Cancel OK

Retail Reflections

Playing ‘small ball’ in the retail sector

What do basketball and fresh produce retailers have in common? They each have their own version of “small ball.”

For those who have followed professional basketball for any length of time, you’ve observed a radical change in the way the game is played. Back in the day, names like Wilt Chamberlain, Bill Russell, and Shaquille O’Neal were all identified as the “big” man on their respective teams. The idea was to have these “big” men playing close to the basket, forcing smaller players to shoot the ball from farther away.

Then a guy named Michael Jordan came onto the scene. His talent, combined with Scottie Pippen, Dennis Rodman, and Coach Phil Jackson radically changed the game. Having a “big” man was no longer the foundation for building championship teams. The term “small ball” came to be associated with speed, agility, and players who could play different roles.

If you follow retail news, either in financial journals or the trade press, you’ve heard about retailers making a shift to their own version of “small ball.” The supercenter format, which saw explosive growth in the 1990s and early 2000s, is actually becoming a drag on the overall performance of many retailers. But how can this be? And what are the future implications for the format itself? The answer lies in two important areas: the consumer value proposition and the financial model of the format.

The consumer value proposition of a “supercenter” lies in one basic premise: one-stop shopping. While many associate Walmart as the main driver of this format, its roots in the United States actually date back to 1962. Fred Meyer out of Seattle, Washington and Meijer (pronounced Meyer) Thrifty Acres in Michigan both came on the scene at about the same time. Both started as grocery stores whose founders recognized that adding general merchandise could significantly impact customer traffic, drive sales, and most importantly, enhance margins. Groceries have historically had significantly lower margins than products such as apparel, toys, hardware, music, books, school supplies, sporting goods, and other general merchandise offerings.

This format soon became a win-win for both the consumer and the company. Walmart took the idea to the next level by adding “Everyday Low Pricing” to the equation. As a general merchandise retailer from its inception, Walmart’s low price reputation was well established by the time its first Supercenter opened in 1989. By the turn of the century, there were almost 2,000 Supercenters. Today, there are 4,500 supercenters in the United States alone—but both the consumer value proposition and the financial model have come under attack by the advent of online shopping.

The Internet has dramatically changed the way people buy certain items. Virtually all of the aforementioned general merchandise is available online, and while the ultimate in shopping convenience is from your own home, this has a major effect on the financial model of the supercenter format. Not only are overall sales compromised, but the gross margin of the entire big box store is challenged. In the case of Walmart, the company is now a food retailer that also sells general merchandise. And the only way to avoid significant margin erosion was to become less competitive. If Walmart can’t win on price, it will lose its major value proposition with the consumer.