Wal-Mart has promised to clean up their stores and make them easier to navigate. Now anybody who has ever been on the inside of a Wal-Mart knows how difficult it is to find your way around. For one their employees are generally sub-par workers that do not really care about their job or the company they work for. Second of all, they are huge! Wal-Marts range in size from around 98,000 square feet to 261,000 square feet. The average size of a Wal-Mart is somewhere around 107,000 square feet. That is a lot of stuff to look at; it is no wonder that people are complaining about not being able to find anything.
Wal-Mart is using this as an excuse to start removing name brand options from the consumer and replacing them with options that are made directly or indirectly by or for Wal-Mart. Currently about 40% of all products sold in Wal-Mart are one of these private label store brands, or is some sort of product offered by Wal-Mart but still produced through Wal-Mart’s contracts with manufacturers. Wal-Mart started to offer these private brands for sale in 1991 when they launched their Sam’s Choice brand sodas. Two years later Sam’s Choice was the third most popular brand of soda in the United States.
We have already seen the potential of a cheaper “off brand” product produced by Wal-Mart. Once they start to remove name brand goods from the shelves people who shop at Wal-Mart may look for them, but they will purchase the Wal-Mart brand rather than go without. All of the people who currently shop at Wal-Mart will continue to do so even after their favorite brand of paper towels are replaced by something made for or by Wal-Mart. Which brands will suffer the most it is difficult to say, but Wal-Mart is such a powerful force that this “Less Clutter” policy they are putting into place may make or break brands. If a brand manages to stay on their shelves then they have a better chance of being bought since there will be considerably fewer options. Unfortunately for those brands Wal-Mart is extremely picky about the profit of items, meaning that if you are not earning them enough profit they will offer to pay you less for your product. A brands option at this point is to either cut their losses and sell for a lower price or get taken off the shelves. Those brands that are no longer on the shelves will obviously suffer great revenue losses.
Let’s sum this entire situation up in one extremely short paragraph. Wal-Mart stores are gigantic, they average 107,000 square feet in size. They not only offer their own brand of products cheaper than name brands, but they have also started refusing to sell competing name brands. Combine this with Wal-Mart buying Voodoo for some 100 million dollars and we have a corporate monster. I smell a monopoly.
Cynical investors might call this move less contrarian wisdom and more quick-profit bounce. After all, while December’s quarterly gross profits jumped to $241.5M from the previous year’s $64.3M earnings, history still indicates the company has some climbing left to do before matching the almost $5.8B earnings reported in September, 2008. Long-term holders might also be tempted to follow the shorts after glancing at a $22 share price and a $29.96 P/E ratio.
On Feb 5th, I saw Jim Cramer’s “Mad Money.” For the record I think Jim’s show is great (that’s right we are on a first name basis). It is rare to find a financial show that can educate and entertain on a consistent basis and Jim has clearly mastered this.
During a recent segment of Jim Cramer’s Mad Money which aired on Feb 1st, he highlighted Natural Gas. Jim interviewed CEO of EQT Murray Gerber. EQT is a 120-year-old company based out of Pittsburgh, PA, that drills natural gas in the Appalachian basin. EQT trades on the NYSE and as of the close on Feb 11, 2010 its closing stock price was 42.01, which is down YTD approximately 5%.