Internet marketing guru Seth Grodin tackled Wal-Mart in a recent blog post. Grodin's theory is that Wal-Mart stifles product innovation:

Walmart wants to sell classics and heavily advertised hits. And they want to do it at close to cost. This appears to be good for consumers--get a Barbie for $12 or whatever.

The problem is that NEW toys aren't classics and it's hard to make the bet that new toys should be heavily advertised.

The second problem is that once you reach the level of success of a classic, selling at cost is no fun at all.

The end result is that the toy guys don't have the guts to launch the new and the remarkable. They are boxed in, encouraged by Wall Street and management to play the Walmart game, which leads to short-term revenue and long term destitution.

Sure, Walmart has driven some other toy stores out of business. But the only thing that has to do with innovation is that those stores chose not to innovate. Walmart is, in so many ways, the world's most innovative retailer. FAO Schwartz or Toys R Us could have tried to change their business model to compete with Walmart. They could have forged relationships with exciting new toymakers. But they didn't. They chose to do the same old, same old and then whine because they couldn't beat Walmart on price.

Walmart's dominance is, in my mind, a win-win. Consumers get lower prices. Other retailers have the opportunity in niches that Walmart doesn't cover. Walmart is interested in breadth, that leaves a whole lot of run for specialty retailers to provide customers with product depth. Think about it. As a consumer would you rather have 5 toy stores all providing the same 10 products at around the same price, or would you rather have 1 retailer providing 10 products at a better price and 2 other retailers providing 200 products in that category? I know which one I'd choose.

Similarly, toy manufacturers would no longer have to try to sell to 5 different retailers who are all interested in hitting the same target market. New niche retailers may now actually be interested in their most innovative, imaginative products, where the FAOs and Toys R Us wouldn't give them a second look because they didn't fit their high volume model.

Grodin says:

The answer is to tell Walmart to go away. Toy companies are beginning to discover that they can't win this game. The answer is to find a new and better and more consistently profitable way to launch the remarkable stuff.

And that's happening. It's happening when they sell online, or through local stores, or directly to people who care. No, this isn't mass. This isn't a fraction of what an endcap at Toys R Us was worth. It's still the best deal in town. Over time, consumers will be trained that the toys they need are only available in places that aren't Walmart.

Maybe he's half right. Without Walmart, these new outlets would never have opened up. The answer isn't for Walmart to go away. The answer is for other retailers to answer Walmart's challenge. How will they innovate to be successful? Without Walmart they would never even have asked themselves that question.