2009 to Witness All-Out Brawl in Retail

The news Wal-Mart Stores Inc. was laying off up to 800 employees at its Bentonville home office sent a shudder through Northwest Arkansas, but it shouldn’t have come as a surprise.

For nearly two years, Wal-Mart has been quite public about its plans to sharply curb its U.S. expansion and focus on free cash flow through reduced capital expenditures, especially new stores.

At its 2007 annual shareholders meeting, Wal-Mart announced it was reducing its planned new stores by 30 percent, down to around 200 stores per year from previous rates of 260 to 275 per year.

Wal-Mart defines free cash flow (a non-Generally Accepted Accounting Principles measure) as operating cash flow minus capital expenditures.

In the first quarter of Wal-Mart’s 2007 fiscal year, its free cash flow was a negative $1.3 billion. For its 2009 fiscal year ended Jan. 31, Wal-Mart banked a record $11.6 billion in free cash flow.

Seeing jobs cut in merchandising, U.S. operations and real estate fit Wal-Mart’s future domestic plans, but somewhat lost in the news about the numbers was this: Wal-Mart is not giving up on its apparel business. Not by a long shot.

Wal-Mart’s well-publicized and poorly executed attempt a few years back to foray into the faux upscale clothing business to compete with Target has clearly not dissuaded it. Now the company is determined to get it right despite the snickering schadenfreude of industry experts and competitors the last time around who questioned — rightly so, it turned out — Wal-Mart’s ability to up-sell its traditionally lower income customer base.

Wal-Mart laid off 200 workers in its Bentonville apparel department in early 2008 as it shifted the division to America’s fashion Mecca in New York City. Much like the vendors who have realized it’s better to be close to Wal-Mart in Northwest Arkansas, Wal-Mart has in turn realized that while it can adjust the temperature in every store from Bentonville, it can’t do everything.

While location is clearly key to Wal-Mart’s strategy, there’s also a greater talent pool available as retailers like Macy’s lay off thousands of workers, many in marketing and merchandising positions.

After lapping the retail field during a dismal 2008, increasing its overall sales to $401 billion from $375 billion year-over-year, Wal-Mart’s top talent is also increasingly attractive to other retailers trying to play catch-up.

As retailers gird up to battle for what’s expected to be a contracting share of consumer dollars, 2009 is setting up for an all-out price war according to many observers.

The shots are already being fired in the United Kingdom, where Wal-Mart’s Asda chain cut prices on 1,000 items after rival Tesco — whose Fresh & Easy chain is attempting to challenge Wal-Mart in America’s southwest — announced it was cutting prices on more than 1,000 lines by up to 50 percent.

The collapse in commodity prices after last summer’s sharp spike in inflation has retailers demanding suppliers drop their prices accordingly, and it’s been well-established that no retailer has more power to exert that kind of pressure than Wal-Mart.

Wal-Mart, which was forced to bail out of its German expansion because it couldn’t compete with Aldi’s prices, is going to face a stiff challenge on its home turf from the store-brand driven retailer.

Aldi plans to open 75 new, brightened-up stores in the U.S. during 2009, many in the heart of Wal-Mart country centered around a new $40 million distribution center in Fort Worth, Texas.

One of the most obvious trends in consumer behavior is a sharp shift toward generic and store-label brands. Nielsen Co. reported that store label brand purchases increased 10 percent during 2008.

More than 90 percent of Aldi products are its own brand, and Wal-Mart has big plans for relaunching its Great Value label in March with an obvious emphasis on price and a likely focus on sustainability as well.