‘Message’ Sent By Wal-Mart’s Store Closings

Jim Prevor - The Fruits of Thought

Jim Prevor - The Fruits of ThoughtRetailers close stores all the time without making a big deal‭. ‬When Wal-Mart made a prominent decree that it was closing 269‭ ‬stores globally‭, ‬of which 154‭ ‬were in the U.S‭. ‬and Puerto Rico‭, ‬the interesting question was not so much why it was closing those stores‭ ‬‮—‬‭ ‬after all‭, ‬the same announcement included reassurance that Wal-Mart is growing‭, ‬and it would open more than 300‭ ‬stores in‭ ‬the next year‭. ‬The interesting question was why make a big deal of it‭?‬

Of course‭, ‬there are SEC regulations that require releases of certain‭ ‬“material”‭ ‬information‭. ‬However‭, ‬Wal-Mart has more than 11,000‭ ‬stores in the world‭, ‬plus online sales operations‭, ‬so these closings were not likely to be deemed material‭. ‬Alternatively‭, ‬minor changes in approach‭ ‬‮—‬‭ ‬for example‭, ‬announcing a few closings each day‭, ‬week‭, ‬month or quarter‭ ‬‮—‬‭ ‬would certainly have made this a non-event‭.‬

Perhaps an announcement that it was closing its Wal-Mart Express experiment‭ (‬accounting for 102‭ ‬closings‭) ‬would have been appropriate‭. ‬But Wal-Mart already signaled the end of this small store experiment when the company started rebranding them as Neighborhood Markets‭.‬

The choice to announce this decision in this way grew out of a desire to send a message‭. ‬But what is the message‭, ‬and to whom was it being sent‭?‬

One of the big changes Wal-Mart underwent during the past few decades was from being a retailer focused on sales and profitability to some kind of geopolitical entity so large that getting along with governments and non-governmental organizations‭ (‬NGOs‭) ‬sometimes seemed to take priority over making a buck‭.‬

By declaring these announcements and other related statements‭ (‬such as a decision not to proceed with opening two stores in poor‭ ‬areas of Washington‭, ‬D.C‭. ‬whose opening had been negotiated as part of a deal to gain access to the D.C‭. ‬market‭), ‬Wal-Mart wanted the word to get out to many constituencies‭.‬

It wanted Wall Street and shareholders to know that Wal-Mart executives were prepared to take the heat that bad publicity engenders‭. ‬These store closings could cost 10,000‭ ‬workers their jobs and leave many towns without a viable large retail operation‭. ‬Wal-Mart‭ ‬anticipated it would be attacked on every basis from its allegedly breaking agreements to abandoning communities and employees‭.‬‭ ‬The retailer wanted to express a recommitment to profitable operation‭.‬

It wanted consumers to begin thinking about Wal-Mart as an online operation‭.‬‭ ‬The closures were portrayed as a strategic re-positioning and got the words‭ ‬“online operations and Wal-Mart”‭ ‬on news programs and articles around the world‭.‬

It wanted governments to realize that policies would impact investment‭.‬‭ ‬Wal-Mart announced it included 60‭ ‬stores it had already closed in Brazil‭, ‬where the economy is collapsing‭. ‬It also included several Wal-Mart stores and Sam’s Club stores in Puerto Rico‭, ‬another economic basket case‭.‬

In making the announcements of its store closings, Wal-Mart wanted the word to get out to many constituencies.

Wal-Mart also announced it wouldn’t be opening several stores‭, ‬including some it had committed to opening as part of a deal with D.C‭. ‬politicians‭. ‬The D.C‭. ‬situation is especially telling‭. ‬The‭ Washington Post‭ ‬ran a piece explaining what happened during the meeting with Council member Jack Evans‭ (‬D-Ward 2‭), ‬head of the council’s finance committee‭, ‬and Wal-Mart officials‭: ‬“‮…‬‭ ‬behind closed doors‭, ‬Walmart officials were more frank about the reasons the company was downsizing‭. ‬He‭ [‬Evans‭] ‬said the company‭ ‬cited the District’s rising minimum wage‭, ‬now at‭ $‬11.50‭ ‬an hour and possibly going to‭ $‬15‭ ‬an hour if a proposed ballot measure is successful in November‭. ‬He also said a proposal for legislation requiring D.C‭. ‬employers to pay into a fund for family and medical leave for employees‭, ‬and another effort to require a minimum amount of hours for hourly workers were compounding costs and concerns for the retailer‭.‬”‭‬

Wal-Mart was sending another message‭: ‬Whether in Brazil‭, ‬Puerto Rico or Washington‭, ‬D.C‭., ‬politicians‭ ‬‮—‬‭ ‬and the citizenry‭ ‬‮—‬‭ ‬can’t view Wal-Mart as some kind of fixed resource‭, ‬guaranteed to always be there to make jobs and pay taxes regardless of the burdens thrown on the retailer or the quality of overall economic management‭.‬

It is not certain that Wal-Mart did itself a favor with these actions‭. ‬One big obstacle to Wal-Mart’s expansion has always been its image as a‭ ‬“Main Street killer‭.‬”‭ ‬Now those looking to oppose Wal-Mart’s expansion can remind communities of what happens after a Main Street is destroyed‭, ‬and then Wal-Mart decides to leave‭.‬

Abandoning the Express format may be a short-term win‭, ‬but there is a place for small-format retailing‭ (‬e.g‭. ‬Trader Joe’s‭, ‬Aldi and soon‭, ‬Lidl‭). ‬We suspect Wal-Mart will regret not investing to get this right‭. ‬In Washington D.C‭., ‬Wal-Mart walked away from a deal‭, ‬and that undermines its credibility‭.

The retailer could have made the deal contingent on formalities such as the minimum wage and family-leave legislation being to its satisfaction‭, ‬but it did not‭. ‬This may outrage local politicians without much affect‭, ‬but it reduces Wal-Mart’s credibility as a negotiating partner‭. ‬This will probably cost the chain big time in years to come‭. ‬It would have been cheaper‭ ‬to build the two stores in the bad locations of D.C‭., ‬and then close them if they lose money‭.‬

But the whole situation shows the degree to which retailers‭, ‬such as Wal-Mart‭, ‬have to do things beyond simply buying and selling‭. ‬Producers ought to remember this before they complain about excessive margins at retail‭. ‬Those margins pay for a lot more than the product‭. ‬Even a lot more than the stores and the advertising‭.