Wal-Mart: Back to Basics for the Holidays
11/15/2006 01:31 PM
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Wednesday November 15, 02:31 PM
Wal-Mart: Back to Basics for the Holidays
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By Pallavi Gogoi
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This year, Wal-Mart Stores (WMT) has tried to woo upscale shoppers with highend organic food, sexy flat-panel TVs, and fashionable apparel from its new
Metro (Xetra: 725750 - news) 7 line.
(Advertisement)
But the challenges of
the up-market strategy
became apparent on
Nov. 14, as the world's
largest retailer
reported financial
results for the third
quarter. Revenues
increased 12% for the
period, to $83.54
billion, falling short of
Wall Street's
forecasts, for $84.48
billion. Meanwhile, net
income rose 11.5%, to
$2.65 billion, at the
high end of Wall
Street expectations. Sales at stores open more than a year, a common
benchmark for success in the retail sector, rose just 1.5%, missing Wal-Mart's
own original forecast for a 2% to 4% gain.
48.68 +1.02%
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Better Tailoring
Some retailing experts say the results underscore the risks of the company's
high-end strategy. They say upscale shoppers may not be impressed by WalMart's new offerings, while the core low-income buyer may end up bewildered
by things like fashion-forward apparel. "Wal-Mart frightened off its core
customers," says Wendy Liebmann, president of market researcher WSL
Strategic Retail. "They come in for the everyday low prices and, seeing these
upscale offerings, they got very nervous."
Wal-Mart executives concede that they've made some missteps. In the
company's conference call to discuss earnings on Nov. 14, John Menzer, vicehttp://uk.biz.yahoo.com/15112006/244/wal-mart-basics-holidays.html
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Wal-Mart: Back to Basics for the Holidays
company's conference call to discuss earnings on Nov. 14, John Menzer, vicechairman, said the rollout of the Metro 7 line did contribute to the disappointing
results. "We expanded Metro 7 beyond what now appears to be the right
segmentation," says Menzer.
11/15/2006 01:31 PM
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Wal-Mart isn't repudiating its move up-market -- far from it. Company
spokeswoman Mona Williams says that the company has learned from the
Metro 7 initiative and will now fine-tune the strategy to increase its chances of
success in the future. "We will play close attention to the demographics of
individual neighborhoods and we will be more focused than ever at tailoring our
products to the needs of individual communities," she says.
Holiday Opportunity
Nevertheless, Wal-Mart looks as if it's going back to basics for this holiday
season. Even before Thanksgiving, when the official holiday shopping kicks off,
Wal-Mart has announced a blitz of deep discounts on more than 100 toys, 100
electronic items, and at least 50 home appliances. And, there's more to come.
CEO H. Lee Scott said on a prerecorded earnings call: "This season, no one
will doubt Wal-Mart's leadership on price and value." [See BusinessWeek.com,
11/14/06, "Wal-Mart: We'll Lead on Price" and "Holiday Hysteria."]
The company's pronouncements came amid a flurry of retail news. Target
(TGT), Saks (SKS), Staples (SPLS), Home Depot (NYSE: HD - news) (HD),
BJ's Wholesale Club (BJ), American Eagle Outfitters (NASDAQ: AEOS - news)
(AEOS), TJX Cos (NYSE: TJX - news) . (TJX), and Abercrombie & Fitch
(NYSE: ANF - news) (ANF (Paris: FR0000063091 - news) ) all reported their
results for the quarter. The stocks largely rose for the day, with strong results
particularly from luxury retailers and Federal Reserve comments that interest
rate hikes may be on hold for now. However, Circuit City (CC), which competes
against Wal-Mart in electronics, saw its stock take a hit because of the prospect
of a brutal price war [see BusinessWeek.com, 11/14/06, "Unhappy Holidays for
Circuit City?"].
Experts say Wal-Mart is looking to shore up its base during the critical holiday
shopping season, reaching out to its core customer with its "everyday low
prices" and more. "Altering Wal-Mart's image is like turning the Queen Mary
around," says Robert Passikoff, president of brand consultant Brand Keys. "It
doesn't matter how many 10-page supplements you buy in Vogue -- you can't
change your image on a dime." [See BusinessWeek.com, 9/28/05, "Wal-Mart
Crashes the Fashion Party."]
Attentive Associates
Still, Wal-Mart has a lot riding on attracting higher-income shoppers. Surveys
show that 80% of Americans shop at Wal-Mart, and people with incomes over
$100,000 are already buying their grocery and other staples from the retailer.
CEO Scott said last year: "We've got to make sure that those customers aren't
bypassing [our] other departments."
Targeted merchandising is Wal-Mart's forte. Wal-Mart is well known for mining
its data and making great use of its internal research. For instance, it has one of
the best stocking and inventory management systems in the world. But critics
say that Wal-Mart has stumbled in its high-end strategy, not because it didn't
use data properly but because it failed to live up to customer's expectations.
Patricia Pao, founder of retail consultant Pao Principle, says that the desired
upscale customer expects a level of service that Wal-Mart hasn't been able to
http://uk.biz.yahoo.com/15112006/244/wal-mart-basics-holidays.html
Page 2 of 4
Wal-Mart: Back to Basics for the Holidays
11/15/2006 01:31 PM
upscale customer expects a level of service that Wal-Mart hasn't been able to
provide. "I saw Wal-Mart's fashion show in New York and the line was really
trend-right, but the store just doesn't provide the experience in terms of layout
and service," says Pao. "This incremental customer is bound to walk out of the
store empty-handed."
Wal-Mart's Williams says that the company is determined to make the
necessary improvements to its stores. "We have remodeled 800 [of the targeted
1,200] stores so far this year with new layouts," she says. "[And we have] also
implemented a new scheduling system via which we have more associates
available at busier times of the day."
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Wal-Mart: Back to Basics for the Holidays
11/15/2006 01:31 PM
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