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The Wal-Martization of America

How malls, food stores, and even Toys 'R' Us, are being being squeezed by the mammoth retailer.

12:00 AM, Sep 7, 2004 • By IRWIN M. STELZER
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THROUGHOUT the start-and-stop growth that has characterized the American economy in the past year, all eyes have been on the American consumer. Accounting for about 70 percent of the U.S. economy, consumers have kept the American and, indeed, the world economies from slipping into a deep recession by splurging on all manner of goods and services.

So much for the buy-side of the market. Less noticed is the revolution in the sell-side, the sector of the economy that is supplying the needs and wants of consumers. Start with automobiles. What were once seasonal price cuts designed to clear the lots at the end of the model year have become year-'round price reductions of as much as $5,000 on some vehicles. Manufacturers' efforts to end the price wars have failed: consumers merely postpone purchases for the month or two that it takes the truce to collapse. Which it does with the regularity of the phony truces promised to the Iraqi government by Moktada al Sadr.

The reasons are simple. The Internet gives consumers access to competitive price offerings, not only from their local dealers, but from around the country. Union contracts that require manufacturers to pay workers whether they are on the production line or at home watching the Olympics make it economical to keep plants operating even if the vehicles produced fetch prices that merely allow General Motors and others to break even. And competition between domestic and foreign manufacturers keeps prices at record low levels.

Autos are not the only sector in which the art of retailing has changed. We are witnessing the in-your-wallet effect of globalization, the impact of the Wal-Martization of several key product areas, and the final joining of the Internet with traditional stores--the merger of clicks and bricks.

The effect of globalization on the supply chain is now widely understood. Retailers shop the world for bargains in everything from sneakers to t-shirts to high-end jewelry, and are forced by competition to pass along the savings to consumers. What is less well understood is the effect that the globalization of retailing has had on the related property sector (some services, such as hair-cutting, are unaffected and therefore increasingly pricey).

Which is why the acquisition of the Rouse Company by General Growth Properties a few weeks ago is so significant. General Growth operates some 150 shopping centers around the country--and has the financial clout to pay $12.6 billion dollars for Rouse, itself the owner of some of America's landmark retailing complexes. Faced with increased competition from discounters, General Growth and other mall owners aim to resist what has come to be called the "de-malling of America" with three innovations. First, malls such as Washington's Mazza Gallerie are being opened on the street side to attract more passers-by. Second, mall owners continue to turn their malls into the shoppers' equivalent of destination resorts--food stalls, entertainment for the kids, and lounging areas for grownups and teen "mall rats." One mall in the Washington, D.C. area allows seniors to use it as a jogging--well, walking--area in pre-opening hours.

Third, the industry is consolidating so that the surviving players can offer large retailers an optimal mix of multi-store locations. The driving force behind the General Properties-Rouse deal, the largest property transaction ever attempted in America, is the fact that the retailer looking for one or two locations is no longer typical. Instead, retailers eager to exploit their brands and maximize returns from national fashion advertising, will open perhaps 50 stores. General Growth will now be able to offer space in almost every significant market in the United States, from Boston to Las Vegas to Los Angeles--an advantage that it has decided makes it worth the risk of the higher leverage resulting from the Rouse purchase.

Then there is the Wal-Mart phenomenon. Analysts like to point out that the discounter accounts for 8 percent of all non-auto retail sales in America. That seriously understates the effect that Wal-Mart has on the market sectors it chooses to enter. Consider toys, jewelry, and food. Wal-Mart only recently started to sell toys, and its massive discounts have proved so attractive that Toys 'R' Us is considering abandoning a market that it once dominated--described to the press by retail consultant Burt Flickinger as "the ultimate corporate capitulation." In the jewelry business, Wal-Mart's decision to sell diamond rings and other such items is forcing high-toned Tiffany to resort to a "something besides diamonds" strategy in order to maintain its growth.