears Canada
Inc. are also believed to be interested in specific Eaton’s locations. But no one is expected to bite unless Eaton’s trims its costs. Ballantyne insists he has no plans to close any of the company’s 64 stores, and that consumers are responding to Eaton's move into upscale fashion. “We’re quite happy with our strategy,” he says. The question now is how long investors are willing to wait for a turnaround.
widely panned. The flip-flop came just days after shares in parent Hudson’s Bay Co. hit a 12-year low on news of weak Christmas sales, due in part to the Bay’s costly discounting war with Eaton’s.
The most successful reinvention to date has been executed by Paul Walters, the 44-year-old chairman and CEO of Sears Canada. The energetic native of Edmonton had his work cut out for him when he was hired away from Zellers in late 1996.
The 109-store Sears chain, which is 55-per-cent owned by Chicagobased Sears, Roebuck & Co., had seen sales drop to $3.9 billion in 1996 from $4.6 billion in 1990, and had cut its staff by 28 per cent. ‘We essentially made no money throughout that period,” says the retail veteran. “It got pretty bad.”
Walters made the radical decision to invest his way out of the slump. Spending on store improvements and expansion was quadrupled in 1997 to $160 million, and a similar amount was allotted last year. Furniture was moved into separate home-furnishing stores, which now number 21 and feature triple the display area. The company also stepped up its advertising and expanded its catalogue business. In the two years since Walters took the helm, Sears has posted record profits and its market share has risen to 19.4 per cent last year from 16.7 per cent in 1996.
In a Wal-Mart world, Walters says retailers stand or fall on customer knowledge. To that end, Sears conducts frequent focus groups and surveys. The company’s in-house credit card, which is used for 64 per cent of transactions, also gives Sears insights into customer behaviour—and a leg up on Wal-Mart Canada, which does not have its own store card. “This business is not rocket science— it’s a question of understanding who your customer is,” says Walters. “I think Wal-Mart is just another example of a company that is more focused on its customers.”
Good customer service is an essential part of Wal-Mart’s credo, but the real key to the company’s success is an unparalleled ability to strip costs out of the entire supply chain.
Founder Sam Walton turned costcutting into a lifelong obsession, and that quest is still at the heart of the Wal-Mart way. The company’s distribution system is regarded as the most efficient in the world. Wal-Mart tracks virtually every item, from point of shipping until the time it
leaves the store, using Wal-Mart Retail Link, a computer system that cost the company billions of dollars to develop. Many suppliers are also connected to the system, and information is transmitted through the company’s own satellite.
It is the smooth flow of goods, in addition to low prices, that gives Wal-Mart Canada the highest stock turnover rate of any department store. But suppliers must meet rigid requirements. Deliveries to Wal-Mart distribution centres can only be made within a 15to 30minute window of opportunity and suppliers who continually miss shipments can face fines. With 3,600 stores worldwide, Wal-Mart uses its enormous buying power to muscle price concessions from suppliers. While the average profit margin in a Wal-Mart Canada store runs about 32 per cent, shelf prices on high-turnover items are sometimes as low as other retailers might pay wholesale. ‘Wal-Mart
A CHANGE IN FORTUNES
In just four years, Wal-Mart has doubled its share of the department store market, while Eaton’s share has been almost halved
is a very powerful company,” says a Toronto consultant whose clients include some Wal-Mart suppliers. “It’s such a big account that you’d do anything to please them.”
In some cases, that means shifting production offshore to take advantage of cheap labour, according to a recent book chronicling WalMart’s business practices. As recently as January, notes Bob Ortega, the author of In Sam We Trust: The Untold Story of Sam Walton and How Wal-Mart Is Devouring America, Wal-Mart Stores Inc. and other high-profile retailers, including The Gap and Sears, were named in three U.S. lawsuits alleging that garment contractors that were retained by the companies in Saipan employed indentured labour. Despite a vendor code of conduct designed to prevent such abuses, similar allegations continue to surface, Ortega says.
Wal-Mart’s relentless drive to cut costs has also been blamed for its staunch opposition to unions. The chain’s Windsor, Ont., outlet has the distinction of being the only Wal-Mart store in the world with a union. Tom Collins, an official with the United Steelworkers of
America who worked to organize the store, says the company is trying to decertify the union, while Wal-Mart Canada steadfastly denies that claim.
From a business perspective, however, analysts contend that Wal-Mart’s arrival in Canada has made department stores more competitive. Going up against the Bentonville behemoth has required a significant leap in sophistication. We’re in the ring with the best,” says Ken Jones, the director of Ryerson’s Centre for the Study of Commercial Activity. “It’s been the saviour of Canadian retailing.” Wal-Mart’s success has forced Canadians to take retail more seriously. University-level retail-management programs, long a staple of U.S. and European business schools, have only been available in Canada in the past year, notes Stephen Arnold, a marketing professor at Queen’s University in Kingston, Ont., who has studied Wal-Mart extensively. ‘Traditionally in Canada, if you couldn’t do anything else, you went into retail,” says Arnold. “Canadian retailers just don’t have the training and experience to compete with the best in the world.”
They’re learning fast, as the success of Sears and Zellers illustrates. But Wal-Mart, analysts say, is determined to dominate the department store sector like no retailer has in the past. The gloves are off for good, and the gentlemanly days of the Bay versus Eaton’s are fading into memory. □
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