August 15, 2007
Supply Chain Digest: Where is Wal-Mart’s Secret Plan?
By SCDigest Editorial
Staff
Through a special arrangement, what follows is an excerpt of a current article
from Supply Chain Digest, presented here for discussion.
Wal-Mart’s stock price sank to a 52-week low this week, after years of disappointing returns to investors, as the retailer announced slow profit growth in Q2 and reduced financial expectations for the year, citing pressure on consumers from higher gas prices and other factors.
Sales and profits were up, but at rates that again paled in comparison to historical percentages. Sales for the quarter on a global basis increased by about $7 billion, or roughly eight percent, but that includes new international business and new store openings in North America. Same store sales at Wal-Mart stores in the U.S. rose just 1.2 percent. Profits rose only by about five percent, helped by gains outside of operations, without which they would have been nearly flat.
“Although some people will report that Wal-Mart has had record sales and earnings, our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us,” said CEO Lee Scott.
While the media widely reports Wal-Mart’s Q2 results, which were being blamed for an overall down day on Wall Street, no one seems to remember that earlier this year the same business media was abuzz with stories about Wal-Mart’s super-secret plan to raise its share price, code named “Project Red.” The strategy was considered so sensitive that high-priced consultants the company used were only allowed to work on parts of the whole strategy and made to toil in extremely high security offices.
The plan reportedly involved a spin-off of its Sam’s Club chain as one component, but later reports said that idea had been quashed.
So a logical question is: Where is the plan now when it seems to be needed most? Still being developed, or forgotten for some undisclosed reason?
Wal-Mart has struggled in its efforts to increase market share in apparel and home furnishings, but lately home electronics has been a bright spot. Plans to enable local stores to have more discretion in product and merchandising decisions do not seem to be getting much traction or attention.
To keep things in perspective, Wal-Mart’s increase of $7 billion in revenue for one quarter is larger than most retailers manage all year. Nonetheless, it seems to many that Wal-Mart’s enormous retail and supply chain clout will diminish relatively over the next decade, as it will simply be unable to match the growth rates other retailers, including increasingly strong competitors such as Target and Costco, and as Tesco prepares to enter the U.S. market.
Discussion Questions: What do you think has happened to Wal-Mart’s “Project Red” plan to raise its share price? How is the company’s share price affecting the way it operates its business? Do you think the focus on share price has resulted in Wal-Mart management making decisions based on Wall Street demands rather than the long-term health of the business? What can (should) Wal-Mart do to reignite same store sales growth in the U.S.?
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If there is a secret plan, it will be very difficult to put in place. I think that Wal-Mart is finally reaching the saturation point on many fronts. One, the concept of “everyday low prices” can only be driven so far until other marketing and sales issues start to suffer, i.e. perceived quality. Two, Wal-Mart has continued to drive vendors and their vendor community in the everyday low cost format as well. Since there is a finite amount of vendors in each category, I think that they are now reaching the saturation point and loss of vendor availability in some of the key categories which will slow growth in those areas and hinder profitability. Three, Wal-Mart is and has continued to try to expand its focus on different consumer groups, trying to persuade those on the upper end of their reach to shop at their locations by offering up-scale merchandise–essentially losing focus on who they are (which has not worked). And last, Wal-Mart is essentially giving up in some areas of the store. In Sporting Goods, for example, they have decided that they cannot compete with the key Sporting Goods retailers and they have cut back the space. This follows the hardware and some of the hard goods categories. They say they are following the trends and placing the space and SKUs in growing areas that they can maintain. One would suggest that this is not true, this in a true marketing sense was why Wal-Mart drove these categories in the first place, which drove the others areas of the location. So I suggest, while there may be a secret plan, it may be too late to implement without some major rethink and reshaping.
One of the interesting things to note in their results is a 14% growth in food sales in supercenters. It seems to be mentioned merely in passing. Yet considering that, the overall rate of same store sales hovers around 1.3%-1-5%, which may or may not be more significant to note. Food sales do not necessarily grow store sales with the same dollars as other consumer goods. Yet it would seem to indicate a higher rate of lackluster sales on one side of the store. Nevertheless, I believe that the 14% growth in food is significant to note, especially for their competitors in the food arena.
Too high a rate of store growth? Lack of a overall marketing approach rather than a strict price approach? Piling up of consistent bad news for the retailer on the public relations and labor relations sides? Expansion into product lines such as consumer electronics and computers that draw limited sales and low margins? The list could keep growing. You name the factor. Any one of these or others that have been mentioned could be factors in a stagnant share price.
Yet all that said, and more, including all in the previous comments, (all good) it would be foolhardy to believe that Wal-Mart has hit a wall or any such notion. Furthermore, any larger retailer in the ring with Wal-Mart would writhe in envy for a 7 billion dollar gain in revenue by anyone’s measure.
Wal-Mart consistently works to expand their offering, deliver more, seek new consumers, change the consumers perception than any other retailer. Anyone thinking that they have hit a wall might be better served by simply considering it as a lull before the next storm. Anything else would be wishful thinking.
I think Wal-Mart’s past success in managing its stock price was all about revenue growth…the objective to raise a company’s stock price often requires growth numbers that the organization or the marketplace environment cannot support. That seems to be the case here.
If you look back at Wal-Mart’s growth pattern it was Division I store expansion followed by the growth into supercenters and then entrance into more urban markets. The first two growth scenarios were all about placing a new retailing format into mostly rural markets and were very successful. The third scenario appears to be a bit more difficult to achieve given East and West Coast resistance to big box store formats and more sophisticated competition in urban markets.
It seems to me that Wal-Mart’s focus needs to be on the creation of its “banking entity” and the tremendous growth available in the emerging markets in Asia (China in particular). I think these are the areas that will create shareholder value and drive its stock price.
Traditionally, Wal-Mart’s success hinged on giving consumers low prices for products and keeping operating expenses around 17%. In the growth phase, that formula was incredibly successful. Along the way, other retailers have become smart about focusing on their consumers and cutting costs. Wal-Mart has responded by changing its focus, experimenting with new options and offerings, and new formats. Wal-Mart is even charging its partners to use scanner data to differentiate assortments of products by store.
New formats, offerings, experiments, and differentiation make it difficult to keep those operating expenses at 17%. Maybe it’s no longer possible to keep operating expenses at 17% given the size, variety, and location of stores along with sharper competition and Wal-Mart is settling into its “new normal.”
There is no question that Wal-Mart management is playing to their Wall Street constituents. Their knee jerk reaction to roll back prices a couple of weeks ago in response to a difficult sales trend is indicative of their position to “play to their investor audience,” not their customer. Does any consumer (or shareholder) actually think that Wal-Mart has prices that are too high? There’s no way. Everyone thinks of Wal-Mart as the clearly dominant low price retailer and leader.
Wal-Mart comp sales are not lagging because their prices are not low enough; that is a joke to even assume. Their sales are lagging because they fail to execute all the way through to their individual stores the improved merchandise strategies that they talk about at every meeting with analysts. It is not enough to look at better merchandise assortments and strategies in conference rooms and PowerPoint decks in Bentonville. They must get these things they are seeing in their corporate meetings and overviews executed at the point of sale so that the customer gets it, sees the improvement and responds.
The rolled back prices they just executed will do nothing to stimulate more sales; they will only trade down the sales they have, reduce the already thin margins, and take precious store hours and attention away from improving the overall presentation and experience (especially in apparel areas).
I guess we’ve got an S-curve problem here, if I’m not stating the obvious.
That’s the model that shows the market penetration of a new technology, industry, product or whatever, and maybe there are other models out there that supersede it. But in the S-curve model, an idea takes a certain amount of time to get first to one percent penetration, then the same amount to ten percent, then fifty, then ninety. Then, once you’re at saturation, you’re at saturation.
Wal-Mart has reached the top of the S-curve of various business models it’s invented along the way, and Wall Street is demanding that it keep reinventing itself instead of accepting that it has now nearly saturated the markets it’s created with those models.
But the company’s never really been about marketing in a competitive environment–what has passed for marketing has been telling a story about price at the consumer level and operations at the trade level.
Its first model was about bringing big-city merchandise to the country at competitive prices–a feat of efficient operations and cost control that happened to have a market that had never been served before.
Its second model was taking that operations expertise and expanding it to undercut other discounters on price. It did that well enough that Venture Stores and other regional players are gone, Kmart is gasping and Target has a completely different position in the market.
And its third was expanding the operations model into grocery. To be clear, by operations I mean all the stuff we talk about all the time–the automated supply-chain management, the overseas sourcing and the relentless labor-cost control–plus factors we may not be privy to.
In my view, WM is an operations-driven company. And its mindset is stuck a bit in the systems of the 20th century–I’m not sure it really understands the internet.
If it’s going to do any more significant growing, it’s got to either pull a 21st-century operations trick out of its hat, and soon. Or it’s got to let itself become a marketing-driven company, only this time do it more gradually and with a set of hires that won’t be so jarring to the existing culture–or the current customer base.
I don’t know what “Project Red” means for Wal-Mart, or where it stands, but I hope that Wal-Mart will continue to do what it does best and not become completely caught up with the usual three-month mentality that victimizes some other publicly held retail companies. Wal-Mart needs to follow its own formulas for success, making only thoughtful adjustments and tweaks along the way to stay up with changing times. Wall Street reacts to a lot of different events and variables that are not necessarily relevant to what drives a solid retail growth model. If you need financial advice please contact your financial adviser but from my point of view, when Wal-Mart stock prices are down, I’m probably a long term buyer. The formula is still a good one and Wal-Mart isn’t going away.
A “secret plan” to raise Wal-Mart’s stock price reminds me of Nixon’s “secret plan” to end the Vietnam War. (We all know how that came out.) It’s tough for the world’s largest corporation to develop strategies to drive its share price without at least some degree of transparency to the investment community, especially when you consider how broadly its stock is owned. We are in a punitive cycle for stocks that disappoint and surprise (on the downside), and Wal-Mart was certainly guilty of that sin this week.
Wal-Mart’s management does seem to have a handle on some of its prior missteps and is taking corrective action to improve the in-store experience, but it’s not a turnaround project that will take a quarter to achieve. In the short term, Wal-Mart’s defensive move to hang onto market share is (as usual) dropping prices, which has a predictable effect on quarterly operating income even as comp sales start to pick up.
Project Red may have referred to ink color. [Sorry, couldn’t resist.] Seriously, Wal-Mart can’t dictate consumer consciousness and its rapidly losing face with its core domestic market. Of course it’s all about share price. Our system of corporate valuation is so twisted the analysts end up with more power than corporate leadership and the public will combined. If I were Lee Scott, I’d start my turnaround by recementing my traditional relationship with my core, no matter what the analysts said. I’d also try a “common sense” appeal to the shareholders based on the radical proposition that what’s good for the company is…well…good for the shareholders. Then maybe they could quit flailing around and get back to business.
I was, unfortunately, not invited to participate in any Plan Red planning. My comment is around the impact of share price focus on management decision making. As a regular visitor to Bentonville over the years, I can’t help but remember the proud display of share price in the austere waiting room for vendors. Share price watching has been a part of the corporate culture for a very long time. Part of this is because the share value appreciation was a significant part of employee wealth appreciation. Many employees have gained measurable wealth over the decades through stock ownership and option participation. For as long as I can remember, executives I dealt with have been hyper aware of the stock value.
Well, that worked unbelievably well for an unprecedented period of time…right up until economic maturity in US operations and inconsistent results for international operations became reality. With the maturation of the US operational base, the company lost the driving engine for growth. One of the Panelists has already documented the stages WM has gone through, and for the most part, I concur. Let’s take one nanosecond though to note that WM actually went through those, and how most of them are almost textbook best practices in managing the growth curve of large organizations in a limited product portfolio play. Nanosecond over….short term quarterly performance management in retail has been found, with very few if any exceptions, to produce management decision making inappropriate for long term shareholder value and business results. I’m relatively sure that intelligent executives know this at WM. It’s not particularly insightful analysis. So why does it appear as if WM is falling prey to the gyrations associated with stock-watching decision making?
I believe the answer lies in the compensation and wealth accumulation model for employees. I do not have overwhelming data to support this. However, I believe that WM’s executive compensation on a position-for-position basis, is below that of its competition, and certainly below when economic scale is factored in. Retail merchants tend to make more money as they are responsible for more dollars. If I am correct, this is going to make for a substantial change in overhead.
Look for Wal-Mart to initially hide their results around the woes of the economy and also to try to say how others like Home Depot are having similar problems. As a final gasp, they will also put all of their hopes on having a stellar fourth quarter which, with the exception of the CE category, will probably wind up being a let-down. This means “Project Red” or whatever they want to call it will probably be activated in the first half of 2008, and yes, I do believe it will involve spinning off Sam’s.
I have always admired Wal-Mart for not allowing share price to dictate how they run their company. That would be like a football team letting the Vegas oddsmakers dictate how they play their game. In my opinion, Wal-Mart could care less about their share price. They often downplay their finances rather than brag. I also do not think Wal-Mart should be concerned about same store sales. Sure, if they had underperforming stores it would be an issue, but Wal-Mart has a sales per square foot performance that is far superior to most of their competitors. They need to build more stores to take the pressure off of the ones they have. What a lot of analysts do not realize is just how far ahead Wal-Mart is in sales per square foot and market share compared to their competition.
I also think Wal-Mart likes to cry the blues and keep their stock price down to give the anti-Wal-Mart extremists some false sense of victory so they back off.
When comp sales rise only 1.2%, Wal-Mart loses its growth stock investors. Wal-Mart has gone through several lifecycle stages: (1) fast growth with low real estate and low labor costs (Sam Walton’s salad days)(2) cost reduction by increased Asian imports and other supply chain improvements (3) overhead increases from expansion into higher cost suburban areas (4) market share expansion via grocery (5) attempting higher margin tactics via apparel and (6) comp store sales increases (less cannibalization) and better capital allocation by opening fewer new locations.
Wal-Mart would do best by cutting new store openings to the bone and testing multiple apparel strategies in dozens of stores simultaneously. Fewer new locations = less cannibalization = better comp sales trends. Apparel margin increases can go straight to the bottom line even if sales are flat.
And it might not hurt to spin off minority percentages of Sam’s Club and more of the foreign divisions. Even though Wal-Mart stock has been a disappointment over the past 5 years, stock in Wal-Mart de Mexico has done very nicely.
First, Wal-Mart has not done a good job in trying to reposition itself with the consumers; or some may say, conduct a ‘marketing turnaround’. And secondly, the go then no go decisions, on all of its other marketing initiatives have been reduced, if not stopped.
WM, implied, if not stating outright to Wall Street, the repositioning and new marketing efforts would help in improving its financial results and marketplace positioning.
So Wall Street and the grocery industry waited for the WM turn around–at some level–from consumer marketing, its stronghold in price strategy, and market image. Well, the ‘turn around’ of WM, didn’t happen! Concurrently, WM went into its ‘comfort zone’ of cost cutting initiatives, to include a modification–if not revamp–of its supply chain management program.
Interestingly, the status of its suppliers, and their need to spend many dollars in the new SCM program, has caused some meaningful issues, and more time to enact.
So even, these ‘comfort zone’ cost savings action steps haven’t proven out , or meaningfully helped the financial results of WM, to date!
This giant, a believer in only price positioning to the marketplace and consumers, thought its growth advance in top and bottom line would always be its engine…or business strategy for success.
The marketplace has changed, as well as the consumer, to include WM’s own shoppers. WM hasn’t figured it out…as its competitors’ tactics against this giant are working better!
The question to be asked, “what supermarketers, if you will, haven’t attended or mastered, marketing 101, and proper consumer communications, 201?” Hmmmmmmmmmmm
It has been mentioned here already but maybe it needs to be mentioned again. Wal-Mart has indeed been an operations-based company. Marketing? I’ve talked to many at Wal-Mart over the years and let’s just say marketing is an overlooked arm of the company.
And marketing doesn’t mean putting ads in media. They need to use real marketing, such as event marketing, which they do use in a small sense with some success.
An idea would be to involve themselves in sports. Use of high loyalty factor sports such as racing, football and golf, plus cause marketing, can create a reinforcement of branding and help implement a strategy that trumps any price cuts. Consumers need to be engaged on a one-on-one basis and how that’s done in the months to come will be a cornerstone to whether they weather this storm (pardon the pun).
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If there is a secret plan, it will be very difficult to put in place. I think that Wal-Mart is finally reaching the saturation point on many fronts. One, the concept of “everyday low prices” can only be driven so far until other marketing and sales issues start to suffer, i.e. perceived quality. Two, Wal-Mart has continued to drive vendors and their vendor community in the everyday low cost format as well. Since there is a finite amount of vendors in each category, I think that they are now reaching the saturation point and loss of vendor availability in some of the key categories which will slow growth in those areas and hinder profitability. Three, Wal-Mart is and has continued to try to expand its focus on different consumer groups, trying to persuade those on the upper end of their reach to shop at their locations by offering up-scale merchandise–essentially losing focus on who they are (which has not worked). And last, Wal-Mart is essentially giving up in some areas of the store. In Sporting Goods, for example, they have decided that they cannot compete with the key Sporting Goods retailers and they have cut back the space. This follows the hardware and some of the hard goods categories. They say they are following the trends and placing the space and SKUs in growing areas that they can maintain. One would suggest that this is not true, this in a true marketing sense was why Wal-Mart drove these categories in the first place, which drove the others areas of the location. So I suggest, while there may be a secret plan, it may be too late to implement without some major rethink and reshaping.
One of the interesting things to note in their results is a 14% growth in food sales in supercenters. It seems to be mentioned merely in passing. Yet considering that, the overall rate of same store sales hovers around 1.3%-1-5%, which may or may not be more significant to note. Food sales do not necessarily grow store sales with the same dollars as other consumer goods. Yet it would seem to indicate a higher rate of lackluster sales on one side of the store. Nevertheless, I believe that the 14% growth in food is significant to note, especially for their competitors in the food arena.
Too high a rate of store growth? Lack of a overall marketing approach rather than a strict price approach? Piling up of consistent bad news for the retailer on the public relations and labor relations sides? Expansion into product lines such as consumer electronics and computers that draw limited sales and low margins? The list could keep growing. You name the factor. Any one of these or others that have been mentioned could be factors in a stagnant share price.
Yet all that said, and more, including all in the previous comments, (all good) it would be foolhardy to believe that Wal-Mart has hit a wall or any such notion. Furthermore, any larger retailer in the ring with Wal-Mart would writhe in envy for a 7 billion dollar gain in revenue by anyone’s measure.
Wal-Mart consistently works to expand their offering, deliver more, seek new consumers, change the consumers perception than any other retailer. Anyone thinking that they have hit a wall might be better served by simply considering it as a lull before the next storm. Anything else would be wishful thinking.
I think Wal-Mart’s past success in managing its stock price was all about revenue growth…the objective to raise a company’s stock price often requires growth numbers that the organization or the marketplace environment cannot support. That seems to be the case here.
If you look back at Wal-Mart’s growth pattern it was Division I store expansion followed by the growth into supercenters and then entrance into more urban markets. The first two growth scenarios were all about placing a new retailing format into mostly rural markets and were very successful. The third scenario appears to be a bit more difficult to achieve given East and West Coast resistance to big box store formats and more sophisticated competition in urban markets.
It seems to me that Wal-Mart’s focus needs to be on the creation of its “banking entity” and the tremendous growth available in the emerging markets in Asia (China in particular). I think these are the areas that will create shareholder value and drive its stock price.
Traditionally, Wal-Mart’s success hinged on giving consumers low prices for products and keeping operating expenses around 17%. In the growth phase, that formula was incredibly successful. Along the way, other retailers have become smart about focusing on their consumers and cutting costs. Wal-Mart has responded by changing its focus, experimenting with new options and offerings, and new formats. Wal-Mart is even charging its partners to use scanner data to differentiate assortments of products by store.
New formats, offerings, experiments, and differentiation make it difficult to keep those operating expenses at 17%. Maybe it’s no longer possible to keep operating expenses at 17% given the size, variety, and location of stores along with sharper competition and Wal-Mart is settling into its “new normal.”
There is no question that Wal-Mart management is playing to their Wall Street constituents. Their knee jerk reaction to roll back prices a couple of weeks ago in response to a difficult sales trend is indicative of their position to “play to their investor audience,” not their customer. Does any consumer (or shareholder) actually think that Wal-Mart has prices that are too high? There’s no way. Everyone thinks of Wal-Mart as the clearly dominant low price retailer and leader.
Wal-Mart comp sales are not lagging because their prices are not low enough; that is a joke to even assume. Their sales are lagging because they fail to execute all the way through to their individual stores the improved merchandise strategies that they talk about at every meeting with analysts. It is not enough to look at better merchandise assortments and strategies in conference rooms and PowerPoint decks in Bentonville. They must get these things they are seeing in their corporate meetings and overviews executed at the point of sale so that the customer gets it, sees the improvement and responds.
The rolled back prices they just executed will do nothing to stimulate more sales; they will only trade down the sales they have, reduce the already thin margins, and take precious store hours and attention away from improving the overall presentation and experience (especially in apparel areas).
I guess we’ve got an S-curve problem here, if I’m not stating the obvious.
That’s the model that shows the market penetration of a new technology, industry, product or whatever, and maybe there are other models out there that supersede it. But in the S-curve model, an idea takes a certain amount of time to get first to one percent penetration, then the same amount to ten percent, then fifty, then ninety. Then, once you’re at saturation, you’re at saturation.
Wal-Mart has reached the top of the S-curve of various business models it’s invented along the way, and Wall Street is demanding that it keep reinventing itself instead of accepting that it has now nearly saturated the markets it’s created with those models.
But the company’s never really been about marketing in a competitive environment–what has passed for marketing has been telling a story about price at the consumer level and operations at the trade level.
Its first model was about bringing big-city merchandise to the country at competitive prices–a feat of efficient operations and cost control that happened to have a market that had never been served before.
Its second model was taking that operations expertise and expanding it to undercut other discounters on price. It did that well enough that Venture Stores and other regional players are gone, Kmart is gasping and Target has a completely different position in the market.
And its third was expanding the operations model into grocery. To be clear, by operations I mean all the stuff we talk about all the time–the automated supply-chain management, the overseas sourcing and the relentless labor-cost control–plus factors we may not be privy to.
In my view, WM is an operations-driven company. And its mindset is stuck a bit in the systems of the 20th century–I’m not sure it really understands the internet.
If it’s going to do any more significant growing, it’s got to either pull a 21st-century operations trick out of its hat, and soon. Or it’s got to let itself become a marketing-driven company, only this time do it more gradually and with a set of hires that won’t be so jarring to the existing culture–or the current customer base.
I don’t know what “Project Red” means for Wal-Mart, or where it stands, but I hope that Wal-Mart will continue to do what it does best and not become completely caught up with the usual three-month mentality that victimizes some other publicly held retail companies. Wal-Mart needs to follow its own formulas for success, making only thoughtful adjustments and tweaks along the way to stay up with changing times. Wall Street reacts to a lot of different events and variables that are not necessarily relevant to what drives a solid retail growth model. If you need financial advice please contact your financial adviser but from my point of view, when Wal-Mart stock prices are down, I’m probably a long term buyer. The formula is still a good one and Wal-Mart isn’t going away.
A “secret plan” to raise Wal-Mart’s stock price reminds me of Nixon’s “secret plan” to end the Vietnam War. (We all know how that came out.) It’s tough for the world’s largest corporation to develop strategies to drive its share price without at least some degree of transparency to the investment community, especially when you consider how broadly its stock is owned. We are in a punitive cycle for stocks that disappoint and surprise (on the downside), and Wal-Mart was certainly guilty of that sin this week.
Wal-Mart’s management does seem to have a handle on some of its prior missteps and is taking corrective action to improve the in-store experience, but it’s not a turnaround project that will take a quarter to achieve. In the short term, Wal-Mart’s defensive move to hang onto market share is (as usual) dropping prices, which has a predictable effect on quarterly operating income even as comp sales start to pick up.
Project Red may have referred to ink color. [Sorry, couldn’t resist.] Seriously, Wal-Mart can’t dictate consumer consciousness and its rapidly losing face with its core domestic market. Of course it’s all about share price. Our system of corporate valuation is so twisted the analysts end up with more power than corporate leadership and the public will combined. If I were Lee Scott, I’d start my turnaround by recementing my traditional relationship with my core, no matter what the analysts said. I’d also try a “common sense” appeal to the shareholders based on the radical proposition that what’s good for the company is…well…good for the shareholders. Then maybe they could quit flailing around and get back to business.
I was, unfortunately, not invited to participate in any Plan Red planning. My comment is around the impact of share price focus on management decision making. As a regular visitor to Bentonville over the years, I can’t help but remember the proud display of share price in the austere waiting room for vendors. Share price watching has been a part of the corporate culture for a very long time. Part of this is because the share value appreciation was a significant part of employee wealth appreciation. Many employees have gained measurable wealth over the decades through stock ownership and option participation. For as long as I can remember, executives I dealt with have been hyper aware of the stock value.
Well, that worked unbelievably well for an unprecedented period of time…right up until economic maturity in US operations and inconsistent results for international operations became reality. With the maturation of the US operational base, the company lost the driving engine for growth. One of the Panelists has already documented the stages WM has gone through, and for the most part, I concur. Let’s take one nanosecond though to note that WM actually went through those, and how most of them are almost textbook best practices in managing the growth curve of large organizations in a limited product portfolio play. Nanosecond over….short term quarterly performance management in retail has been found, with very few if any exceptions, to produce management decision making inappropriate for long term shareholder value and business results. I’m relatively sure that intelligent executives know this at WM. It’s not particularly insightful analysis. So why does it appear as if WM is falling prey to the gyrations associated with stock-watching decision making?
I believe the answer lies in the compensation and wealth accumulation model for employees. I do not have overwhelming data to support this. However, I believe that WM’s executive compensation on a position-for-position basis, is below that of its competition, and certainly below when economic scale is factored in. Retail merchants tend to make more money as they are responsible for more dollars. If I am correct, this is going to make for a substantial change in overhead.
Look for Wal-Mart to initially hide their results around the woes of the economy and also to try to say how others like Home Depot are having similar problems. As a final gasp, they will also put all of their hopes on having a stellar fourth quarter which, with the exception of the CE category, will probably wind up being a let-down. This means “Project Red” or whatever they want to call it will probably be activated in the first half of 2008, and yes, I do believe it will involve spinning off Sam’s.
I have always admired Wal-Mart for not allowing share price to dictate how they run their company. That would be like a football team letting the Vegas oddsmakers dictate how they play their game. In my opinion, Wal-Mart could care less about their share price. They often downplay their finances rather than brag. I also do not think Wal-Mart should be concerned about same store sales. Sure, if they had underperforming stores it would be an issue, but Wal-Mart has a sales per square foot performance that is far superior to most of their competitors. They need to build more stores to take the pressure off of the ones they have. What a lot of analysts do not realize is just how far ahead Wal-Mart is in sales per square foot and market share compared to their competition.
I also think Wal-Mart likes to cry the blues and keep their stock price down to give the anti-Wal-Mart extremists some false sense of victory so they back off.
When comp sales rise only 1.2%, Wal-Mart loses its growth stock investors. Wal-Mart has gone through several lifecycle stages: (1) fast growth with low real estate and low labor costs (Sam Walton’s salad days)(2) cost reduction by increased Asian imports and other supply chain improvements (3) overhead increases from expansion into higher cost suburban areas (4) market share expansion via grocery (5) attempting higher margin tactics via apparel and (6) comp store sales increases (less cannibalization) and better capital allocation by opening fewer new locations.
Wal-Mart would do best by cutting new store openings to the bone and testing multiple apparel strategies in dozens of stores simultaneously. Fewer new locations = less cannibalization = better comp sales trends. Apparel margin increases can go straight to the bottom line even if sales are flat.
And it might not hurt to spin off minority percentages of Sam’s Club and more of the foreign divisions. Even though Wal-Mart stock has been a disappointment over the past 5 years, stock in Wal-Mart de Mexico has done very nicely.
First, Wal-Mart has not done a good job in trying to reposition itself with the consumers; or some may say, conduct a ‘marketing turnaround’. And secondly, the go then no go decisions, on all of its other marketing initiatives have been reduced, if not stopped.
WM, implied, if not stating outright to Wall Street, the repositioning and new marketing efforts would help in improving its financial results and marketplace positioning.
So Wall Street and the grocery industry waited for the WM turn around–at some level–from consumer marketing, its stronghold in price strategy, and market image. Well, the ‘turn around’ of WM, didn’t happen! Concurrently, WM went into its ‘comfort zone’ of cost cutting initiatives, to include a modification–if not revamp–of its supply chain management program.
Interestingly, the status of its suppliers, and their need to spend many dollars in the new SCM program, has caused some meaningful issues, and more time to enact.
So even, these ‘comfort zone’ cost savings action steps haven’t proven out , or meaningfully helped the financial results of WM, to date!
This giant, a believer in only price positioning to the marketplace and consumers, thought its growth advance in top and bottom line would always be its engine…or business strategy for success.
The marketplace has changed, as well as the consumer, to include WM’s own shoppers. WM hasn’t figured it out…as its competitors’ tactics against this giant are working better!
The question to be asked, “what supermarketers, if you will, haven’t attended or mastered, marketing 101, and proper consumer communications, 201?” Hmmmmmmmmmmm
It has been mentioned here already but maybe it needs to be mentioned again. Wal-Mart has indeed been an operations-based company. Marketing? I’ve talked to many at Wal-Mart over the years and let’s just say marketing is an overlooked arm of the company.
And marketing doesn’t mean putting ads in media. They need to use real marketing, such as event marketing, which they do use in a small sense with some success.
An idea would be to involve themselves in sports. Use of high loyalty factor sports such as racing, football and golf, plus cause marketing, can create a reinforcement of branding and help implement a strategy that trumps any price cuts. Consumers need to be engaged on a one-on-one basis and how that’s done in the months to come will be a cornerstone to whether they weather this storm (pardon the pun).