THE DANGERS OF OVERESTIMATING WAL-MART'S IMPACT

How many of the supermarket industry's current challenges are due to Wal-Mart as opposed to other factors, such as the economy? And what are the chances that Wal-Mart's U.S. growth strategy will be thrown off course?These are intriguing questions raised at the eighth annual Supermarket News Financial Analysts' Roundtable, which is covered in this week's issue (see Page 10).There's been so much talk

How many of the supermarket industry's current challenges are due to Wal-Mart as opposed to other factors, such as the economy? And what are the chances that Wal-Mart's U.S. growth strategy will be thrown off course?

These are intriguing questions raised at the eighth annual Supermarket News Financial Analysts' Roundtable, which is covered in this week's issue (see Page 10).

There's been so much talk about structural changes brought on by Wal-Mart that I thought the seven analysts who gathered recently in our New York offices would lay almost all the blame for supermarket industry challenges at Wal-Mart's door. But it turned out I was wrong.

Analyst Lisa Cartwright, managing director, Salomon Smith Barney, said too many people look at the impact of the Bentonville giant in black-and-white terms. "I personally think the pendulum has swung completely," she said. "I mean, for a long time, people thought Wal-Mart didn't matter, and now most people believe Wal-Mart is the entire reason why food retailers' earnings growth has decelerated. But it can't be that dramatic, and I think the economy is having a much bigger impact than people are willing to admit."

Interesting point, although I was sure no one could actually quantify the economy's impact on food retailers. Turned out I was wrong again.

"I think if you look at comparable-store sales among food retailers today -- and I'm generalizing here -- but if they're down 2%, I think 1.5% of that is due to the economy," observed Mark Husson, first vice president, Merrill Lynch.

In Husson's formula, Wal-Mart at most represents 25% of the comp-sales problems of food retailers today, not 50% or 70% or 100%. From my perspective, that means that while no one should discount Wal-Mart's influence, it is possible to overstate the impact, which could have the effect of causing fear and paralysis among Wal-Mart's competitors.

There are vulnerabilities in Wal-Mart's U.S. growth plans, even if they're not always apparent. Husson pointed out that Wal-Mart operates about two-thirds of its stores outside the top 100 metro markets where 70% of food retail dollars are spent, which gives supermarkets a battle advantage. "You don't want to get caught in an open field with Wal-Mart around you, but if you're hiding behind big city walls, that's OK," he said.

Also, Wal-Mart will have to increasingly face the labor union factor in the future. This is particularly true as the retailer expands on the West Coast, said Meredith Adler, managing director, Lehman Bros. Adler pointed out that unions may have leverage against Wal-Mart on the West Coast as the retailer seeks zoning approvals for expansion. Wal-Mart will also experience a declining labor cost advantage over time as it runs out of opportunities in non-union areas and supermarket labor packages move closer to the Wal-Mart model, Adler added.

None of this means that Wal-Mart is stumbling as it grows in markets including California. But to borrow an analogy from California politics, while Wal-Mart isn't about to be recalled anytime soon, it isn't necessarily the Terminator either.