Can WalMart Shrink Its Stores?

Chain stores have some obvious advantages, such as well-known brand names and the ability to command volume discounts from suppliers. But they have some less obvious disadvantages. High among them is that having a lot of stores makes it hard to change direction when things aren’t going so well.

An interesting article in today’s Wall Street Journal, in which WalMart Stores obviously cooperated, discusses CEO Doug McMillon’s effort to reshape the company in the face of customers’ changing tastes. WalMart has been the leader in developing gigantic stores, which it calls supercenters. In the United States, it runs more than 3,300 of them, averaging more than 180,000 square feet in size. Three football fields could fit into a store like that, complete with end zones and goal posts, and still leave room to spare.

Trouble is, customers don’t want to go to a supercenter every time they need a can of bug spray, or even a television. Some shoppers prefer to visit smaller stores, at least some of the time. Others would rather shop online, but might be persuaded to pick up their online purchases in a store if that’s faster or cheaper than having them delivered to the house.  As a result of shoppers’ fast-changing preferences, WalMart owns a lot of real estate that isn’t very productive. It needs to reshape its portfolio.

I wrote about this problem in my book The Great A&P. The Great Atlantic & Pacific Tea Company, then by far the largest retailer in the world, was slow to develop supermarkets in the 1930s. The innovators were wild-eyed marketers without much to lose, not established grocers. But by 1936, A&P’s president, John A. Hartford, was convinced that larger self-service stores would prove more profitable than the relatively small outlets A&P owned all over the country. His more conservative brother George, the company’s chairman, initially disagreed. But by early 1937, the brothers ordered a concerted effort to replace small, underperforming stores with supermarkets.

And then…nothing happened. Although the Hartfords owned almost all of the company’s shares and exercised total control, their executives knew that opening big stores would hurt business at small ones, forcing the layoffs of loyal managers whose stores would be closed. They stalled until the Hartfords pounded the boardroom table. In late 1937, in the face of diminished profits, the reluctant executives began to yield. Over a two-year period, the Hartfords relentlessly drove their team to open 750 large stores and close 4,000 small ones, lowering costs and prices, restoring growth, and winning back customers who had abandoned A&P for the likes of Big Bear and Big Bull.

Walmart will have to achieve something similar.  It’s a good bet that managers of its biggest supercenters earn a whole lot more money than managers of its much smaller discount and grocery stores, and won’t be eager to take a step down the ladder. And regional managers and execs in the supercenter division may not have incentives to see their sales wander off to other divisions operating other store formats. Mr. McMillion may have the right strategy, but convincing his own employees to embrace it may be even harder than jousting with Target and Kroger.

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