Is Wal-Mart in Trouble? Is Amazon to Blame?

Commentary about business and finance.
May 17 2013 2:23 PM

Is Wal-Mart in Trouble?

How Amazon and the strengthening economy are threatening the once-invincible retail giant.

A man stands on a skateboard outside a Wal-Mart store in Williston, N.D., March 13, 2013.
A man stands on a skateboard outside a Wal-Mart store in Williston, N.D., March 13, 2013.

Photo by Shannon Stapleton/Reuters

No company likes to admit problems, but yesterday’s quarterly earnings report from Wal-Mart featured a remarkable amount of excuse-making, even by corporate standards. The company surprised analysts by reporting a 1.4 percent quarterly decline in comparable-store sales across the United States. In other words, Wal-Mart’s American stores sold less stuff this past quarter than the quarter before. Wal-Mart blamed this drop on essentially everything under the sun except people not wanting to shop at their stores: “A delay in income tax refund checks, challenging weather conditions, less grocery inflation than expected, and the payroll tax increase” were all said to have created “considerable headwinds” for America’s No. 1 retailer. And perhaps they did, but companies all across the land dealt with the same issues and most of them did better than Wal-Mart.

Wal-Mart is such a mainstay of the American economy that the company stumbling as consumers go elsewhere is almost impossible to imagine. Whole books have been written about how the company’s success reflects underlying structural flaws in neoclassical economic theory, and how it’s transforming the entire American economy. In this paradigm, Wal-Mart cannot fail. It can only be crushed by concerted political action or praised as a beneficent bringer of low prices.

That’s why when Wal-Mart reported “a total disaster” in weekly sales back in February it sparked a minor media panic.

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The store, conceiving of itself as a force of nature, pointed the finger at the expiration of the payroll tax holiday. And the press, doing the same, took the claim much more seriously than it would similar blame-evasion from almost any other firm. If Wal-Mart was sinking, surely the whole economy was drowning.

Except when February retail sales numbers came out, they were fine. There was a dip in March and then a renewed increase in April. Overall GDP grew at an unspectacular but totally fine 2.5 percent inflation-adjusted rate in the first quarter. Overall personal consumption expenditures grew even faster than that, at a 3.2 percent rate.

In other words, it’s not as if the overall American economy went into some kind of tailspin. In fact, another corporate earnings story offers a telling counterpoint to Wal-Mart’s tale of woe. Whole Foods announced 8.5 percent identical-store sales growth the past quarter, paired with 13.6 percent overall growth, and most astoundingly of all an increase in gross profit margins. Whole Foods had warned investors to expect at least a modest decline in margins as the company deliberately sought to stock some cheaper items to appeal to more value-oriented customers. But the strategy worked better than the company dared to predict and higher traffic to the store led to an increase in margins.

Whole Foods has a different customer profile than Wal-Mart, of course. But there’s just as much weather in Whole Foods’ parking lots. Its customers pay taxes, too. And it’s not just that they didn’t scale back their purchases, there appear to be more of them than ever before. By the same token, restaurant sales have been surging ever since the broader economy bottomed out in 2010.

The real story is that Americans simply don’t seem to like Wal-Mart’s grocery options as much as they used to. Wal-Mart dominates the low end, but middle and higher income consumers are buying food at restaurants and higher-end retailers.

But of course Wal-Mart is much more than a grocery store. And the good news about its non-grocery business is that e-commerce sales rose a dramatic 30 percent year-over-year. On the other hand, Amazon’s sales rose 22 percent from a much larger base. In dollar terms, in other words, the gap is likely growing rather than shrinking. And the risk is that like Borders, Circuit City, and J.C. Penney before it, Wal-Mart will experience a decline of its brick-and-mortar business that’s faster than the rise of its Internet sales. Wal-Mart is known first and foremost for its low prices and great bargains, but it’s hard to operate as a low-cost entrant into a market where the established incumbent has no profit margins. Wall Street is willing to let Amazon lose money in pursuit of growth, while Wal-Mart’s shares plummeted on falling sales even in the context of continued profits.

If anything, Wal-Mart’s best hope might be for the economic climate to get worse. It sounds bad to blame prosperity for your problems, but it looks more plausible that Wal-Mart’s grocery business has been hurt more by the recovery than by the payroll tax hike. More prosperous consumers benefiting from lower commodity prices are voting with their feet for more upscale options. A return to a bleaker economic outlook is exactly what Wal-Mart needs to get people back in stores while it solves the tough problem of competing with Amazon online.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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