A Time To Worry

This morning’s financial news included a modest-looking notice that Wal-Mart is starting its Christmas sales early this year, having already lowered prices on what its forecasters believe will be the most popular toys and games. You can catch the story on CNN online here if you want to. Not really anything ominous, at least not in an age where the headlines often include war casualties, erosion of our Constitutional rights, global warming, terrorist threats and Paris Hilton. Yet, if we take a closer look at the story, I’d have to say that anyone in the retail, consumer products or wholesale sectors should be feeling a little uneasy this morning – as should anyone connected to those industries as vendors, suppliers, customers or investors. Which means pretty much everyone but the military…

First off, let’s consider the effect of Wal-Mart lowering prices on these product categories just in itself. Every time they do this, Wal-Mart is taking market share away from other companies, particularly when they lower the prices to the point where there is no remaining profit (a “loss leader” strategy – see my post about those here). This is bad for other retailers, of course, especially general merchandise stores, which will also lose the sales they would have made of non-toy merchandise that the people who came in to buy toys won’t purchase now because they’ve gone to Wal-Mart instead. For stores that have no other product categories (e.g. toy stores) this Wal-Mart sale could intercept all of their holiday sales, and eliminate as much as half of their annual revenue. For an independent toy store, this could easily mean bankruptcy.

The effect isn’t limited to retail stores, either. My contacts in the toy industry tell me that Wal-Mart gets a lot of its deep discounts by putting the screws to their suppliers – effectively telling the manufacturers that unless they give Wal-Mart a special, favorable price on these key products, Wal-Mart will refuse to carry ANY of their products. Wal-Mart is also ruthless about returns, credits, shipping policies, and famous for its indifference to vendor relations. In effect, they will treat their vendors as badly as possible – because they can.

But as bad as this is for business in and of itself, the projected cause of this Wal-Mart toy bonanza is the really chilling bit of news in this story. CNN speculates that retailers may be nervous about weak holiday sales because of weak consumer confidence and the inability of many consumers to get or maintain credit – both side effects of the ongoing mortgage crisis and the weakening housing market. With quite literally half of the year’s revenue anticipated in the next three months, and as much as 80% of the year’s toy sales expected during the same period, any major breakdown of consumer spending – now – will have a massive ripple effect in the economy.

Of course, Wal-Mart and the other major retailers (Target, Toys “R” Us, K-Mart, etc.) are already worried about all of the toy recalls in the past few months, which may already have undermined confidence in some toy categories, not to mention the downturn in the economy already being caused by the failure of mortgage companies and lending institutions. I don’t know if the smaller retail companies, vendors and investors are frightened yet; I only know that if a behemoth like Wal-Mart is running scared, it’s time to worry…