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Wal-Mart’s Efforts To Go Back To Days Of Sam Walton May Only Position The Company In Between Deeper Discounters And More Upscale Venues

Jim Prevor’s Perishable Pundit, February 28, 2011

The Wall Street Journal ran a piece by Miguel Bustillo titled, Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula:

Wal-Mart Stores Inc. is in the midst of its worst U.S. sales slump ever.

When it reports earnings on Tuesday, the retailer is widely expected to post its second straight year of declining domestic same-store sales.

Wal-Mart’s struggles are the result of a misstep: To jump-start lethargic growth and counter the rise of competitors such as cheap-chic rival Target Corp., executives veered away from the winning formula of late founder Sam Walton to provide “every day low prices” to the American working class. Wal-Mart, the world’s biggest retailer by sales, instead raised prices on some items while promoting deals on others.

Company executives acknowledge having miscalculated and are adjusting their strategy again. The big question is how quickly the mammoth chain can turn itself around.

Wal-Mart’s shift from its traditional core customer manifested itself in numerous ways. A foray into organic foods didn’t catch on with discount shoppers. A push to sell trendy fashions like skinny jeans bombed. And an attempt to cut clutter in stores to attract higher-income customers wound up undermining Wal-Mart’s appeal to its traditional audience.

We’ve written a great deal about Wal-Mart, and this article strikes us as not fully persuasive.

To start with we are not actually sure that the move to go “upscale” was really about capturing more customers. If you study transactions at Wal-Mart, you find that there are a lot of affluent customers who shop Wal-Mart selectively. They are happy to buy Clorox or dog food, but would not buy clothing or jewelry there. Whether they would buy fresh foods is an interesting question.

The whole push on fashion was not so much to woo the upscale shopper who would never deign to step foot in a Wal-Mart to suddenly consider Wal-Mart a good alternative. Rather, the push on fashion was to get Wal-Mart’s existing more affluent customer base that was already in the store buying branded goods for cheaper prices to consider Wal-Mart an option when buying clothes, accessories and other items.

This is a tough category for Wal-Mart and tough in a way that shows why Wal-Mart could go from nothing to preeminence in food but flounder in upscale clothing. Those upscale consumers who come to Wal-Mart to buy toys or Ritz Crackers are just people who, wealthy or not, don’t want to overpay. They are smart enough to recognize that these are the exact same items available elsewhere for more money and prefer to buy at Wal-Mart and not waste money.

Wal-Mart could offer a similar value proposition in food from Day 1. A box of Kellogg’s Corn Flakes is a box of Kellogg’s Corn Flakes. Wal-Mart could easily prove to consumers it offered the best deal. This is why Sam Walton liked to sell national brands.

It is also why Bruce Peterson, when he was starting up Wal-Mart’s produce operation, realizing that Wal-Mart had no brand equity in fresh produce, wanted to emphasize branded product as much as possible.

In food this was possible because most vendors would sell to Wal-Mart. That is not true in clothing. Chiquita gladly took the order, but Hermes would not.

So fighting in this area, Wal-Mart lost its best weapon — the ability to sell the exact same item at a lower price. Wal-Mart had to persuade consumers that its private label brands were equivalent to national brands. Not an easy thing to do.

Another problem Wal-Mart confronted is that Clorox or Campbell’s Soup is almost always purchased for personal use, and nobody ever asks where you purchased these items.

In contrast, fashion items are frequently purchased as gifts and, even when being worn, people often ask “Where did you get that?”

How much market research is required to understand that a gentleman preparing to buy his girlfriend an engagement ring is not only considering where the best value is, but also what his girlfriend’s thoughts will be when she asks “Where did you get it?” and he responds, “Wal-Mart.”

The Wall Street Journal article also did not really wrestle with the issues that senior executives were wrestling with when they made various decisions. For example, the push for organics was not really a marketing decision in which it is fair to say Wal-Mart just misjudged the market. Although surely Wal-Mart would have loved to sell lots of organics and make money doing so, the decision to push organics was at least as much a political decision as a marketing judgment.

Wal-Mart was being vilified by its opponents. Laws were being passed against its stores, politicians were attacking, and it needed initiatives that put it on the side of the angels: Organics, sustainability, etc., all were driven by this political imperative.

That is why we doubt that the gist of this article — that Wal-Mart lost the way that had been established by “Mr. Sam” and needs to get back to his ethos — is really sensible.

We have great admiration for Sam Walton, and we think that when Wal-Mart brought in new management, it made the mistake of telling them that Wal-Mart was “broken” and needed to be fixed. But Sam ran a much smaller company, in a very different environment. For most of his life, he was focused on bringing small town Americans better variety, better quality and better prices. Now Wal-Mart is a geo-political entity spanning the globe, bound to be blamed by activists and politicians for any number of sins of omission and commission.

Sam Walton had everyone live in Arkansas and fly out to see the stores, he eschewed involvement with Washington, DC and could “stick to his knitting” on operating as the buying agent for the consumer.

That world is gone forever.

Nostalgia is unlikely to replace it. Wal-Mart has a specific problem. Its greatest asset was a confidence by consumers that Wal-Mart would always have the “right” price. That has partly been messed up by Wal-Mart executives who abandoned the Every Day Low Price (EDLP) formula that Wal-Mart was built on.

However, the bigger challenge for Wal-Mart is that a range of deep discounters, such as Aldi, have discovered a formula that enables them to profitably undercut Wal-Mart’s pricing.

In time, this reality will degrade Wal-Mart’s reputation and leave Wal-Mart stuck in the middle between deep discounters and more upscale venues. As retired executives at A & P and Sears could tell Wal-Mart executives, the middle is a very bad place for retailers to be. It is a new situation for Wal-Mart and will likely require innovative thinking if Wal-Mart is to triumph. Mr. Sam was pretty good at innovative thinking and we somehow doubt, if he were still around, that his suggestion would be to go back to doing what he had been doing in 1978.

Perhaps the only thing more destructive to a business than excessive willingness to discard its heritage is an excessive nostalgia for the way things used to be.

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