Are Big-Box Retailers Winning in Big Cities?

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Wal-Mart (NYSE:WMT) wants a piece of the Big Apple, but New York City wants nothing to do with the mega-store. Retail giants Target (NYSE:TGT), Costco (NASDAQ:COST) and Home Depot (NYSE:HD) all hang their shingles in Manhattan, but resistance toward the big-box store is showing no signs of weakening.

Wal-Mart’s PR campaign to win over the New York market is dominating the airwaves, but so far no welcome mat has been rolled out for the smiley face retailer.

Urban market expansion is key to these big-box retailers as suburban markets are being quickly developed. I decided to ask Brian Sozzi of Wall Street Strategies who is winning the urban expansion and what Wal-Mart needs to do to turn that PR frown upside down.

LL: There is a battle right now between the NYC Council and Wal-Mart who wants to open a store in a time where tax revenue is greatly needed. Why such a battle?

BS: There is an old saying that money talks and you know what walks. In the case of Wal-Mart (NYSE:WMT) versus the powerful pro labor union NYC officials, you know what is not walking. Oddly enough, it seems to be sticking.

At the very core of this tug-o-war, which had gone forgotten since former Wal-Mart CEO Lee Scott nixed the NYC development plans in 2007, is the perception of Wal-Mart in the eyes of those with ulterior motives, small business owners who voice valid concerns, and the consumer that just wants to save money.

I think the perception differential between Wal-Mart and other big box retailers, for instance Target, was exemplified perfectly in CNBC’s insightful documentary “Target: Inside the Bulls eye.”

Target’s entrance into Manhattan was cheered by the community, Wal-Mart (NYSE:WMT) can barely get through the gate out of pure fear for the unknown. Fear of low wage jobs infiltrating the neighborhood (despite unemployment being high surrounding the sites Wal-Mart is looking at in NYC). Fear that every single small business owner will fold up shop.

Fear that Wal-Mart will take from the neighborhood, but give little back in return. However, I feel it’s important to note that Target, like Wal-Mart, is a big box retailer that price matches Wal-Mart, pays similar wages (if not lower), and sources many of its goods from the same overseas vendors.

LL: NYC has a Target, Costco, and a Home Depot. Why the negative Wal-Mart sentiment?

BS: The negative sentiment is something that I thought Wal-Mart shook during the grips of the Great Recession seeing as it was front and center with low prices on everyday essentials for cash starved consumers.

The company’s marketing message even changed to convey a greater sense of sympathy with the plight of those out of work and those trading down because their retirement savings took a walloping. Alas, it’s obvious that once a reputation is built up for a retailer, or any company for that matter, it’s hard to reverse public opinion at a drop of a dime.

In reading a few books on the life Wal-Mart’s founder, Sam Walton, I have an interesting view on the reason for the anti Wal-Mart sentiment. Sam Walton essentially began taking over towns with his successful five and dime retail store format in the 1950s. He put local merchants out of business by using low prices and fantastic merchandising techniques, and in turn the offspring of those merchants (baby boomers) grew up suspect as to the true underlying benefits of a Wal-Mart world.

Additionally, we must not forget that Wal-Mart revolutionized retailing, particularly shaking up the once dominant U.S. manufacturing industry by sourcing from China (NYSE:FXI). Wal-Mart now sources about 80% of its merchandise from China. Toss in the endless array of anti Wal-Mart surveys and well publicized lawsuits, and it becomes apparent as to why the company is vilified more often than not.

LL: Anti Wal-Mart advocates say Wal-Mart is a proven job killer. It’s an argument that has been going on since Wal-Mart began. Why does Wal-Mart continue to be portrayed as a villain?

BS: Where to begin, there are so many different angles.

I think Wal-Mart being viewed as public enemy number one reflects: (1) years of ingrained negative sentiment by many elected officials toward the Wal-Mart business model; (2) Wal-Mart is the largest private employer in the U.S., and is non-union; (3) countless lawsuits against Wal-Mart have shed light on business practices which may have not been up to snuff; and (4) people love the low prices, but get upset when the local merchant they haven’t gone to in years closes due to Wal-Mart; this creates mixed emotions amongst those in the community.

LL: Could Wal-Mart really kill small businesses in NYC?

BS: I am pro free market, so by that I would like to think savvy small business owners could carve out a niche should NYC receive a Wal-Mart. Remember, Wal-Mart can’t be everything to everyone.

The business model is essentially predicated on buying in bulk from overseas suppliers, using sophisticated planning of course, of things that have a history of selling. Wal-Mart is not trying to reinvent the wheel with its product assortment.

Therefore, Wal-Mart is unlikely to carry items that local residents have come to depend upon (example: ethnic foods and seasonings). I think small businesses have an opportunity to see what Wal-Mart does well and what it doesn’t do well, and then make adjustments to exploit the company’s cracks in its armor. That said, it would be foolhardy to believe that Wal-Mart will not force some smaller retailers out of business over the ensuing five to ten years. The allure of low prices on the part of the consumer is powerful.

LL: Wal-Mart’s expansion into Chicago was a celebrated success. What do they need to do to get into the largest city in the country?

BS: Wal-Mart needs to assume a more humble approach. Show the elected officials the good it brings to neighborhoods other than low price merchandise.

For example, the company typically will contract with local business owners for some of the merchandise in its stores and for store services. The company’s NYC centric online campaign is too provocative a position on such a touchy issue, and certainly deciding to pull out of the February 3 council meeting sends all the wrong messages. If Wal-Mart is able to demonstrate how it has changed and what it will do to promote positive economic and social outcomes in NYC, then progress may be made.

LL: Urban store development is the next frontier for these big box retailers as they mature out in suburbia. Which stores are doing it right?

BS: You are 100 percent correct, the development of urban sites for big box retailers is the wave of the future for the likes of Home Depot, Costco, and Target, to name a few. There will come a day in the future where the local Duane Reade, Walgreen (NYSE:WAG), or CVS (NYSE:CVS), which have typically been the go to places for those in the city aside from small businesses, will be in close proximity to a Target.

This very fact explains why Walgreen, for example, is introducing fresh food sections in its urban stores; it anticipates an evolution. But, overall, what a change in the business for these companies! They began chasing families out of the city, but are now chasing them back into the city.

At the end of the day, municipalities can use the tax revenue from these retailers. NYC alone is projecting a $16.2 billion cumulative budget deficit in the next three years, according to the Comptroller’s office. Who is doing well?

Target and Costco have hit homeruns in terms of store design and bringing the consumer a model many were unfamiliar with or traveled to partake in. Both the Target and Costco NYC stores seem a natural fit into the surrounding neighborhoods aesthetically, and are helping residents save money in a time in which funds are still tight.

Moreover, the store shopping environment is exciting, and that over time will promote the urchase of a few extra goods in the basket.

A Senior Talent Producer at CNBC, and author of “Thriving in the New Economy:Lessons from Today’s Top Business Minds.”

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