The Superstore Crunch of 2008-9, Target and Walmart

One of the most important retail innovations of the late twentieth century was the superstore, or the category killer. Pioneered by Charles Lazarus and his colleagues with their innovative Toys R Us concept in the late 1950s, this idea gained steam in the 1980s and really came into power in the 1990s.
The basic concept was simple – pick one category of merchandise, preferably one where demand was booming – and carry a huge array of items within that category, aggressively priced. Each superstore was adapted to the nature of the product: Home Depot carried the largest stuff so built the largest stores; Barnes & Noble went the way of wood shelving and coffee shops; and Bed Bath & Beyond, Office Depot, and Best Buy all had their own vibe. These companies grew to enormous size, the largest in sales – Home Depot – becoming one of the world’s top ten retailers.
I developed the BOOKSTOP concept in the late 1970s and we opened our first store in Austin, Texas in September, 1982. Borders had already opened one store in Ann Arbor in the early 1970s. We began to add more stores in 1983, and Borders soon followed. The two companies were bought up by the industry’s largest players: BOOKSTOP by Barnes & Noble/B. Dalton in 1989 and Borders by Kmart/Waldenbooks in 1992. Then began a period of even faster expansion.
At the time my friends and I founded BOOKSTOP, I felt that the concept probably had a good 20-30 year “arc” or run of success. This was based on my extensive studies of the long-term success of new retail concepts. I am fascinated by the life expectancies of companies, a subject that does not get much attention. 
In each category of business, there were large numbers of competitors – at least a dozen in the home improvement store business, at least a half dozen in office supply superstores. Consumer electronics saw such names as Federated Group, Frisco, Highland Superstores, and Circuit City before the preeminence of Best Buy. All had plenty of capital for expansion; many were venture capital backed. IPOs were not uncommon. 
As we went through the 1980s and 1990s, real estate developers came up with the term “power center” to denote centers anchored by a range of the new superstores. They had a field day building new buildings for the expanding chains. At the time, I asked my developer friends, “What happens when these companies begin to close up?” Not a question anyone wanted to ask, or answer. But a study of retail history indicates that very few types of retailing can sustain 5 or 6 successful national (not regional) competitors. In most fields we end up with a “big three” or even a “big two.” Based on this, I anticipated that some of the weaker players would begin to fall by the wayside. If they were lucky, one of the stronger companies might buy them up for their locations and real estate deals.
At one point in this evolution, it looked to me like Home Depot might wipe away all their home improvement competitors. At their peak, they were so good at what they did that able companies like Hechinger’s and Payless Cashways hit the wall, among many others. But finally an older company, Lowe’s, got its act together and came roaring along to become a powerful number 2.
No matter what pattern each category followed, it was inevitable that the number of companies would decline. I expected this to happen sometime after the year 2000. 
The 2008 recession brought these projections into reality. The collapse of Linens & Things and Circuit City were not caused by this recession – both had been in the works a long time. But their precise timing was the result of the recession. Borders is today in a struggling position. The only real surprise to me is that some of these categories – even though they are big in total revenue – may not be able to support even two players, they may come down to just one survivor. If so, that puts the single survivor in a very strong position. As long as Best Buy and Bed Bath & Beyond keep their eye on the ball – stay great merchants – they should prosper.
But here comes the catch to all this, which could spell more doom to the superstores than I anticipated. 
I was recently in my local Office Max store with a shopping list. Three of the items on it were out of stock. These were all items which the store normally carried, and the shelf-talkers (little price tags on the shelf) were intact. But the goods were not there. 
At the same time, I see both of the big bookstore chains cutting back on their inventory and title selection levels. Usually, to make the store look full, they take out whole fixtures and sections rather than show empty-looking shelves. And a recent article in the Wall Street Journal said that many types of retailers are cutting their selections of products.
It is no puzzle why they are doing this – sales are off and you can’t afford to carry inventory that isn’t moving. But if superstores, more than any other type of store, begin to “not have what you are looking for,” it could be the beginning of the end for many of them. With online retailers carrying massive selections and mass market retailers like Walmart and Target carrying the best sellers at low prices, the only justification for superstores is their original purpose – a giant selection. If these stores begin to cut into that competitive advantage, they begin to drive a stake into their own hearts.
Given this, I believe this is a perilous time for such retailers. Over the next 12 months they will make key merchandising decisions – what to carry, where, and when – which will determine their long-term viability. This is a tough time for everyone, and only the smartest and most foresighted will come out of the recession ahead. If customers are driven away now and get in the habit of shopping elsewhere for any reason but price, they may not come back later.
In a parallel observation about the impact of these hard times, I believe perhaps Walmart is gaining on Target. Anyone who watches the numbers knows that Walmart has had better sales growth than Target for many months now. Target announced another disappointing month this week. But that’s not what I am talking about.
Target throughout most of the last 10-15 years has out-merchandised Walmart. Target consistently had better sales growth from about 2002 to 2007. While some observers attributed this to the trading up of consumers, looking for better quality goods, equally important was the fact that Target did a superior job of bringing new, exciting merchandise to the customer. Their stores were well-maintained and looked better and better every day. While Walmart has always been a competent merchant – especially good at staying in stock and giving good value – they were slipping on a competitive basis. Anyone who has heard me speak has heard me sing the praises of both companies, but when pressed I admitted I would rather own Target stock.
In these tough times it only makes sense that Walmart would pick up market share on a price basis, and that has been showing in the numbers for many months now. But to the extent that was a recession effect, it was unlikely to last after the recession ends. 
What I seem to be observing – at the store level rather than the numbers level – is that Target has gone a bit flat; they are no longer improving their stores every day. I am guessing the recession has taken their eye off the ball. 
On the other hand, Walmart, perhaps taking advantage of a temporary position of strength, makes their stores better and better every day. They do not seem to have slacked off at all on their long-term program of improving their stores, and in fact in many categories like consumer electronics continue to upgrade their product line. Many of their moves “Targetize” their stores, often the result of experiments they have tried in the past, many of them in north Dallas markets like Plano. These days I see these experiments paying off: the ones that worked are being replicated throughout the Walmart system.
If my observation – at this time just a feeling in my gut – is correct, then the future is looking better for Walmart and a bit less bright for Target. As a retail lover and observer, I hope both companies remain vibrant and at the top of their game. That would also be better for customers.
One important point throughout all this: Walmart is one of the most “learning” companies I have ever studied. The great business historian Alfred Chandler talked about companies that learn, and how important it is to their long-term prosperity. In my book and speeches, my primary value is curiosity. 
Sam Walton was one of the most curious business leaders of the twentieth century. The “DNA” that he put into the company is still visible. They clearly look at their competitors not to make fun of them, but to learn from them. Despite the fact they are the largest, they still have doubts about being the best, and are always working to learn and improve. They try new things. 
My observation is that Walmart, at $400 billion in sales, has less pride and hubris than General Motors did when it had $4 billion in sales. This is a remarkable statement, and makes all the difference in the world. In order to compete with such a learning/experimenting machine, the merchants at Target and the superstore chains better be working long hours, and focus on 2015 as well as the next quarter of 2009.




  1. Hmmm, interesting stuff. I hope you are aren’t too right about Target fading. I cannot stand going into a Wal Mart. I’d rather pay a bit extra for the ability to get in and out quickly. Wal Mart is for people with more time than money.

    But given the retirement boom coming up, the Wal Mart time/money make sense for an increasing number of people…

    In some ways we could be going full circle. Wal Mart originally went after Sears’ original market: rural folks who lived far from department stores. The web is really a renaissance in the original Sears MO. Instead of a huge catalog, we have Amazon’s giant virtual inventory. This is nice in some ways, as the web can have an even bigger inventory than a big box store. But it is also sad, as I like to browse physical merchandise. I miss Tower Records. (I miss Bookstop as well.)

  2. Thanks for your note, Carl.
    I really miss the big CD stores. I do not believe you can browse online and discover new things as easily as you can in a real store. Now with both Tower and Virgin gone, the world is a lot smaller, although Austin still has Waterloo.
    I am actually finding some products at Walmart are higher quality than what Target carries. I think Walmart is really working hard to improve their products. I agree about the hassles of the biggest Walmarts, but some of their stores are not so hard to get into. And I hope Targets stay pretty crowded, because I want to be able to shop both stores.
    Your point about the rural markets and the Internet as the ultimate superstore is most interesting, I think you are onto something there.