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Wal-Mart sees super future

THE BALTIMORE SUN

Get your hair trimmed and styled. Apply for a loan. Leave the car for an oil change, and drop off the kids in the game room. Stock up on socks, detergent, printer cartridges, milk, ground beef, bananas, paint and mulch. You could, in one trip, get a rotisserie chicken for dinner, some extra tennis balls and a rifle.

It's one-stop shopping the Wal-Mart way, at "supercenters" up to twice the size of a typical Wal-Mart.

For the world's largest retailer, it's also the future. With $165 billion in annual sales, 4,100 stores and more than a million workers, Wal-Mart has reached unparalleled dominance in the history of retailing. Its march across the planet is far from over.

Supercenters, which add a supermarket to the regular discount store, figure heavily in Wal-Mart's growth plans. While the Bentonville, Ark., company has been opening about 170 new stores each year, the chain recently announced its biggest expansion ever - retail space next year totaling 40 million square feet at a cost of $8.5 billion. Besides building 40 discount stores, Wal-Mart will open as many as 180 supercenters, more than in any single year. The company will either convert or relocate existing discount stores to create up to 110 of those supercenters. The rest will be built in new markets, said Tom Williams, spokesman for Wal-Mart.

"As huge as they are, you'd think how can they keep growing?" said Sally H. Wallick, a retail analyst at Legg Mason Wood Walker Inc. in Baltimore. "But the reality is, they are preparing themselves in very concrete ways to continue to grow 10 years from now."

The discount giant is hoping that bargain-conscious America - and the rest of the world - will eventually see its supercenters as the only stores time-starved consumers could ever need.

Betty Hilker sees it that way. Three years ago, when the Norrisville, Harford County, resident first stopped in the new Wal-Mart across the Pennsylvania line, she saw, to her surprise, a supermarket.

Like other supercenters, the Shrewsbury, Pa., store has grocery aisles, a bakery, meat counter, deli and dairy and produce sections, while racks in the wide aisles across the warehouse-style building burst with apparel, shoes and sporting and home goods. Wal-Mart leases the front of the store to a bank and hair salon and also has a cafe, a tire and lube center and a garden center.

"I saw the groceries and the prices, and I said that's it," said Hilker, 70, who liked the idea of finding everything under one roof. "It's clean, and everyone is so friendly."

Maryland, home to 28 Wal-Marts, has three supercenters, in Hagerstown, Fruitland and Pocomoke City. The company is reportedly eyeing potential superstore sites - mostly in less heavily populated areas for now.

"We're not saying where the specific areas are today," Williams said. "As we get to the various communities, as we come closer and plans solidify, we'll talk about it quite freely."

To build or convert a store, Wal-Mart needs enough land and the proper zoning. In some areas where it can't build a supercenter, Wal-Mart hopes to fill the gap with a Neighborhood Market, the retail giant's version of a grocery store and a 2-year-old concept. Thirteen Neighborhood Markets now operate in Arkansas, Texas and Oklahoma. Plans call for 15 to 20 more next year.

There's still more. The growth blueprint calls for up to 50 more Sam's Club member warehouses, up to 110 international stores in existing markets - Mexico, United Kingdom, Canada, Germany, Brazil, Puerto Rico, China, South Korea and Argentina - three general merchandise distribution centers, two food distribution centers and two fresh-food distribution centers.

The supercenter idea evolved even as Wal-Mart was steadily outrunning competitors and helping to crush some big chains to the point of bankruptcy. Wal-Mart realized it would reach a limit in sales at any given "big box" store, especially those that had been around a while. Looking for even more productive stores, former Chief Executive Officer David Glass, with the support of company founder Sam Walton, decided the future was food.

After a fleeting experiment with a "hypermarket" in 1987, which sold produce, Wal-Mart expanded the idea to include a full supermarket, building the first supercenter in Missouri in 1988.

Because the 835 supercenters have experienced "strong consumer acceptance and financial results," Wal-Mart said it plans to speed up the division's growth.

As for the timing, Williams would say only that "we really continue to work very hard at our growth, while running our existing business as efficiently and profitably as possible. Sam Walton started that whole impetus, the way he expanded from the very early days," piloting his twin-engine plane in search of new store sites. "Company leaders worked with him, and are just following through."

Even before the expansion, by the end of this year, Wal-Mart will have $75 billion in supermarket sales, more than twice the sales of Safeway Corp., three times the sales of Ahold USA, owner of Giant Food Inc., and more than 1 1/2 times the sales of Kroger Co., the nation's largest supermarket chain, said Burt Flickinger III, managing director of Reach Marketing in Westport, Conn. Wal-Mart is now the largest retailer of supermarket items in the world, followed by the French Carrefour SA and Kroger.

Supermarket chains are acutely aware of Wal-Mart's plans.

"We'll do what we have to do to continue to be a competitive food retailer in the market," said Barry F. Scher, a spokesman for Giant Food, noting that Giant has recently begun offering a Bonus Card and now has the strength of global food provider Ahold behind it.

Analysts predict that by 2005, Wal-Mart supercenters, which now cover 40 percent of the United States, will blanket the nation. Already since the mid-1990s, Wal-Mart's food sales have influenced the bankruptcies or liquidations of nine regional supermarket chains in the country, Flickinger said.

And he predicts, "Only three or four of the regional supermarket chains in the U.S. will be able to survive beyond the next five years because of Wal-Mart's national [supercenter] expansion."

Few experts question Wal-Mart's ability to pull its expansion off, especially in light of how far the chain has come in such a short span.

Wal-Mart traces its roots to Walton's 5 & 10, a variety store that shopkeeper Walton opened on Bentonville's town square in 1950. But the chain as shoppers know it didn't start until 1962, when Walton, then operating several variety stores, saw discounting as the next big trend. He opened Wal-Mart Discount City in Rogers, Ark., offering "everyday low prices." He'd been a discounter at heart, finding that his early variety stores could be more profitable by selling higher volumes with smaller profits on each sale, rather than taking bigger markups on fewer sales.

As he opened his first Wal-Mart, some of the country's biggest retailers, among them Kresge, Woolworth and Dayton Corp., began launching their versions of discount chains, calling them Kmart, Woolco and Target. But Walton's philosophy differed somewhat: He'd put a store in a small, rural and underserved town, where it became the biggest store for miles.

By 1990, Wal-Mart's annual revenue had ballooned to $25.8 billion. At the company's annual shareholders meeting that June, CEO Glass told shareholders that "Mr. Sam" Walton, looking 10 years ahead to 2000, believed that sales would reach $100 billion. But last year, Wal-Mart sold $165 billion worth of goods, more than its four-closest competitors combined - Kroger; Sears, Roebuck and Co.; Home Depot; and Albertson's, according to the National Retail Federation. Analysts predict that sales for this fiscal year, ending Jan. 31, will reach $190 billion.

Analysts who follow Wal-Mart say the company has single-mindedly pursued what in hindsight seems a simple strategy. Build more stores and offer the lowest prices, but do it with the highest effi- ciency and the lowest cost.

"They have never taken their eye off the ball," Wallick said. "They're always looking to cut costs, be efficient, increase production and pass the savings on to consumers in lower prices. As they've gotten bigger, the better they can buy. They've got tremendous buying power and muscle in the marketplace, and they're not reluctant to use that to get the best possible price from vendors."

Keeping overhead low is drummed into employees from top management to store cashiers.

"That thought is driven all the way down to every employee. It's part of the culture," Williams said. "When you come here as a new person, it takes some getting used to."

At the corporate office, for instance, directors and vice presidents work in offices not much bigger than cubicles. Business trips are taken only if absolutely necessary, with executives sometimes expected to share rooms.

Wal-Mart has also become known for its highly efficient distribution system. But Wal-Mart's trademark low prices have from the beginning lured customers, forcing other retailers to meet those prices or go out of business.

"They lower prices on whatever commodity good they sell," said Kenneth Gassman, a retail analyst with Richmond, Va.-based Davenport & Co. "You either meet Wal-Mart's price or you get left behind."

By keeping prices lowest on everyday consumables, such as toothpaste and deodorant, Wal-Mart can create the perception of low prices on everything. In fact, that is not the case, Gassman said. Wal-Mart charges nearly twice as much as Home Depot on some home improvement items, such as a quart of walnut stain.

"They understand that consumers are price-sensitive to a point, and they know what that point is," Gassman said, adding that Wal-Mart's great strength is its pricing power. "They don't claim to have high service, don't claim to have the cleanest stores, don't claim any great selection at low prices. And if you have any intentions of going in and getting out of that store quickly, it's not going to happen."

But once consumers are hooked by prices, many continue shopping Wal-Mart for other reasons. They find the stores upbeat, entertaining and a good place to browse and see what's new, according to research on shopping patterns by WSL Strategic Retail, a New York-based marketing and retailing consultant.

The survey found that about 40 percent of women age 18 to 70 shop at Wal-Mart once a week. More than half the women shopped at a mass merchant - Wal-Mart, Target or Kmart - once a week.

"We call it the Wal-Marting of America," said Wendy Liebmann, president of WSL. "Wal-Mart and mass merchants in general have become core benchmarks, a core shopping location for the majority of American women. That's regardless of age or income level. This is not just about low-income consumers. For most Americans born in the last 30 years, Wal-Mart is really their department store."

It's part of an "all-American" image that Walton, who died in 1992, worked hard to cultivate. He started initiatives such as 1985's "Buy American," in which Wal-Mart pledged to buy everything possible from suppliers who make products in the United States. And he hoped to win employee loyalty through profit sharing and by offering company stock at a discount.

Employees, who yell out the company cheer each morning before work - a practice Walton is said to have adopted from factories in South Korea and Japan - often buy into the Wal-Mart culture.

"It's a nice place to work," said Marlene McCarthy, who has worked three years in fabrics and crafts in the Shrewsbury store. The customers "are like family. They'll show us what they're making. We love them as much as they love us."

Still, Wal-Mart has weathered torrents of criticism, over the years slogging through numerous public relations nightmares. Many have stemmed from the very strategies Wal-Mart uses to keep costs low. The company is staunchly anti-union, so far thwarting employees' attempts to organize. It has been accused of exploiting workers in sweatshops in the United States and in developing nations.

Charles Kernaghan, director of the National Labor Committee for Human Rights, says his group continues finding evidence of worker abuses in factories from Honduras to Bangladesh to China, which are under contract making apparel for Wal-Mart and other retailers. Wages as low as 20 cents an hour, forced overtime and inhumane conditions are prevalent, he said. In 1996, his group first exposed how children in sweatshops in Honduras were making Wal-Mart's Kathie Lee Gifford clothing line.

Kernaghan accuses Wal-Mart of leading the race to the bottom, driving down human rights conditions and wages.

"What has changed? Very little," he said. "What Wal-Mart is about is always finding the cheapest wages and the workers who have no rights. They get away with whatever they possibly can."

Williams responds that Wal-Mart belongs to a coalition of retailers who use third-party inspectors to uncover abuses in factories.

"There are still cases of abuses being found," Williams said. "We're working the system as hard as we can. If we find a supplier where there are violations, we stop doing business with that supplier."

As to the Buy American program, that still stands, with Wal-Mart making "every effort to source from American suppliers," Williams said. "But we have never claimed to source all of our products in the U.S. because it's simply not possible. There are some products, such as toys, shoes and some apparel which are not available from U.S. suppliers."

Kernaghan says his group wants only to improve conditions, not pull much-needed jobs from developing nations or drive customers away from Wal-Mart.

"If you're making $30,000 a year and you've got a large family, where else are you going to shop?" he said.

Wal-Mart is rushing to make sure the answer to that question won't be Target, Kmart, Food Lion or Safeway - at least not in as big a way as they shop at Wal-Mart. Gassman, for one, believes that Wal-Mart has secured a dominant and enduring spot on the retail landscape.

"It just seems that Wal-Mart has that power with the consumer," he said. "It's like a magnet."

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