Wal-Mart's Most Wanted
Attention, affluent shoppers. The retail giant is bent on capturing your dollars
At Fair Lakes shopping center in Northern Virginia, where the median household income of $81,000 is nearly double the national average, Wal-Mart certainly has no problem attracting the customers it sees as its future. But a peek in their shopping carts reveals the retailing titan's plight. Laura Swearingen, who lives 25 miles away in Alexandria, Va., comes to buy cleaning supplies and cat food and perhaps "tank tops and stuff for softball." Penny Peyton of Annandale also has made a long drive from the inner suburbs to look for staples such as paper towels and toothpaste. As for clothing, she'd look to Wal-Mart only for "maybe something cheap to knock around in" and, of course, for underwear. Not for a nice outfit for work or a special occasion. "They don't have the selection or quality," says Peyton.
A low-cost, middle-America image certainly has served Wal-Mart well on its march to worldwide dominance in the retail industry. With annual sales of $285 billion and 5,350 stores (3,700 in the United States), Wal-Mart has pushed aside Main Street small businesses, crushed competing grocery chains, and changed the way America shops. It is still retail's undisputed king, but now Wal-Mart faces new challenges in its drive for future growth. Sales at existing stores--an important industry benchmark--increased just 2.9 percent in the first quarter, considered lackluster compared with the 6.2 percent hike at cheap-but-chic competitor Target. Although Wal-Mart's revenues are still six times as high, its stock price has slid 15 percent since March 2004, while the value of Target shares has soared 23 percent. High gasoline prices and the uptick in interest rates have dealt a bigger blow to Wal-Mart because its average shopper has less disposable income, an annual salary of $35,000, compared with $50,000 for the Target regular.
When Wal-Mart shareholders convened near the Bentonville, Ark., headquarters earlier this month for the company's annual meeting, Chief Executive Officer Lee Scott confessed, "We aren't where we need to be." He wasn't talking primarily about the myriad troubles that have made headlines in the past few years: the largest class action lawsuit ever, a discrimination case on behalf of its 1.6 million female employees; the union-funded campaign against the company's labor practices; or the activism that has blocked the opening of new stores. Scott's main concern now is how to capture a new prey, the upscale customer.
Americans already know they can turn to Wal-Mart for low prices on food, detergent, and underwear. But its executives are convinced that if the behemoth is to maintain the momentum that Wall Street expects, it will have to sell more profitable goods like stylish apparel, home fashion, and electronics. "Historically, they're the low-cost replenishment leader," says Mandy Putnam, analyst at Retail Forward, a market research firm in Columbus, Ohio. "Their challenge has been how to get that shopper across the store to shop for something other than basics."
Nice threads. Wal-Mart's efforts thus far have often fallen flat. Analysts at Credit Suisse First Boston noted recently that the quality of goods has improved, including, for example, high-thread-count cotton bedsheets. But in stores the analysts visited, nothing distinguished the fancy sheets from the cheaper alternatives. "The merchandising of the improved product has not kept up," said the CSFB report.
At the Fair Lakes store, Wal-Mart has a display showcasing its designer line of apparel, George, named after British fashion guru George Davies. Wal-Mart acquired the line as part of its purchase of the United Kingdom's ASDA supermarket chain in 1999. But Wal-Mart has done little to trumpet the brand it clearly hopes will appeal to higher-income consumers. In the center of the George display, for example, stands a well-picked-over rack of clearance items, including sleepwear, maternity blouses, and house-brand casual wear, with quite a few of the items strewn on the floor.
Sticking a "pile-it-high, let-it-fly" rack amid the stylish coordinates is a "Merchandising 101" error that is all too common at Wal-Mart, says Putnam. She contrasts Wal-Mart's approach with that of Target, which heavily advertised its partnership with designer Isaac Mizrahi. In contrast, Wal-Mart did nothing to introduce its designer line. "I'll literally stand in a Wal-Mart and hear people ask, 'Who the heck is George?'" says Putnam. Scott has admitted that crowding stores with cheap items has turned off customers. "The more congested the store, the junkier the store looked," said Scott, and "it became less relevant" to shoppers with more disposable income.
Wal-Mart brass have laid out an aggressive merchandising campaign. The company is hiring fashion experts to help train store managers to, say, feature items that will catch the consumer's eye and draw it toward more expensive goods. Wal-Mart plans to make some of its stores showcases for new tech goodies, including wall-length displays of high-end TV s. Wal-Mart also hopes to widen its appeal by offering more organic and natural foods--at lower cost than groceries or specialty stores, of course. "We don't think you should have to have a lot of money to feed your family organic foods," said Scott at the annual meeting. "Let's face it, affluent customers appreciate saving money, too."
At the same time Wal-Mart is making its pitch to the well heeled, it is forging ahead with its better-known strategy: expanding its so-called Supercenters. Providing groceries along with apparel, sporting goods, tires, and eyeglasses has proved enormously successful. Groceries are a lower-margin business than designer clothing or electronic gadgetry. But the volume Wal-Mart generates at Supercenters is so high--more than $100 million in annual sales at some locations--that the company says the return on investment outstrips that of its traditional discount stores. (Wal-Mart does not disclose sales figures for individual stores.) An example of the impact on the market: Earlier this year, venerable supermarket chain Winn-Dixie, which operates 920 stores in the Southeast, was driven to seek bankruptcy protection, largely, in analysts' view, because it could not beat Wal-Mart prices.
Wal-Mart currently has 1,713 Supercenters, and it plans to open 2,700 more and convert 1,200 current stores to the format. But as the nonunion company has steamrolled traditional grocers, Wal-Mart has made a slew of enemies, many of whom are now uniting to battle the retailer. Both the United Food and Commercial Workers union and the Service Employees International Union have mounted anti-Wal-Mart campaigns, arguing the retailer does not pay a fair wage and burdens state governments by failing to provide adequate healthcare benefits. The UFCW has hired Paul Blank, former political director for Howard Dean, to organize the opposition.
Sometimes joining with grocery chains, the unions have had some triumphs. In Turlock, Calif., the City Council passed an ordinance banning retailers larger than 100,000 square feet. Wal-Mart, which planned to place a 226,000-square-foot store there has sued to overturn the restriction. Meanwhile, Maryland's state legislature recently passed a law that would have forced Wal-Mart to pay more of its workers' health benefits. Republican Gov. Robert Ehrlich vetoed it, but the UFCW is lobbying for the same bill in all 50 states. "We're the focus of one of the most organized, most sophisticated, most expensive corporate campaigns ever launched against a single company," Scott told shareholders.
Bad press. Blank says Wal-Mart shouldn't blame the unions but the press it has gotten over the discrimination lawsuit and the fines it paid for federal child and immigrant labor violations. "It is going to be a problem as Wal-Mart gets into markets where price isn't the only consideration, and people can afford to ask, 'Does this company reflect my values?'" he says, noting that Wal-Mart has opened only four of the 40 Superstores it said in 2002 it hoped to in California. Bob McAdam, Wal-Mart's vice president for community affairs, says that figure is a four-to-six-year goal. "Even in places where we've seen opposition, once the stores open, they are phenomenally successful," he says.
Resistance to new stores could pose a problem, however, since many of those planned locations are in more-affluent areas. "It's a complicated issue, because large numbers of people want to shop at Wal-Mart. They just don't want them across the street," says Edward Weller at ThinkEquity Partners in San Francisco. But based on how Wal-Mart has reigned supreme since the early 1990s, he and many analysts are betting the company will weather its current woes. And if U.S. growth proves difficult, there's the rest of the world, which already accounts for 20 percent of the retailer's business. "I don't think Wal-Mart can ever be underestimated," Weller says. "They are so very good."
This story appears in the June 27, 2005 print edition of U.S. News & World Report.