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Wal-Mart's pricey gamble
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This strategy is plenty risky. Wal-Mart could manage to alienate its core lower-income customers by making them feel that the store no longer wants them. Wal-Mart could fail to attract the new market segment it wants because its new products are unfashionable, too stodgy or not edgy enough. Wal-Mart will have to spend more to upgrade stores, more on advertising and more on product intelligence and design, at a time when investors already are worried about rising costs. And there is certainly no guarantee that the company will be able to develop a fashion sense in apparel, electronics or any other category. It's not exactly in Wal-Mart's genes (or jeans, for that matter).
A logistical-might scare
The biggest risk, however, the one that makes this a bet on the company strategy, is that Wal-Mart pays so much attention to this new direction that it loses its focus on logistics, the area that has made Wal-Mart the retail powerhouse that it is. Because Wal-Mart's computerized system knows what everything costs, what everybody is buying, where they're buying it, how long a product sits on the company's shelves and how long it took to get there, Wal-Mart has been able to drive down costs and drive them down some more. Sure, Wal-Mart has huge sales volume -- at $285 billion in 2004, the company's sales are about as large as the 2004 GDP of Indonesia. But it's the ability to get the right information to the right place at the right time that allows Wal-Mart to put that clout to best use -- and that gave it the edge over competitors so that it could get that big to begin with.
The challenge facing Wal-Mart isn't just learning a new trick but learning how to blend the new tricks of trend merchandising with its traditional strengths in logistics.
The most dangerous period facing the company is probably the next year to 18 months. Costs will go up. The retail environment will remain tough. The results of the new strategy won't be apparent in same-store sales growth over that period. I mean, hey, it does take a while to get this new direction implemented when you run 5,000-plus stores. Wall Street will go nuts over some of the quarterly numbers and trends. Impatient investors could well push the stock down further for small offenses, like the normal missteps that come with executing any new strategy. If Wal-Mart management gets cold feet and reverts to current strategies or announces a new one, then the company will indeed have dug itself a much deeper hole. The problems it faces then will be just that much harder to fix.
The upside, though, is potentially enormous. The next frontier in retailing is applying Wal-Mart-style logistics to trend-driven merchandizing. The company that can put out the fashion of the moment in an appealing store at Wal-Mart-like prices by sourcing the product at the best global price -- and then update each product with the same speed that Apple Computer (AAPL, news, msgs) has applied to the iPod -- will turn global retailing on its head. No company has yet put it all together.
The turf is still out there waiting for somebody to stake a claim and then build barriers of entry so high that no one can climb them. That's the potential in what Wal-Mart has set out to do with its new strategy.
I'd say wait six to nine months. See the stock take some lumps on costs and a soft economy for retailers this winter, and then, if Wal-Mart has demonstrated that it's truly committed to this strategy, load up the truck and buy.
If Wal-Mart wants to bet the company, the least we can do is go along for the ride.
New developments on past columns
8 stocks for a wandering market
On Sept. 30, PepsiCo (PEP, news, msgs) reported third-quarter earnings of 78 cents a share, a huge 5 cents a share above the Wall Street consensus and the company's fifth consecutive quarterly earnings surprise. Even better, PepsiCo reported its strongest sales gain in three-and-a-half years thanks to the company's noncarbonated drink offerings, Gatorade and Aquafina. As it did last quarter, the company's management raised projections for all of 2005 to $2.64 to $2.65 from the prior $2.56 to $2.59 a share. Revenue climbed 12.8% from the third quarter of 2004 to $8.18 billion. (The Wall Street consensus had been $7.81 billion.) North America, which had been a problem division for the company earlier in the year, showed an 8% growth in beverage volumes on a 24% increase in non-carbonated drinks. Sales for carbonated beverages were flat in the region. The company's Frito Lay North America operation grew sales by 6%, but the division continued to face margin pressures from higher prices of raw materials and marketing. The company's international unit showed 17% growth in revenue. I think the shares remain undervalued given the strength of the fundamental growth story at PepsiCo. As of Oct. 7, I'm raising my target price to $66 a share by March 2006 from my prior target of $65. (Full disclosure: I own shares of PepsiCo.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Pepsico. He does not own short positions in any stock mentioned in this column.
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