December 1, 2006
Behind Wal-Mart’s Disappointing Numbers
Commentary by George Anderson
In recent days, a number of retailers, Wal-Mart being the most notable, have gone public with disappointing financial results while offering an unhealthy dose of pessimism for the near future. As is always the case, company executives, analysts and assorted gadflies have rushed in to offer their insights as to the why behind the “I’m not going to buy” signs being put up by consumers.
In Wal-Mart’s case, the retailer has blamed its race to become more hip and attractive to, let’s be frank, Target’s core customer as one factor in its own shoppers holding back
on purchases. The perception by some on the outside is that Wal-Mart may have scared off some of its own who have come to think of it as not “always” having “low prices.”
Of course, this supposition really doesn’t hold up when you look at the numbers. Clearly, Wal-Mart didn’t inspire consumers to buy its new fashion-forward apparel but when it came to everyday staples, such as food, HBC, household chemicals, paper, pet food/supplies and basic apparel (underwear and socks), the chain’s regulars were in its stores shopping.
So that pretty much leaves the cause of the sales problem (we’re only talking revenue here, not expenses) to the financial state of the Wal-Mart shopper. The bigger question arising from this is whether a struggling Wal-Mart will take the national economy with it.
Before we get into a discussion on the theoretical impact of what will happen should the retailer not pick up its sales pace in the U.S., let’s look at consumers who fit the profile of a Wal-Mart shopper.
According to a number of sources we’ve seen, the average income of a Wal-Mart household is in the $35,000 to $40,000 range. It’s fair to say that most of the chain’s shoppers fall into three primary economic states: middle-class, the near poor and the impoverished.
Today, more Americans (numbers not percentage) are living below the poverty line than ever before. Real wages, according to Census Bureau numbers, have declined even as the wealthiest among us grow richer and many corporations post record profits.
Last year median household income was up slightly (good news) but it was the first gain since 1999 (not so good news).
Another good news/bad news scenario is being played out at the pump. It’s true that gas prices are currently well below record highs set earlier this year. It is equally true that, while fuel prices have come down, they are still more than 50 percent higher (conservative estimate) than five years ago.
Wal-Mart shoppers, it seems obvious, have not fared well economically in recent years. Despite the many advances made on the macroeconomic level, there are a large and growing number of Americans who are not going along for the ride.
Last year, Wal-Mart CEO Lee Scott made a plea for legislators to raise the national minimum wage. “We can see first-hand at Wal-Mart how many of our customers are struggling to get by. Our customers simply don’t have the money to buy basic necessities between pay checks,” he said.
The last increase in the minimum wage, it is well known, was in 1997. Leading economists including Nobel winners Kenneth Arrow (Stanford), Lawrence Klein (Penn), Robert Solow (MIT) and Clive Granger (UC San Diego) have said the current rate, in real value terms, is at it lowest level since 1951.
Today, nearly 15 million workers, many of whom are likely to be Wal-Mart shoppers, work for the minimum wage. According to the Economic Policy Institute, 80 percent of these workers are 20-years of age or older. Families with minimum wage earners count on what they make for more than half the household’s income. Nearly half are their household’s sole source of income. More than 7 million kids live in minimum wage households.
Expectations are high that the new Congress with Democratic majorities in both houses will pass a higher national minimum wage. A number of states have already taken the step and pushed their own minimums higher.
The fact remains, however, that even with minimum wage increases there are serious challenges facing these and other Wal-Mart shoppers who are financially better off.
Housing now takes up about 30 percent of household income. In lower income households that percentage is often higher.
Energy prices while lower are bound to go up again.
Americans are carrying record levels of debt. The personal savings rate, according to the Department of Commerce, has been in negative territory since the second quarter of 2005.
Health insurance and medical care, even with $4 generics, in-store health clinics, etc., continues to place a heavy burden on many segments of the population not to mention employers.
So what does this all mean for Wal-Mart? It means some challenging times lie ahead, although there is little doubt that it will find a way to adapt. It did not get to be the world’s largest retailer by accident.
To build on that point, there’s no doubt that Wal-Mart is an economic engine. But what will happen to the national economy as Wal-Mart finds answers to the challenges before it? Does America go the way of Wal-Mart or does Wal-Mart go the way of America?
Discussion Questions: Do you see Wal-Mart as a bellwether for the national economy? If yes, what will that mean moving forward? If no, how do you make
sense of the most recent financial results and projections made by the company?
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This question is something of a non-sequiter: (due to its size) a poor economy will make for poor sales at Wal-Mart, but poor sales at WM will not (necessarily) mean a poor economy. (Whether “poor sales” describes WM at the moment is unclear: this seems like much ado over a small decline in a month or two’s worth of comp sales.) Though it often seems impervious to practically everything, it’s possible WM’s problems — such as they are — are simply due to poor execution.
As for God’s plans for the economy, I don’t know…He hasn’t returned my calls.
Wal-Mart reminds me of an athlete who fakes a limp to look like he’s hurt. Basically we are saying Wal-Mart’s primary shoppers are poor people. Perhaps, but there are a lot of Wal-Mart stores in upscale areas as well. I have some news: poor people have never fared well economically, and never will. That’s why they are poor. Yet somehow they continue to find a way to survive. And Wal-Mart is more than happy to help them out. I don’t think I have ever read a report in my life on how well poor people are improving their conditions.
What we do know is Wal-Mart is still building a few hundred stores each year with no end in sight. The thing about Wal-Mart is they can limp along faster than most retailers can run.
Raising the minimum wage is just “feel good” politics, whether it’s coming from Wal-Mart or activists for the poor. Anyone working for minimum wage who gets a raise would only lose a similar amount in government aid, food stamps, earned income tax credits, and other handouts. Businesses would just raise prices to cover the increased expense. So who wins? Nobody. This is 2006 and wages are now determined by the laws of supply and demand, the way God and Adam Smith intended.
From what I see, anyone who makes minimum wage or $40,000 a year, they are in the same boat. If you don’t make $40,000, the government finds a way to get you there with assistance programs and aid.
With all due respect, I think it is not really correct to jump to the conclusion that Wal-Mart’s problems are all somehow related to the income situation of its supposed core customer base.
It overly stereotypes the Wal-Mart shopper — the true mix is much more broad, though Target clearly does get a generally more upscale shopper. Also note that when gas prices skyrocketed, WM blamed much of its woes on that impact, but now that gas prices have come way back down the results are basically still the same.
Final intro note — the problems are relative. Same stores sales flat, total sales up based on continued, though slowed, new store growth….
Ah, the cannibalization issue. In the US, WM is simply running into the law of big numbers, to a certain extent. In search of growth, it is packing stores closer and closer together. This of course will have an impact on sales growth at nearby stores when a new one opens.
Following “the wheel of retailing,” W-M is partly trying to go “upstream” to attract a more upscale customer, but this is awfully hard for a store so ingrained in the public mind with low price, staple goods, and which has such a huge scale over which this transition has to be managed.
One area where there clearly have been real operational/strategic issues has been international (UK, Germany, South Korea), for a number of reasons, in part from the lack of understanding of local markets.
Finally, the supply chain competencies of most of WM’s suppliers have improved dramatically, meaning WM’s cost advantage has significantly evaporated. That means, to have a price advantage, it has to push prices down even lower… impacting revenue and profits.
So, I don’t think this really has some big socio-economic twist, it is fundamentally the same old competitive story that plays out over and over again in retail. It’s just a surprise for many to see it happening to WM.
Wal-Mart has now entered the mature phase and the issues they’re facing should be expected. Every company goes through this phase where they reach a point of maximizing revenue from their core customer group and to maintain growth they try to expand out to other customer segments. The problem is they are attempting to move too quickly in too many different directions all the while fighting numerous PR issues that won’t go away. Wal-Mart’s problems are not indicative of a slowing of consumer spending among low and middle income segments. These groups are taking their dollars to other retailers as evidenced by the early reads we’re getting from other retailers.
I think we place way too much emphasis on the excessively aggregated data (such as financial statements) and not enough on the actual metrics that drive success (e.g., customer acquisition, repeat purchase rates, etc.). I’m disappointed that top financial analysts don’t insist that retailers (and other firms) disclose these kinds of numbers.
There’s no doubt that the “bottom line” matters, but it’s often a reflection of past decisions (often unrelated to the core business) rather than future performance.
Wal-Mart is so big that of course they are an economic indicator, but they should not be the only one. Even as leaders, they account for a minority, not a majority of sales, so there is plenty of opportunity for Wal-Mart to fall behind others on same store sales performance; meaning that the economy is not quite as bad as studying Wal-Mart might suggest.
You can ask the people at my former company; when Wal-Mart stopped sharing sales data with syndicated sales information providers (e.g. Nielsen, IRI) — I predicted this day would come! No one should think they are so big that they only have to study their own sales. The consumer is king, not Wal-Mart and they are floundering around a bit, trying to get back the pulse of the market.
It is hard to raise revenue when you are cutting prices.
Wal-Mart’s culture has been anti-marketing; for years they bragged about how low their marketing expenses were as a percentage of their sales. Competitors are now out-marketing them and getting a good return on their marketing investments. It will take a long time for Wal-Mart to learn how to better communicate their message (besides price) to their core customers and to attract new customers.
Wal-Mart’s metrics DO speak to the economic realities of its core customer. However, those realities are not grim. They simply aren’t good…which does not by implication mean “bad.” People are not spending more, nor are they spending appreciably less. Digging into Wal-Mart’s numbers in the past several years, one might have seen that comp growth was driven primarily through the addition of new product categories, the expansion of grocery and the addition of gasoline. They’ve done a great job of being the store of choice for a great many items with their core customer.
What they haven’t done is become a broader store of choice for secondary or tertiary customer groups. And even when they succeed here, the overall impact is low. Getting a 5% gain out of a segment which contributes 10% of your sales results in a half point overall improvement.
Let’s not overreact. Wal-Mart will continue to attempt to grow comp stores by increasing average spend for secondary consumer segments already shopping its stores. Growth from the primary segment WILL be a function of the overall economy. If the economy picks up steam and the demographic represented most strongly in the core customer group is financially better off, look for Wal-Mart comp results to rise.
There are some fundamental economic principles that, one might say, we are overlooking. But, to the bottom line of the question, Wal-Mart is a factor in considering how the shopper is feeling i.e.: a specific group; and the economy is acting.
But, if Wal-Mart says its numbers are disappointing, what does this mean? Is it that the annual plan’s numbers are too high? Or the last year, quarter, or month comparisons?… not a fair measurement, given other factors impacting them versus this year’s
Same store numbers are an indication of the individual retailer’s effectiveness to motivate the shopper to enter/buy. BUT, IT IS A ONE MONTH SNAPSHOT, and NOT the final indicator of a retailer’s success, or failure, for the quarter or year.
By all means, Wal-Mart’s same store numbers may call to action adjustments in its marketing and merchandising programs. And WM has done so, but on price; the marketing and merchandising program for ’06.
SIDE BAR: Isn’t it a practice by most shoppers in today’s business climate to wait for the final sales for some Holiday shopping? Or waiting to buy after the Christmas period? When price is your only marketing position, guess what?! WM has painted itself into a corner of major proportions.
Interestingly, a year ago the planning process should have had some research and monitoring feedback on consumers; whether in the high, middle, or low income segment.
Additionally, Wal-Mart should have had a gauge on its direct and non direct competitors. And, how they would impact Wal-Mart’s planning and programs developed, for ’06, and the crucial Holiday Season!
Wal-Mart, either misread its core shopper base, or its competitors’ program impact — or both is a more accurate response.
What is the saying…”to move an elephant is a gigantic task. But, use a mouse and the elephant will move quickly”?
Wal-Mart hasn’t found the mouse, or more appropriately, the mice for the Holiday season. And it is paying the price for it. Hmmmmmmmmmmm
Thrilled to see the balance perspective offered so far. Is Wal-Mart a bellwether for the larger economy? I would answer “Yes, but perhaps not this year.” As pointed out by other panelists, Wal-Mart is digesting an astounding number of new-ish initiatives to include brand launches, store of the community tweaks, large-scale remodels, national advertising initiatives, energy conservation tests, international expansion, “best” product experiments…oh, and a complete restructuring of merchandising and product processes and roles at HQ (always left out in the coverage of woes). To borrow from David’s observation, they are limping along nicely all things considered and I’d give them high marks for boldness and embracing change.
Wal-Mart comp sales increases have been getting more and more muted for several years. Target comp sales increases, comparatively, have been robust. So the Wal-Mart weakness isn’t new, and isn’t being experienced by all of the competition. Those facts indicate that the cause (1) isn’t economy-wide and (2) isn’t recent.
For several years, as Wal-Mart rolled out its supermarket-killers, nice comp sales resulted. The supermarket-killer tactic is now a mature business. So Wal-Mart needs a giant new business to roll out. Otherwise, it will experience more of the same sales maturity (flat sales).
It is, of course, not a good sign when a retailer the size of Wal-Mart shows bad numbers, since the overall percentage of their impact is substantial. At the same time, the good news from the department store world and specialty retailers — as well as Target, their main competitor — all make me think that there is a transitional merchandising lag at Wal-Mart that is impacting their numbers.
The remodels, assortment changes and PR in general good and bad, are all going to need to be digested by senior management. As mentioned in the article, they did not get to be this big by mistake, so the real issue will be how good the team is as they adjust to the consumer feedback of their decisions.
George,
I hate to provide such a quick response to what is obviously a well thought-out question, but being a “root cause thinker” I have been curious about the Wal-Mart numbers. Specifically, the effects of Katrina. When you think about this time last year (October/November), you had a lot of displaced households that were setting up in new locations and making a lot of purchases with FEMA and other relief checks. The stuff they were buying was exactly the kinds of things you find at Wal-Mart, the everyday items that you need to just run a household and don’t really have a brand name associated with them. No wonder this years sales don’t compare to last year’s. I haven’t seen any discussions that address this effect.
Actually this response has taken longer to prepare, because the other challenge I have as a “root cause thinker” is trying to figure out what sales figure everyone is talking about. Is it “sales,” “same store sales,” or “comparable store sales.” Which number we are talking about can have a huge impact on its meaning. Sales, as I understand it, are actually up at Wal-Mart. “Same store sales,” which is the more restrictive number that includes only stores that have been open at least a year, are down. This can be adversely affected by nearby store openings that draw customers from existing stores. Finally, “comparable store sales” attempts to eliminate the distortion in same store sales, but I am not aware of a standard definition for the stores in this group. I believe the Wal-Mart numbers are for same store sales, which could merely be distorted by the the cannibalization of existing stores in addition to the Katrina effect.
Having said that, I believe you answered your own question as you described the changes in the US population’s economic status. We are becoming “Two Americas” and I believe we should be concerned about it. I think that resolving this is very difficult but one part will be the need to tax automation. I know this will effect productivity, but as a society I feel it is more important that we understand the social costs of replacing workers with automation and imports. Since NAFTA and other trade agreements make it difficult to tax imports we are left with automation.
The minimum wage is so out of whack that it needs to be addressed immediately, but the long term solution must be a society where a person completing their years in the public education system can find employment compensation sufficient to support a family. If that means raising the cost of automation through taxes that fund public spending in order to employ high school graduates, so be it. Some of greatest art work and infrastructure resources were produced though public works programs. Another thing that could be done is to use the automation tax revenue to reduce the cost of additional education, in effect making an undergraduate degree part of the public education.
But all these efforts ignore the fact that in the end, some people simply are not going to make it. Just as we would reach out for the physically disabled, we must be ready to help those who just don’t get quantum physics. If that means using some of the robot taxes to fund social workers and other support networks, then we must do that.
The key to a successful Democracy is a strong middle class. The only reason a dictator can appeal to the population is if there is perceived disparity between the haves and the have-nots. Once the have-nots believe they have nothing to loose by trying the “new order,” the future of the democracy is lost.
It’s interesting that so many tie Wal-Mart’s troubles to product selection. Even with all of its changes, 90 percent (or more) of what the typical Wal-Mart sells is the same stuff people were scooping up before. There’s no doubt that Wal-Mart shoppers, whether middle or lower-income, have less to spend today than they’ve had in recent years. That is what keeps same-store sales down.
When your entire business is built on your “everyday low” prices (Wal-Mart) and your competition (Target) is able to match those prices, you are in trouble! They should have known that one day another company would sneak in, find its own niche, match its prices, and gain market share — that they should have known — but they must not be quite as savvy as we had thought, because had they been, they would have had a plan in place for when it happened! And here we are, 2006, and they have no plan. Reminds me of Hurricane Katrina; the government knew it would happen, but didn’t have an effective plan in place for when it did.
Don’t cry for Wal-Mart, America. And furthermore, this is a giant that unlike others before it, is always looking to change even if it hurts.
A major executive of Wal-Mart told me that their demographic is everyone – his base for this was that 90% of Americans go to a Wal-Mart every year. Now the fact sales are down is indeed a sign the economy is weak (this is cyclical) but for not for long and the same will be true for Wal-Mart.
Wal-Mart’s competition has become more efficient and they are able to price down to Wal-Mart levels. Manufactures understand the need for other healthy retailers so partner equally with Wal-Mart’s competition. As the rich get richer and the poor poorer there will be less dollars to purchase Wal-Mart’s product portfolio.
I believe Wal-Mart knew the growth would slow and their to market strategy needed additions. They can look at what is happening to the big 3 auto makers and how quickly they need to react without appearing desperate.
Richard Seesel’s metaphorical reference to Wal-Mart as a “big ship” is the key to understanding an inherent disadvantage in the way that Wal-Mart historically operates.
A “big ship” is neither elegant nor subtle in its movements and changing direction takes a good deal of effort and it is pretty darn visible to anyone observing it.
Operationally the company has had a tendency to be fairly reactionary and to over-steer and over-correct, a “ditch to ditch” approach to business if you will. As the company grew larger and its business matured, this “navigational” tendency has become a growing problem.
While the concept of having a “low resistance to change” is a hallmark of Wal-Mart’s internal culture, the truth is the company has always been slow to make decisions that result in change. The time and energy that builds up within the company prior to the decision to change is massive and when this kinetic energy is released it plows its way along despite its impact.
You can see this in the company’s approach to the decision to battle the image of cheap and dowdy apparel. Most of what it did was spot on, reducing the number of in house brands, refining and building on those which remained and building an assortment which appealed to a more sophisticated apparel customer.
Had the approach been done in a phased and well planned way it would have been a smoother ride, but when the decision was made there was a massive reaction internally and the assortment swung wildly to the upside. An example is that Metro 7, while successful in its initial distribution to a few hundred stores, was expanded and distributed throughout the chain and subsequently fell flat on its face.
If the reaction to this disappointment is equal in size and scope resulting in a pullback that may well kill the brand entirely.
Wal-Mart has and incredibly talented and highly intelligent management team, they are simply going to have to learn how to navigate that big ship in a more measured way.
One other factor to consider here is the merchandising prowess of Wal-Mart vs. the rest of the world. Wal-Mart has never been known in manufacturer circles for being a great merchandiser. Often times their execution is sorely lacking.
Then, begin to look at the competition. Grocers, specialty stores, department stores, electronics stores and warehouse clubs are all better merchandisers than Wal-Mart. Walk through a few Wal-Mart stores and you will begin to see what I mean.
The “stack it high; watch it fly” mentality is alive and well at Wal-Mart. But, most consumers are looking for more than just this, even in a tight economy. They still desire easier stores to navigate, wide aisles, and “easy to make a buying decision” planograms. Wal-Mart doesn’t do this part very well.
While many will contest this POV, many friends not connected with the CPG industry have echoed this on numerous occasions to me.
While a bit off topic, I feel as though I should comment on a previous post in this discussion.
First off, I won’t pretend that God has let me in on how the economy is intended to work. I do know, however, that Adam Smith may be one of the most frequently misrepresented individuals in history. Reading The Wealth of Nations and The Theory of Moral Sentiments, it is clear Smith was not about commerce without conscience. Consider his words.
“All for ourselves and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind.”
“What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
Smith was vehemently against putting wealth into the hands of the few be they individuals, companies or government officers. His economic treatise was based on making it possible for the small guy to better their financial situation. Let’s not suggest that the current distribution of wealth in the U.S. is consistent with the outcome Smith desired. As for God, I’ll let Him/Her/It answer the question without me placing my own assumptions on what that response might be.
Look for a Wal-Mart in an upscale neighborhood near you soon!!! We are seeing this in the Phoenix area as they have run out of poor people to sell to and are now having to expand into the higher income suburbs of Chandler, Gilbert & Scottsdale.
Even the other value oriented chains such as Dollar Tree and 99 Cents Only are opening stores in neighborhoods in which no one thought they would be 5 years ago. In the upscale 85308 zip code in the Arrowhead area of Glendale, Arizona, 99 Cents Only opened a store directly across the street from specialty grocer AJ’s Fine Foods, only to discover how well the well heeled are attracted to bargains. When you look at their parking lot you would be hard pressed to find any 10 year old cars parked out front.
Why is this happening? It’s no mystery that those who have the money like to keep it and not waste it. Some of the best performing individual stores within these chains are in nicer areas.
When I talk to execs from some of these companies in my day to day business, they all tell me the same thing, they want to serve customers who have money. They are tired of chasing the poor and/or middle class.
Of course, slowing sales numbers at Wal-Mart will have an effect on the economy because it is a huge employer and because the media will be talking about what and why. However, during the past 18 months there has been a lot of discussion here about Wal-Mart’s evolving strategy: going after fashion, experimenting with a high end store in Plano, deciding to vary the offerings in stores to reflect the consumers in that area. None of these are the core Wal-Mart strategy: offer products so ordinary folks can buy the same products rich people do.
One of the previous comments mentioned that sales of Wal-Mart’s core products were doing well. Maybe Wal-Mart needs to listen to its consumers and return to its core strategy.
It’s simple. Everyone’s now selling China, Inc. The local hardware, pharmacy or grocery store is as likely to have that profitable electronic, self-care, home-thing, lawn-garden tool thing at a low price as Wal-Mart. Wal-Mart is stuck selling loss leaders while competition for the good stuff is too high. Everyone has decent computer power now and an efficient distribution system no longer has the advantage it once did.
I agree with most of the commentators that Wal-Mart’s sales problems are not necessarily indicative of the “financial state of the Wal-Mart shopper.” Disappointment with merchandise content once the customer is in the store is probably the root cause. Wal-Mart has blamed itself for moving too quickly to roll out fashion initiatives like Metro7.
That being said…is Wal-Mart’s long-term strategy to upgrade its store design and merchandise offerings right or wrong? Clearly Target’s solid performance says that it’s gaining market share in apparel and home at Wal-Mart’s expense, as well as other competitors like Old Navy. Repositioning a big ship like Wal-Mart is not a six-month project; the company still needs to grow by broadening its appeal beyond the lowest income rung of its customer base.
The methodology of being the low cost provider of product works well in an economy that is growing. When the majority of Wal-Mart’s consumers are at the lower income level, the ability to continue to grow is restricted at some point. There just not enough growth in income at this lower financial bracket. Couple this with the fact that Wal-Mart is slow in evaluating new products and introducing them to their consumers and has a proportional affect on both sales and margins. I am of the opinion that those retailers who will shorten the process of the introduction of new products with respect to getting them within their system will be those succeeding.
Seeing Wal-Mart having some problems is concerning, and in many ways as seen in the past, as Wal-Mart goes, so does the economy. However Wal-Mart is now facing problems not based on economic conditions, but because they forgot who their customer is. I’m thinking of the story about the dog looking off the bridge into the water, and seeing another dog with a bigger bone; the dog drops its bones while trying to take the perceived bigger bone. What Wal-Mart needs to accept is that there are certain shoppers that Target has, that they will never have as a customer, and vice versa. Wal-Mart needs to remember who their core customer is, and not forget them. Discontinuing layaways is an example of Wal-Mart losing sight of its base. Layaways are very important to many of its core shoppers, and the loss of them at Christmas is problematic. All retailers want to get better and to grow, but you can’t risk losing your base customers along the way.
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This question is something of a non-sequiter: (due to its size) a poor economy will make for poor sales at Wal-Mart, but poor sales at WM will not (necessarily) mean a poor economy. (Whether “poor sales” describes WM at the moment is unclear: this seems like much ado over a small decline in a month or two’s worth of comp sales.) Though it often seems impervious to practically everything, it’s possible WM’s problems — such as they are — are simply due to poor execution.
As for God’s plans for the economy, I don’t know…He hasn’t returned my calls.
Wal-Mart reminds me of an athlete who fakes a limp to look like he’s hurt. Basically we are saying Wal-Mart’s primary shoppers are poor people. Perhaps, but there are a lot of Wal-Mart stores in upscale areas as well. I have some news: poor people have never fared well economically, and never will. That’s why they are poor. Yet somehow they continue to find a way to survive. And Wal-Mart is more than happy to help them out. I don’t think I have ever read a report in my life on how well poor people are improving their conditions.
What we do know is Wal-Mart is still building a few hundred stores each year with no end in sight. The thing about Wal-Mart is they can limp along faster than most retailers can run.
Raising the minimum wage is just “feel good” politics, whether it’s coming from Wal-Mart or activists for the poor. Anyone working for minimum wage who gets a raise would only lose a similar amount in government aid, food stamps, earned income tax credits, and other handouts. Businesses would just raise prices to cover the increased expense. So who wins? Nobody. This is 2006 and wages are now determined by the laws of supply and demand, the way God and Adam Smith intended.
From what I see, anyone who makes minimum wage or $40,000 a year, they are in the same boat. If you don’t make $40,000, the government finds a way to get you there with assistance programs and aid.
With all due respect, I think it is not really correct to jump to the conclusion that Wal-Mart’s problems are all somehow related to the income situation of its supposed core customer base.
It overly stereotypes the Wal-Mart shopper — the true mix is much more broad, though Target clearly does get a generally more upscale shopper. Also note that when gas prices skyrocketed, WM blamed much of its woes on that impact, but now that gas prices have come way back down the results are basically still the same.
Final intro note — the problems are relative. Same stores sales flat, total sales up based on continued, though slowed, new store growth….
Ah, the cannibalization issue. In the US, WM is simply running into the law of big numbers, to a certain extent. In search of growth, it is packing stores closer and closer together. This of course will have an impact on sales growth at nearby stores when a new one opens.
Following “the wheel of retailing,” W-M is partly trying to go “upstream” to attract a more upscale customer, but this is awfully hard for a store so ingrained in the public mind with low price, staple goods, and which has such a huge scale over which this transition has to be managed.
One area where there clearly have been real operational/strategic issues has been international (UK, Germany, South Korea), for a number of reasons, in part from the lack of understanding of local markets.
Finally, the supply chain competencies of most of WM’s suppliers have improved dramatically, meaning WM’s cost advantage has significantly evaporated. That means, to have a price advantage, it has to push prices down even lower… impacting revenue and profits.
So, I don’t think this really has some big socio-economic twist, it is fundamentally the same old competitive story that plays out over and over again in retail. It’s just a surprise for many to see it happening to WM.
Wal-Mart has now entered the mature phase and the issues they’re facing should be expected. Every company goes through this phase where they reach a point of maximizing revenue from their core customer group and to maintain growth they try to expand out to other customer segments. The problem is they are attempting to move too quickly in too many different directions all the while fighting numerous PR issues that won’t go away. Wal-Mart’s problems are not indicative of a slowing of consumer spending among low and middle income segments. These groups are taking their dollars to other retailers as evidenced by the early reads we’re getting from other retailers.
I think we place way too much emphasis on the excessively aggregated data (such as financial statements) and not enough on the actual metrics that drive success (e.g., customer acquisition, repeat purchase rates, etc.). I’m disappointed that top financial analysts don’t insist that retailers (and other firms) disclose these kinds of numbers.
There’s no doubt that the “bottom line” matters, but it’s often a reflection of past decisions (often unrelated to the core business) rather than future performance.
Wal-Mart is so big that of course they are an economic indicator, but they should not be the only one. Even as leaders, they account for a minority, not a majority of sales, so there is plenty of opportunity for Wal-Mart to fall behind others on same store sales performance; meaning that the economy is not quite as bad as studying Wal-Mart might suggest.
You can ask the people at my former company; when Wal-Mart stopped sharing sales data with syndicated sales information providers (e.g. Nielsen, IRI) — I predicted this day would come! No one should think they are so big that they only have to study their own sales. The consumer is king, not Wal-Mart and they are floundering around a bit, trying to get back the pulse of the market.
It is hard to raise revenue when you are cutting prices.
Wal-Mart’s culture has been anti-marketing; for years they bragged about how low their marketing expenses were as a percentage of their sales. Competitors are now out-marketing them and getting a good return on their marketing investments. It will take a long time for Wal-Mart to learn how to better communicate their message (besides price) to their core customers and to attract new customers.
Wal-Mart’s metrics DO speak to the economic realities of its core customer. However, those realities are not grim. They simply aren’t good…which does not by implication mean “bad.” People are not spending more, nor are they spending appreciably less. Digging into Wal-Mart’s numbers in the past several years, one might have seen that comp growth was driven primarily through the addition of new product categories, the expansion of grocery and the addition of gasoline. They’ve done a great job of being the store of choice for a great many items with their core customer.
What they haven’t done is become a broader store of choice for secondary or tertiary customer groups. And even when they succeed here, the overall impact is low. Getting a 5% gain out of a segment which contributes 10% of your sales results in a half point overall improvement.
Let’s not overreact. Wal-Mart will continue to attempt to grow comp stores by increasing average spend for secondary consumer segments already shopping its stores. Growth from the primary segment WILL be a function of the overall economy. If the economy picks up steam and the demographic represented most strongly in the core customer group is financially better off, look for Wal-Mart comp results to rise.
There are some fundamental economic principles that, one might say, we are overlooking. But, to the bottom line of the question, Wal-Mart is a factor in considering how the shopper is feeling i.e.: a specific group; and the economy is acting.
But, if Wal-Mart says its numbers are disappointing, what does this mean? Is it that the annual plan’s numbers are too high? Or the last year, quarter, or month comparisons?… not a fair measurement, given other factors impacting them versus this year’s
Same store numbers are an indication of the individual retailer’s effectiveness to motivate the shopper to enter/buy. BUT, IT IS A ONE MONTH SNAPSHOT, and NOT the final indicator of a retailer’s success, or failure, for the quarter or year.
By all means, Wal-Mart’s same store numbers may call to action adjustments in its marketing and merchandising programs. And WM has done so, but on price; the marketing and merchandising program for ’06.
SIDE BAR: Isn’t it a practice by most shoppers in today’s business climate to wait for the final sales for some Holiday shopping? Or waiting to buy after the Christmas period? When price is your only marketing position, guess what?! WM has painted itself into a corner of major proportions.
Interestingly, a year ago the planning process should have had some research and monitoring feedback on consumers; whether in the high, middle, or low income segment.
Additionally, Wal-Mart should have had a gauge on its direct and non direct competitors. And, how they would impact Wal-Mart’s planning and programs developed, for ’06, and the crucial Holiday Season!
Wal-Mart, either misread its core shopper base, or its competitors’ program impact — or both is a more accurate response.
What is the saying…”to move an elephant is a gigantic task. But, use a mouse and the elephant will move quickly”?
Wal-Mart hasn’t found the mouse, or more appropriately, the mice for the Holiday season. And it is paying the price for it. Hmmmmmmmmmmm
Thrilled to see the balance perspective offered so far. Is Wal-Mart a bellwether for the larger economy? I would answer “Yes, but perhaps not this year.” As pointed out by other panelists, Wal-Mart is digesting an astounding number of new-ish initiatives to include brand launches, store of the community tweaks, large-scale remodels, national advertising initiatives, energy conservation tests, international expansion, “best” product experiments…oh, and a complete restructuring of merchandising and product processes and roles at HQ (always left out in the coverage of woes). To borrow from David’s observation, they are limping along nicely all things considered and I’d give them high marks for boldness and embracing change.
Wal-Mart comp sales increases have been getting more and more muted for several years. Target comp sales increases, comparatively, have been robust. So the Wal-Mart weakness isn’t new, and isn’t being experienced by all of the competition. Those facts indicate that the cause (1) isn’t economy-wide and (2) isn’t recent.
For several years, as Wal-Mart rolled out its supermarket-killers, nice comp sales resulted. The supermarket-killer tactic is now a mature business. So Wal-Mart needs a giant new business to roll out. Otherwise, it will experience more of the same sales maturity (flat sales).
It is, of course, not a good sign when a retailer the size of Wal-Mart shows bad numbers, since the overall percentage of their impact is substantial. At the same time, the good news from the department store world and specialty retailers — as well as Target, their main competitor — all make me think that there is a transitional merchandising lag at Wal-Mart that is impacting their numbers.
The remodels, assortment changes and PR in general good and bad, are all going to need to be digested by senior management. As mentioned in the article, they did not get to be this big by mistake, so the real issue will be how good the team is as they adjust to the consumer feedback of their decisions.
George,
I hate to provide such a quick response to what is obviously a well thought-out question, but being a “root cause thinker” I have been curious about the Wal-Mart numbers. Specifically, the effects of Katrina. When you think about this time last year (October/November), you had a lot of displaced households that were setting up in new locations and making a lot of purchases with FEMA and other relief checks. The stuff they were buying was exactly the kinds of things you find at Wal-Mart, the everyday items that you need to just run a household and don’t really have a brand name associated with them. No wonder this years sales don’t compare to last year’s. I haven’t seen any discussions that address this effect.
Actually this response has taken longer to prepare, because the other challenge I have as a “root cause thinker” is trying to figure out what sales figure everyone is talking about. Is it “sales,” “same store sales,” or “comparable store sales.” Which number we are talking about can have a huge impact on its meaning. Sales, as I understand it, are actually up at Wal-Mart. “Same store sales,” which is the more restrictive number that includes only stores that have been open at least a year, are down. This can be adversely affected by nearby store openings that draw customers from existing stores. Finally, “comparable store sales” attempts to eliminate the distortion in same store sales, but I am not aware of a standard definition for the stores in this group. I believe the Wal-Mart numbers are for same store sales, which could merely be distorted by the the cannibalization of existing stores in addition to the Katrina effect.
Having said that, I believe you answered your own question as you described the changes in the US population’s economic status. We are becoming “Two Americas” and I believe we should be concerned about it. I think that resolving this is very difficult but one part will be the need to tax automation. I know this will effect productivity, but as a society I feel it is more important that we understand the social costs of replacing workers with automation and imports. Since NAFTA and other trade agreements make it difficult to tax imports we are left with automation.
The minimum wage is so out of whack that it needs to be addressed immediately, but the long term solution must be a society where a person completing their years in the public education system can find employment compensation sufficient to support a family. If that means raising the cost of automation through taxes that fund public spending in order to employ high school graduates, so be it. Some of greatest art work and infrastructure resources were produced though public works programs. Another thing that could be done is to use the automation tax revenue to reduce the cost of additional education, in effect making an undergraduate degree part of the public education.
But all these efforts ignore the fact that in the end, some people simply are not going to make it. Just as we would reach out for the physically disabled, we must be ready to help those who just don’t get quantum physics. If that means using some of the robot taxes to fund social workers and other support networks, then we must do that.
The key to a successful Democracy is a strong middle class. The only reason a dictator can appeal to the population is if there is perceived disparity between the haves and the have-nots. Once the have-nots believe they have nothing to loose by trying the “new order,” the future of the democracy is lost.
It’s interesting that so many tie Wal-Mart’s troubles to product selection. Even with all of its changes, 90 percent (or more) of what the typical Wal-Mart sells is the same stuff people were scooping up before. There’s no doubt that Wal-Mart shoppers, whether middle or lower-income, have less to spend today than they’ve had in recent years. That is what keeps same-store sales down.
When your entire business is built on your “everyday low” prices (Wal-Mart) and your competition (Target) is able to match those prices, you are in trouble! They should have known that one day another company would sneak in, find its own niche, match its prices, and gain market share — that they should have known — but they must not be quite as savvy as we had thought, because had they been, they would have had a plan in place for when it happened! And here we are, 2006, and they have no plan. Reminds me of Hurricane Katrina; the government knew it would happen, but didn’t have an effective plan in place for when it did.
Don’t cry for Wal-Mart, America. And furthermore, this is a giant that unlike others before it, is always looking to change even if it hurts.
A major executive of Wal-Mart told me that their demographic is everyone – his base for this was that 90% of Americans go to a Wal-Mart every year. Now the fact sales are down is indeed a sign the economy is weak (this is cyclical) but for not for long and the same will be true for Wal-Mart.
Wal-Mart’s competition has become more efficient and they are able to price down to Wal-Mart levels. Manufactures understand the need for other healthy retailers so partner equally with Wal-Mart’s competition. As the rich get richer and the poor poorer there will be less dollars to purchase Wal-Mart’s product portfolio.
I believe Wal-Mart knew the growth would slow and their to market strategy needed additions. They can look at what is happening to the big 3 auto makers and how quickly they need to react without appearing desperate.
Richard Seesel’s metaphorical reference to Wal-Mart as a “big ship” is the key to understanding an inherent disadvantage in the way that Wal-Mart historically operates.
A “big ship” is neither elegant nor subtle in its movements and changing direction takes a good deal of effort and it is pretty darn visible to anyone observing it.
Operationally the company has had a tendency to be fairly reactionary and to over-steer and over-correct, a “ditch to ditch” approach to business if you will. As the company grew larger and its business matured, this “navigational” tendency has become a growing problem.
While the concept of having a “low resistance to change” is a hallmark of Wal-Mart’s internal culture, the truth is the company has always been slow to make decisions that result in change. The time and energy that builds up within the company prior to the decision to change is massive and when this kinetic energy is released it plows its way along despite its impact.
You can see this in the company’s approach to the decision to battle the image of cheap and dowdy apparel. Most of what it did was spot on, reducing the number of in house brands, refining and building on those which remained and building an assortment which appealed to a more sophisticated apparel customer.
Had the approach been done in a phased and well planned way it would have been a smoother ride, but when the decision was made there was a massive reaction internally and the assortment swung wildly to the upside. An example is that Metro 7, while successful in its initial distribution to a few hundred stores, was expanded and distributed throughout the chain and subsequently fell flat on its face.
If the reaction to this disappointment is equal in size and scope resulting in a pullback that may well kill the brand entirely.
Wal-Mart has and incredibly talented and highly intelligent management team, they are simply going to have to learn how to navigate that big ship in a more measured way.
One other factor to consider here is the merchandising prowess of Wal-Mart vs. the rest of the world. Wal-Mart has never been known in manufacturer circles for being a great merchandiser. Often times their execution is sorely lacking.
Then, begin to look at the competition. Grocers, specialty stores, department stores, electronics stores and warehouse clubs are all better merchandisers than Wal-Mart. Walk through a few Wal-Mart stores and you will begin to see what I mean.
The “stack it high; watch it fly” mentality is alive and well at Wal-Mart. But, most consumers are looking for more than just this, even in a tight economy. They still desire easier stores to navigate, wide aisles, and “easy to make a buying decision” planograms. Wal-Mart doesn’t do this part very well.
While many will contest this POV, many friends not connected with the CPG industry have echoed this on numerous occasions to me.
While a bit off topic, I feel as though I should comment on a previous post in this discussion.
First off, I won’t pretend that God has let me in on how the economy is intended to work. I do know, however, that Adam Smith may be one of the most frequently misrepresented individuals in history. Reading The Wealth of Nations and The Theory of Moral Sentiments, it is clear Smith was not about commerce without conscience. Consider his words.
“All for ourselves and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind.”
“What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
Smith was vehemently against putting wealth into the hands of the few be they individuals, companies or government officers. His economic treatise was based on making it possible for the small guy to better their financial situation. Let’s not suggest that the current distribution of wealth in the U.S. is consistent with the outcome Smith desired. As for God, I’ll let Him/Her/It answer the question without me placing my own assumptions on what that response might be.
Look for a Wal-Mart in an upscale neighborhood near you soon!!! We are seeing this in the Phoenix area as they have run out of poor people to sell to and are now having to expand into the higher income suburbs of Chandler, Gilbert & Scottsdale.
Even the other value oriented chains such as Dollar Tree and 99 Cents Only are opening stores in neighborhoods in which no one thought they would be 5 years ago. In the upscale 85308 zip code in the Arrowhead area of Glendale, Arizona, 99 Cents Only opened a store directly across the street from specialty grocer AJ’s Fine Foods, only to discover how well the well heeled are attracted to bargains. When you look at their parking lot you would be hard pressed to find any 10 year old cars parked out front.
Why is this happening? It’s no mystery that those who have the money like to keep it and not waste it. Some of the best performing individual stores within these chains are in nicer areas.
When I talk to execs from some of these companies in my day to day business, they all tell me the same thing, they want to serve customers who have money. They are tired of chasing the poor and/or middle class.
Of course, slowing sales numbers at Wal-Mart will have an effect on the economy because it is a huge employer and because the media will be talking about what and why. However, during the past 18 months there has been a lot of discussion here about Wal-Mart’s evolving strategy: going after fashion, experimenting with a high end store in Plano, deciding to vary the offerings in stores to reflect the consumers in that area. None of these are the core Wal-Mart strategy: offer products so ordinary folks can buy the same products rich people do.
One of the previous comments mentioned that sales of Wal-Mart’s core products were doing well. Maybe Wal-Mart needs to listen to its consumers and return to its core strategy.
It’s simple. Everyone’s now selling China, Inc. The local hardware, pharmacy or grocery store is as likely to have that profitable electronic, self-care, home-thing, lawn-garden tool thing at a low price as Wal-Mart. Wal-Mart is stuck selling loss leaders while competition for the good stuff is too high. Everyone has decent computer power now and an efficient distribution system no longer has the advantage it once did.
I agree with most of the commentators that Wal-Mart’s sales problems are not necessarily indicative of the “financial state of the Wal-Mart shopper.” Disappointment with merchandise content once the customer is in the store is probably the root cause. Wal-Mart has blamed itself for moving too quickly to roll out fashion initiatives like Metro7.
That being said…is Wal-Mart’s long-term strategy to upgrade its store design and merchandise offerings right or wrong? Clearly Target’s solid performance says that it’s gaining market share in apparel and home at Wal-Mart’s expense, as well as other competitors like Old Navy. Repositioning a big ship like Wal-Mart is not a six-month project; the company still needs to grow by broadening its appeal beyond the lowest income rung of its customer base.
The methodology of being the low cost provider of product works well in an economy that is growing. When the majority of Wal-Mart’s consumers are at the lower income level, the ability to continue to grow is restricted at some point. There just not enough growth in income at this lower financial bracket. Couple this with the fact that Wal-Mart is slow in evaluating new products and introducing them to their consumers and has a proportional affect on both sales and margins. I am of the opinion that those retailers who will shorten the process of the introduction of new products with respect to getting them within their system will be those succeeding.
Seeing Wal-Mart having some problems is concerning, and in many ways as seen in the past, as Wal-Mart goes, so does the economy. However Wal-Mart is now facing problems not based on economic conditions, but because they forgot who their customer is. I’m thinking of the story about the dog looking off the bridge into the water, and seeing another dog with a bigger bone; the dog drops its bones while trying to take the perceived bigger bone. What Wal-Mart needs to accept is that there are certain shoppers that Target has, that they will never have as a customer, and vice versa. Wal-Mart needs to remember who their core customer is, and not forget them. Discontinuing layaways is an example of Wal-Mart losing sight of its base. Layaways are very important to many of its core shoppers, and the loss of them at Christmas is problematic. All retailers want to get better and to grow, but you can’t risk losing your base customers along the way.