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In the April 30th issue, BusinessWeek ran a cover story on Wal-Mart’s midlife crisis. The story pointed out that Wal-Mart’s same store sales were only up 1.9% in 2006, not only the worst in its history but also less than half of competitors like Target and Costco. The main problem is that the once uber-confident company wants to be like Target and is going through an identity crisis.

Emblematic is the well documented bust that Wal-Mart has endured with getting into “cheap-chic” clothing, the type you would typically see at Target. This new market has befuddled the company that is used to simply putting the lowest cost on something and waiting for the market to come to them. While this is largely seen as the problem for Wal-Mart, I think it’s actually just the symptom.

For full disclosure, I don’t shop at Wal-Mart. I abhor their labor practices and find that the stores are more madness than I want to deal with (more on this below). We did shop at Sam’s Club when the baby was born (have you seen formula prices?!?!!?) but switched to Costco as soon as one opened up.

I think the real problem is Wal-Mart’s crisis of confidence and its move upscale. For the first 40 years of the company the business plan was simple. Place giant stores in rural areas, kill off the local businesses with lower prices, and become the only game in town. People had to shop at Wal-Mart not only because it was cheap but often because Wal-Mart was it. The only place to buy groceries. The only place to buy clothes. The only place to buy medicine. etc…

Now, Wal-Mart has basically filled out the rural areas that can support their stores. The exurban and suburban areas are largely maxed out as well. They have to move into the more urban areas in order to keep growing. And in these areas, Wal-Mart isn’t the only game in town.

A reader letter from John Moody of Hudson, OH in the May 21st issue of the magazine summed up the situation perfectly:

Customers may be attracted to a store by low prices but will remain loyal only if the store can meet the customer’s needs.

Therein lies Wal-Marts problem. In the St. Louis area they are starting to build Supercenters, but the vast majority of stores are older. These stores are dirty, confining, and crowded. Even if I was to want to shop at Wal-Mart I couldn’t imagine going into one of their local stores on a Saturday afternoon. It’s total chaos. Lines are long, aisles are narrow, and people are pushy. It’s an altogether unpleasant experience.

Wal-Mart isn’t used to dealing with this. If Wal-Mart is the only game in town you shrug your shoulders and barrel through the front door. But I don’t have to shop at Wal-Mart for reasons of geography or economics. Wal-Mart has to make me want to shop there.

As part of their push to get more upscale shoppers, they’ve added lines like the cheap chic clothing lines. Wal-Mart is not used to being in the fashion business. The clothes they sold previously were traditional clothes that didn’t go in and out of style. Now, they have to manage their inventory on a quarterly basis and that goes against the “buy as much as possible at one time to save money” mentality that has been ingrained in every Wal-Mart executive from Sam on down.

Will they learn how to sell to urban professionals who don’t need them? Will they learn how to manage fashions like toothpaste? I wouldn’t bet against them. But I certainly won’t be switching from Target anytime soon.