Walmart (NYSE: WMT) has found itself in the unfamiliar and uncomfortable position of losing being on the defensive in recent years. The discount goliath actually announced a rash of store closings, and reported a $3.52 billion revenue loss in January.
Naturally this has all the Walmart haters out there jumping for joy. Yet it does not explain what wrong nor can it tell us what the threats to Walmart are. Investors need to understand the threats in order to make an informed decision about Walmart.
That is why I have compiled a list of what I think the 10 greatest threats to Walmart are. This information can help us invest intelligently, and more importantly understand today’s retail landscape.
The Ten Greatest Threats to Walmart:
- Amazon (NASDAQ: AMZN) – The Everything Store is the most aggressive and dangerous competitor that Walmart has ever faced. Amazon is capable of undercutting Walmart’s prices; and it offers the ultimate in convenient shopping experiences, you can order everything you need from your couch and never have to go to a store. A major problem for Walmart is that Amazon steals the most affluent shoppers, at a time when its core customers are more strapped for cash than they have been in a generation. Walmart recognizes the threat, but it will take years to counter it.
- Wage stagnation and rising income inequality in the United States -The last Pew Income Study from December 2015, confirmed what many Americans suspected; the rich are getting richer, while the middle class has less money. Pew found that the median wealth of the average middle class family fell by 28% between 2001 and 2013 and the average income of a middle class family fell by 4% between 2000 and 2014. That means middle class families have less money to spend at Walmart. To make matters worse, the fastest growing class in America is the rich – who are the least likely to shop at Walmart.
- Costco Wholesale (NASDAQ: COST) – One beneficiary of wage stagnation is Costco which caters to the upper classes. Statista reported that 41.3% of Americans with a household income over $200,000 a year said they shopped at Costco in 2014. The same study found that 36.6% of those with a household income of more than $100,000 a year shopped at Costco. Costco saw its revenues grow by $1.63 billion in 2015, while Walmart’s revenues were shrinking. Its revenue grew from $115.64 billion in February 2015 to $117.27 in 2016. Part of the problem is that Costco has more potential customers – Pew found that the percentage of upper income Americans increased from 8% in 2011 to 9% in 2015. Meanwhile the percentage of middle class Americans fell from 61% in 1971 to 50% in 2015.
- Kroger (NYSE: KR) – The grocery giant now operates 2,774 stores in 35 states thanks to its recent merger with Roundy’s. That will also give the supermarket goliath over $113 billion in revenue. Since Kroger is already able to match and undercut Walmart’s prices; it is now more competitive than ever. A major threat for Walmart is that Kroger; like Costco and Amazon, now has the revenue to leverage the kind of discounts from suppliers that only Walmart could get in the past. Another danger is that Kroger is expanding and competing directly with Walmart in more lines including clothing and jewelry.
- Dollar Stores – Brands like Dollar Tree (NASDQ: DLTR) and Dollar General (NYSE: DG) are an indirect threat to Walmart. They offer comparable prices to Walmart in more convenient locations. A bigger danger though is that these chains serve a growing demographic; the poor. The percentage of Americans officially in poverty grew from 12.3% in 2006 to 14.5% in 2014. A major problem for Walmart here is that many lower income families can no longer afford some of its products; such as TV sets and barbecues, so they have stopped shopping there.
- Walmart.com – This is the strangest threat to Walmart and perhaps the least understood. Walmart is planning to spend around $2 billion on infrastructure to support its website in 2016 and 2017. During the fourth quarter 2015, Walmart.com’s sales grew by 8% while whiles revenues fell by 1.4%, GeekWire reported. One has to wonder how much of the new sales at Walmart.com were taken from Walmart’s brick and mortar stores. Is Walmart cannibalizing itself? Such strategies have worked before during the 1960s and 1970s, the dime store operator S.S. Kresge successfully transformed itself into Kmart; and Sears succeeded in switching from a catalog company to a retailer. It is too early to tell if Walmart could undertake such a paradigm shift; but if one is successful, it would be at the expense of brick and mortar stores.
- Walgreens (NASDAQ: WBA) – The acquisition of America’s third largest drug store operator Rite Aid; which collapsed last year, could give Walgreen nearly 13,000 stores in the US. That would give the drugstore giant the kind of revenue; around $130 billion by my estimate, to engage in the kind of deep discounting seen at Kroger and Walmart. This could be a tremendous threat, because Walgreens operates thousands of convenient locations that combine a small box discount store with a pharmacy. The growing percentage of Americans with access to health insurance also drives more customers to Walgreens.
- People are driving less. Walmart’s whole business model is based around the car, the assumption that most people will be able to drive to its stores and haul all the stuff they buy home. The number of miles the average American drove fell by 1% a year or 10% between 2004 and 2014, The Huffington Post A study by the University of Michigan’s Transportation Institute shows things could soon get far worse for Walmart, because many young people simply do not drive. Only 69% of America’s 19-year olds had a driver’s license in 2014, compared to 90% in 1983, the study found. The percentage of Americans who drove fell in every age group under 44. Over 15% of persons between 20 and 24 did not have a driver’s license. This is good news for Amazon; which lets UPS and FedEx do the driving, but bad news for Walmart.
- The decline of brands – Much of Walmart’s success has been based upon its ability to deliver name brands at much lower price than competitors. This is threatened because Americans are no longer buying name brands. Three of the fastest growing retailers; Aldi, Costco and Trader Joe’s, base their business model on a limited selection of low-cost but high-quality private label products. Kroger is also making a big push into the private-label business; its house brand of coffee regularly sells for three or four dollars less than Folgers where I live in in Colorado. This takes away much of the incentive to go to Walmart. It also helps Aldi function as the cheapest grocer.
- Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) – The two home improvement giants have been growing fast even during the recent recession. Much of that growth has come at Walmart’s expense. One reason why these chains threaten Walmart, is that they offer a host of products it does not such as lumber. Another is that average Americans love shopping at them as much as they hate going to Walmart. A problem for Walmart here is that consumers; who can meet their needs from a variety of stores, increasingly seek specialized shopping experiences like that the home-improvement stores offer.
There are of course many other threats to Walmart out there, some of which are of its own making. Walmart will survive because of its resources, but it will have a struggle to reestablish its position as the cutting edge of American retail.
Disclosure: Your Friendly neighborhood blogger recently sold a position in Kroger.