MICHAEL HAINSWORTH (sitting in for Pat Bolland): Wal-Mart lowered its guidance today amid December same store sales that missed Wall Street expectations. Wal-Mart shares might be the next thing to be hit, selling at a lower price. For more on the state of retail, we turn to Rick Wolfe, the President of PostStone Consulting. He’s at the TSX Broadcast Centre. Rick, thank you for joining us.

RICK WOLFE: My pleasure.

MH: It seems in 2004 Wal-Mart went a little late in the game on the advertising, this year they weren’t going to make the same mistake, but it turns out it wasn’t the right strategy.

RW: Well I’m not sure that it wasn’t the right strategy and just that there are so many things stacked against them, it’s pretty hard for them to have breakaway numbers anymore.

MH: So what was your initial reaction then considering they were expecting a four per cent increase or so and the only got about a two?

RW: Look at what everybody else is doing. Yes, Wal-Mart did do a much better job of picking items. Yes, they had a great Black Friday. Wal-Mart has an innovative approach to warranties on electronic goods, which is causing some nervousness at Best Buy and Circuit City. But then you’ve got everybody else out there just hammering the marketplace with deals. Gift Cards would not be a Wal-Mart strength and gift cards have had explosive growth. It’s just constant turmoil out there that’s pretty tough even for Wal-Mart to keep up with.

MH: I understand as well that you feel Wal-Mart is suffering from the same effect that McDonald’s has: pleasing the Street.

RW: Well that’s right. Let’s go back 10,15 years and look at McDonald’s and then do a comparison with Wal-Mart. There was a point in time when McDonald’s simply should have stopped growing. But they kept trying to grow, pressured by the Street, for 10, even 15 years after that. Finally, in desperation, James Cantalupo was brought back from retirement. He knew McDonald's inside out, but he had a fresh perspective from having been in retirement. And he transformed the company. He stopped the store growth. He started re-investing in existing stores. He changed the kitchen. He brought out new products. He reconnected with the customer and created a better customer experience. So, now on a lower growth trajectory, McDonald’s is doing very well, thank you very much. That’s got to happen at Wal-Mart. The Street’s crazy to expect Wal-Mart to keep growing.

MH: Do they have to do precisely the same thing? Because we may see stagnancy in the United States. I understand internationally they are doing quite well.

RW: They are doing quite well. They have very stiff competition in some markets. Here in Canada Loblaws is pushing them back. The grocery market in Canada is nowhere near as attractive as it is in the States because Loblaws is just that much more efficient than their U.S. competitors, and has great product in President's Choice. Plus overall the Canadian distribution system is a much more efficient distribution system than the U.S. grocery distribution system. So Wal-Mart couldn’t come in to grocery and surprise the consumer with great value. In the U.K. Tesco is the powerhouse, and Wal-Mart’s ASDA brand is good but nowhere near as strong as Tesco.

MH: I’m surprised to hear you say that Loblaws has a strong Canadian distribution system because that’s been the big Achilles Heel for the company in their latest quarterly results.

RW: Bad quarter, but good enough over the last decade to make Wal-Mart work much harder than they are used to.

MH: As far as Loblaws goes do you think they ought to be resting on their laurels or is their strategy only half complete when it comes to fighting off and fending off Wal-Mart?

RW: You’re absolutely right, there is no way they can rest on their laurels. I think they need to be paying very close attention to Sam’s Club now that Wal-Mart has Sam’s Club here in Canada. I think they need to be looking for their own innovations. Loblaws’ great innovations are pretty old themselves and that won’t do.

MH: As far as Tesco goes, as you mention they're out of the U.K., what I find interesting about their strategy is they know bigger isn’t necessarily better. Should Wal-Mart be applying that theory?

RW: If they can figure out how to copy Tesco and adopt that bigger isn’t necessarily better strategy, it would be great. Tesco does have giant stores. They also have convenience stores and medium-size stores. And more amazing still, they have figured out how to get goods to a convenience store at the same cost as they can get goods to a superstore, with the result that their convenience store prices are the best on the street. It’s a terrific value proposition for their customer.

MH: They also seem to have customers right across the demographic spectrum, whereas Wal-Mart seems focused on lower income Americans.

RW: Nobody else has done it. If you take a look at Tesco’s customer, their demographic pretty much matches the demographic of the U.K. And the standard wisdom – and heck, I’ve recommended it too - is that you have to pick a customer segment and focus on that. Tesco is so innovative that they have figured out how to please customers at every income level.

MH: Do you think that those high profile labour issues over at Wal-Mart are still affecting the company or have they affected the company at all?

RW: They have affected the company. They are going to continue to affect the company. And the company has to make a transformative move on this. It will not be enough to get peace with the outside stakeholder groups that are pressuring Wal-Mart. They need to learn to be good buddies with those groups and if they don’t I think you can expect that their growth really will stagnate.

MH: Rick, we appreciate your insight, thanks very much for joining us.

RW: My pleasure.