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3 O'Clock High: A Hootenanny


"Let's go shopping on Memory Lane"


Am I the only one having a semi-vacation week? The cold wind is howling outside my window. Even more than is normally the case, I'm not inclined to leave home. I'm cuing up some Johnny Cash, downing a pot o' black coffee and getting some things off my chest. I've got lazy dogs in front of a warm fire, happy little kids in their happy little kid jimmies and no particular place to go.

Pull up a chair and sit a while.

Minyan Lurlene Lumpkin Kelley Writes:

Jeffmacke, why is it so hard for store managers to comprehend your father's basic premise about unclean stores? It goes back to the stuff you learned in kindergarten. If people see unclean spaces, they are less likely to think that it should be kept clean. The Wal-Mart (WMT) nearest my home in upstate New York is in a relatively tough neighborhood and has a filthy parking lot. The Target (TGT) parking lot is, well, clean. That one observation is enough to affect your attitude as you enter the store. What does that say to the customers? "We don't think you deserve a clean store."

Boggles the mind.


There's a certain level of self-selection in regards to what a customer is saying they "deserve" based on which discounter they choose to shop. While a single person can freely choose the socio-economic group with whom they feel most comfortable for a given shopping experience the chains themselves are, to an extent, locked into their individual sub-strata of the discount universe in regards to target customers.

Which is a mouthful. Since you mentioned my dad, let me try to explain it the way the Big Fella explained it to me, back in the 70's....

You're getting Sleepy...

Imagine yourself stepping over a slush-filled transom and into the warm bench-seated confines of an Oldsmobuick station wagon. It's a Sunday afternoon and you're getting a ride home from the park after a day playing pick-up hockey. As is custom, you're going to do some shopping on the way.

You throw your stick and skates into the back seat and ask your dad the score of the Vikings game playing on the AM radio. Dad jams the car into drive before you have time to settle in your seat, pressing you heavily against the still-frozen leather. Dad mutters something vulgar as you get yourself situated properly. You play the weekly game of trying to figure out which side dad is betting.

Dad isn't actually allowed to tell you if he's got money on the game, of course. You aren't supposed to know the idea of gambling even exists, let alone speak of it freely. But you can generally figure out which way dad is laying money by asking code-word laden questions like, "Did most fans expect the Vikings to win by a lot or was it supposed to be a close game?"

You suspect dad knows you know why the last-minute field goal may be "meaningless" in the eyes of the announcers but still matter a great deal. You suspect dad takes a certain dark pride in your being able to figure this stuff out without having to be told. But neither of you mention it. Doing so would spoil some of the fun.

Now... the nature of the path you need to travel to get from the park to your discounter and back home again in our hypothetical 1977 trip to the store tells you what you should expect when you go to a discounter today.

If you took the freeway 5 minutes or so then exited almost directly into a parking lot, then you were probably going to Target. The chain paid up for good real-estate, generally close enough to a major road to allow the store to be seen from the road. The store is located slightly on the rural edge of a mid-sized urban area. It's a suburban store, built for suburban folks. Customers are assumed to have the mindset of wanting to get in and out fast and with few hassles.

These stores are cleaner because they have to be; Target is a discounter primarily in the sense that its core shopper is buying for a family of 4 or more. Rich or poor, these people need exercise clothes, cleaning supplies and the like; they love a good deal but that's not their main driver.

The company makes their money (their margin) by giving fair prices on the basics, running clean, efficient stores and carrying a decent array of higher-margin toys or electronics.

If you took the freeway 5 to 10 minutes then drove for another 10 minutes until you got to a larger, c-level strip mall behind the last car dealership before the farms started, you'd likely be going to Kmart. Kmart probably got a good deal on the location when a Zayre's or something went out of business. The store is a bit more of a dump than Target but it's more promotional and more aggressive on price.

The customers are apt to think the people shopping at and living near the Target store are "uppity" or "yuppies" or "think they're neat" or some other not-quite favorable thing. The Kmart makes its money by being more convenient to the neighborhood it serves. But if the locals are really looking to stock up or get a slightly nicer looking swing-set they are going to make the trip to Target.

If you took the freeway 20 minutes or a half an hour, out to where you can't quite see the lights of the city anymore, you're going to WalMart. This is more agrarian land where there is little tighter compliment than saying someone runs a "tight ship." The prices are rock bottom because there isn't time for nonsense.

The store makes the bulk of their money by having the lowest costs - lowest costs for real-estate, for building and for goods. If you have the lowest costs you can give the lowest prices and still make a profit. It's a square deal all around and if the pompous jackasses in the city don't understand that, well, who cares?

Back to the Future

The cities have been built up around all the stores now. In many communities it would be hard to guess the discounter based simply on a map or demographic today. Still, our little road trip goes a long way towards explaining the differences between the chains today.

It's not that Store Managers can't understand the idea of keeping a clean store. Store managers work ridiculous hours and are horribly underpaid. They are overworked and, like all overworked people (read: "everyone") they tend to focus their attention on what matters to the people above them on the company food chain.

At Target, that means your store better be well-presented and running smoothly. At WalMart that means you better have a handle on your store budget.

At Kmart you don't really know what it means because no one above you on the corporate food chain is ever able to find your store, let alone visit it.

WalMart, by design and historic precedent, competes almost entirely on price. It's what they do. It's all they do and they are very good at it. Cleanliness is an afterthought at WalMart and part of the bone marrow of Target. It's a question of their business models as opposed to a value statement about the chain or their customers.

I think competing on price is a tough way to make a living, regardless of your industry. WalMart has the best cost-controls in retail but that's not enough to make them a growth story, margin-wise. It's simply what they have to do to stay in business.

In terms of investing, this little story leads me to three other conclusions. These guide all my thinking in the discount space:

1. WalMart is doomed to failure on initiatives like fashion for teens (they'll never have the store footprint to sell it).
2. Target necessarily has a higher cost on a per-store basis but more room to capture margin on high-end goods.
3. Kmart is like a 70's vintage Detroit family-style car: if you fix it up and smooth out the rust you can make it run better but you'll never make it great. The idea that the chain has a great deal of hidden value as a real estate play ignores the way Kmart was rolled out in the first place.

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