The Real Reason Wal-Mart Is Dying

What's the reason for the unabated plunge of Wal-Mart's sales for the past two years? We assumed it was because Wal-Mart sucks a big one. In fact, there may be a mathematical explanation!

In Ad Age, Jack Neff points out that Wal-Mart has bigger problems than the settled fact that 100% of their products are cheap crap: their entire business model is collapsing. They've finally hit the rock bottom of those "Rock bottom prices" we've heard so much about!

So why has Walmart let its pricing edge erode?

A secret ingredient in the productivity loop was rapid store growth in prior decades, which boosted sales and efficiency so much that prices could stay lower. But Walmart has slowed expansion as existing markets got saturated and big urban coastal markets resisted stores. Last year, Walmart added only about a quarter the square footage it did in fiscal 2007.

As growth slowed, Walmart let prices rise relative to competition to please investors with fatter margins. This was never the officially acknowledged plan, but suppliers for years have said margin growth was a high priority for buyers.

In short, Wal-Mart doesn't always have the lowest prices any more, compared with competitors like Target. And low prices are all Wal-Mart has. You ain't there for the ambiance, amirite? Like a weed that has covered every available inch of land, Wal-Mart now finds that its own maximized growth is strangling itself—which explains why WM is so desperate to break into NYC, one of the last untapped markets in America.

Wal-Mart has three options: grow, die, or change its business model. It's still trying to grow, not only with stores in urban markets, but with smaller stores, more competitive groceries, and anything else it can think of. Radically changing its business model is probably not in the cards. Wal-Mart is a one-trick pony. When they stop having the lowest prices, they start to die.

We won't see a dead Wal-Mart any time soon. It would be cool if they lost a few limbs, though.

[Ad Age, photo via Rob Stinnett/Flickr]