Grocery Shoppers Leave Wal-Mart For Dollar Stores

Wal-Mart, the world's biggest retailer, announced its second quarter earnings this week. While profits were up, sales were down in the U.S. It's the ninth consecutive quarter that important number has declined. Because of Wal-Mart's size, economists are paying attention. Analyst Brian Sozzi talks to Renee Montagne about what Wal-Mart can learn from other retailers.

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RENEE MONTAGNE, host:

Sales are also down at Wal-Mart stores in the U.S. This week, the world's biggest retailer announced its second-quarter earnings. Its profits were up, but for the ninth consecutive quarter sales declined. Because of Wal-Mart's size, economists are paying attention.

To explain what's going on at Wal-Mart, we reached retail analyst Brian Sozzi.

Good morning.

Mr. BRIAN SOZZI (Retail Analyst): Good Morning.

MONTAGNE: It would seem like, in a recession, that shoppers would go for Wal-Mart's deals, and I would've thought they would have been doing these last couple of years.

Mr. SOZZI: You would think that, Renee, but it's kind of gone counterintuitive. And what's going on with Wal-Mart is what they call the pronounced paycheck cycle. And I think that speaks great volumes to what's going on in this quote-unquote "recovery." Basically, when the core Wal-Mart customer - which makes about $30,000 to $60,000 a year - when they get paid, they go to the stores. But on those weeks they don't get paid, they're not going to the stores, because they continue to be stretched.

Now, why are they stretched? Outside of the wage debate - the wages have not been there - but inflation, inflation has been a big factor throughout the retail sector, and certainly within the Wal-Mart, believe it or not. Yes, they may very well be the price leader. But when you're dealing with price increases from everything from a can of tuna fish down to paper towels, those things add up and chip away at other things you can potentially by and put in the basket.

MONTAGNE: But have also Wal-Mart's customers - have they migrated elsewhere for the sorts of things they might have got at Wal-Mart?

Mr. SOZZI: Absolutely. If you look inside Wal-Mart's results, one interesting thing they noted: Customers are trading down to one private label and also to smaller package sizes. Now, who the king daddies of that? That is the dollar stores: Family Dollar, Dollar Tree, Dollar General. And you go to the dollar stores, they've done a much better job of offering food to the consumers. And that's where they're going to buy most of their daily essentials. They don't necessarily have the money available to invest - believe it or not - in the type of goods that Wal-Mart offers.

MONTAGNE: What about what you might call the high-end - Target for instance, reported its earnings this week. Its earnings were up, as were its sales. What is Target doing that Wal-Mart isn't?

Mr. SOZZI: It's almost night and day. I believe Wal-Mart's sales were down almost one percent. And here you have Target come out, and their sales were almost up four percent in the quarter, a very good number. And what's happening here is that Target is adding more food to their stores, so they're creating a wow factor.

But above all of those things, you have to keep in mind who that Target consumer is. It's not the Wal-Mart consumer. The Target consumer is upper-middle-income. They're pulling in 60 to $80,000 a year. So if you can get them excited and give them a reason to go to a Target, wow, we have food. Come on in, buy food. But then on the other side of the aisle, you could find a piece of chic apparel. That's great. They're responding to it. And, you know, I think the trend will continue towards the back half of the year, barring another downdraft in the consumer.

MONTAGNE: So it was just the food that made the difference?

Mr. SOZZI: Primarily, it's the food. What we've seen over the past three months, they are driving strong sales month over month within their food categories, almost in excess of 10 percent, which significantly outpaces some of the major grocery chains and anything that Wal-Mart's putting on the board.

MONTAGNE: What does all of this say about the state of the American consumer?

Mr. SOZZI: It's wacky, Renee. I mean, there's no other way for me to put it. A normal consumer spending recovery, I think you see more retail companies doing well. In a normal consumer spending recovery, you do not see the savings rate increase like it has over the past three months, and that's now sitting at five-and-a-half percent.

You have to see jobs come back consistently. It's not just one month. You need job growth. You need wage growth. It's harder for the consumer to go out there and spend in this type of environment. So you have low wages, lack of confidence in the future. Plus, when you go to the likes of Target and Wal-Mart, you're being asked to pay more for that basket of goods than you were last year.

MONTAGNE: Joining us from our New York bureau, Brian Sozzi. He's a senior research analyst at Wall Street Strategies.

Thank you very much.

Mr. SOZZI: Thank you.

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