We often write about Wal-Mart, and after Wal-Mart came out with its earnings we asked: Wal-Mart Reports Strong Earnings: Is It Creating A Pricing Umbrella For Aldi?
After writing this piece on Wal-Mart’s earnings, what prompts us to return to the matter was a note we received regarding a piece on Business Week’s website by the title ‘ Wal-Mart and the Paycheck-to-Paycheck Consumer”. The piece discusses why the US Wal-Mart stores reported negative comps for the 4th quarter. It also notes that Sam’s Club comps were up 0.7% during the same period. The article also pointed out was that customer traffic was down. The piece cited food deflation and speculated that Wal-Mart’s core customer was living “week to week” as to the reason why.
This may all be true, but a Pundit correspondent, who was once a major vendor to Wal-Mart, suggested some other reasons:
1. Wal-Mart has shifted from a sales strategy to a margin strategy. This has manifested itself in two ways:
A) Wal-Mart has been raising prices for some time now. While they still maintain some price advantage, the gap is narrowing. And as Pundit sister publication, PRODUCE BUSINESS has pointed out in its long-running series, the Wal-Mart Pricing Reports, they are not the market leaders in some markets. Wal-Mart has always been a “price play” in the minds of the customers. EDLP resonated in the customers’ minds, and the perception proved to be true in the stores. The company now raises prices, then rolls them back. This is a cultural revolution; there was a time, not all that long ago, when a buyer would be fired for doing that!
B) The second issue is the drive by Wal-Mart’s top echelons to expand private label at the expense of national brands. This causes at least two problems: One is that now the customer is being forced to buy what Wal-Mart wants to sell them instead of what they want to buy. This is having a huge impact on all customers, but especially those with discretionary income. These customers tend to be more brand-loyal and are willing to pay for that brand. Now, they have to find those items elsewhere. The other problem is that a private brand strategy compromises a store’s price image. This may sound counter-intuitive as private label items generally cost less. But customers can’t compare prices at different chains by their private label as quality standards vary widely. Tide is Tide, whether at Wal-Mart or Kroger, so it’s a true apples-to-apples comparison.
2. Wal-Mart has made a major shift in merchandising. Wal-Mart was a “price and item” merchant. The new merchandising leadership has removed “action alley” and has become a “solution merchant”. So when a customer walks into a store, there is no price impact.
3. Wal-Mart touts its inventory reduction. What they fail to mention is their horrendous out-of-stock problem, particularly on periphery items. Basically, customers can’t fill their shopping list because of out-of-stocks. This is both a replenishment problem and a merchandising problem. When suppliers were held accountable for in-stock, they had selfish incentive to stay in stock on their items. And when they collaborated on modular, they would be pushing the buyers to give enough shelf space to key items.
4. Finally, Wal-Mart’s quality standards have really slipped, and it’s starting to show. They have finally screwed the suppliers down so much that the supplier is making other choices about who they ship their top box to.
Bottom line: Wal-Mart’s issues are leadership issues. It is amazing how smart Sam Walton really was! Look at his legacy of ideas:
● Price and Item
● Always the Low Price — Always
●We Sell For Less
That vendors might yearn for the “good old days” is understandable. It may even be the correct response, but it is not realistic. Wal-Mart is not going back.
Our own assessment is that Wal-Mart’s leadership has become increasingly tactical, identifying a short-term problem and jerry-rigging a solution rather than developing an alternative strategic approach to the one Sam Walton detailed.
So sometimes sustainability is the key focus and other weeks it is beating up suppliers for cheap prices — sustainability be dammed. Some weeks Wal-Mart is rolling back prices and other weeks it is raising them.
In the meantime, Aldi and other deep discounters are increasingly undercutting Wal-Mart on price and the Behemoth from Bentonville has simply no strategic response.