Wal-Mart plays Monopoly

I believe Wal-Mart is going to come out of this economic downturn with unprecedented market power. That is going to ultimately be a problem for them. Here is why:

I was reading at the front page of the November 2, 2008 New York Times when an article demanded my attention. Entitled: “Debt Linked to Buyouts Tightens the Economic Vise,” the articles first two paragraphs read as follows:

Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names-Neiman Marcus, Metro Goldwyn Mayer and Toys R Us.

The new owners than saddled the companies with the billions of dollars of debt use to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time…And this is coming at the same time that consumers are staying home with their wallets closed.

The next day, November 3, I received my copy of Retailing Today’s Weekly Retail Fix. Under the headline, “A Widening Moat and a Widening Lead,’ the article spoke about Wal-Mart’s just concluded two day analysts meeting. Here is what that article said:

With the strength of its balance sheet, Wal-Mart’s executives spoke confidently about the future of the company and its opportunities for growth, even in a difficult economic environment.

“We are placing some distance between ourselves and our competition,’ [CFO Tom Schowe] said. “How many companies could stand before you today and say that their balance sheet is stronger today than it was a year ago?”

Wal-Mart is by far the retailer best positioned for an economic downturn and, when you look at the pressure Toys R Us, Circuit City and other retailers are under, Wal-Mart will undoubtedly come out of it far stronger relative to their competition. 

Here is where I see a problem for Wal-Mart. Wal-Mart’s meteoric growth has occurred during an era of low or no regulation. That era is coming to an abrupt end .  The public is scared and ready for renewed controls over big business. Democrats in Congress and activists are going to be taking a hard look at powerful corporations and some are going to suggest that Wal-Mart is too big and should be broken up.

Wal-Mart has done nothing wrong. They have earned their market power through a great business model and steady execution. They may, however, find that what looks like the best of times for them could be the dawn of the worst of times. We will have to wait and see.