I heard on CNBC a few days back that Wal-Mart’s low prices and other stores attepting to compete with Wal-Mart helps reduce US inflation by a significant amount. This is not something I thought about before but it somehow it stuck with me and got me thinking. How do other stores compete with Wal-Mart? After all it sells more groceries than Kroger, more toys than Toys-R-Us and the next few toy retailers combined, more electronics than Circuit-City (less than Best Buy however). This is probably true in many other categories also. Wal-Mart not only competes with everybody, it wants to be the king in every segment and can be with it’s competitive advantage on pricing.
But many stores successfully compete with Wal-Mart and do quite well – take Target as one example – it has been beating Wal-Mart consistently at same store sales growth, though that might be easier given Target being a smaller company. One reason Target can effectively compete with Wal-Mart is its better image, similar pricing yet better shopping experience. Take Best Buy as another example – they price match Wal-Mart, have a better selection of mid to higher-end electronics which Wal-Mart is recently starting to add, but can never devote as much space to it as Best-Buy can, being a specialty retailer.
What about small businesses? We keep hearing Wal-Mart drives small businesses out of business. A month or so ago I heard an example of exactly the opposite. I can’t remember too many details but the store was a beauty products store and a new Wal-Mart opened right next door. The owner said that foot traffic and sales in the store increased several times thanks to Wal-Mart shoppers who also stopped by at his shop that would never have visited otherwise and did not even know the store existed. I am not saying Wal-Mart does not kill small businesses, I am saying it only kills small businesses in direct competition. The idea here is to co-exist with Wal-Mart, not compete with it. Sell a larger variety, a better variety, products that Wal-Mart will not carry. Here is a link to a study that studied the effect of Wal-Mart on small business in more detail than the usual Wal-Mart bashers everywhere (of-course if you look hard enough you will find a contradictory study) and found that businesses close but new ones open instead which do not directly compete with Wal-Mart – in effect Wal-Mart just shifts the nature of small business.
So would I invest in Wal-Mart? Maybe. But not now. Wal-Mart cannot grow too much in the US and I’m not sure how it’s international expansion will pan out. So I’ll revisit the stock in the future but for now, I’m happy with the performance of my TGT stock. I might even consider Best Buy.