February 12, 2007
Wal-Mart’s Still About Pricing
By Faye Brookman, special to GMDC
Although Wal-Mart recently promoted its top marketing executive to a new role designed to elevate the chain’s fashion stance, competitors still see only dollar signs when vying for shoppers against the nation’s largest retailer.
Wal-Mart named John Fleming to a new post as chief merchandising officer. Fleming is a veteran of Target and said he wants to improve the customer experience at Wal-Mart.
This isn’t the only manifestation of Wal-Mart’s interest in going beyond price competition. Organic products is another area where Wal-Mart has made a major push, which has also encouraged others to follow, including Target and even retailers such as Walgreens (which added organic beauty lines). Wal-Mart senses an opportunity to sell organics at cheaper prices than leaders such as Trader Joe’s or Whole Foods.
In addition, Wal-Mart is experimenting with upscale stores such as in Plano, Texas where sushi is served and greeters wear polos and khakis. Edgier fashions under the Metro 7 brand were offered, but not purchased by as many consumers as hoped. Making the situation worse last Christmas was that the hardest hit consumers were low-income shoppers who frequent Wal-Mart.
Some industry experts wonder if Wal-Mart can ever move from its industry position as the ultimate price discounter. Recent actions by Wal-Mart only enhance its reputation on pricing.
In the grocery industry, for example, word that Wal-Mart planned aggressive expansion of its Wal-Mart Supercenters in the St. Louis market sent competitor Schnuck’s to the cash registers lowering prices on more than 10,000 items. Local marketer Dierbergs also took the pencil to some prices.
The cuts aren’t just on food items, but, in particular, also food, drug and general merchandise. Many supermarkets in other markets have done the same in reaction to pricing when Supercenters invade.
In the drugstore industry – as well as supermarkets and discounters with pharmacies – Wal-Mart also caused a pricing stir late last year when it sliced the price of generic drugs to $4 in select markets. Target immediately followed, as did other chains. However, Walgreens and some drug operators tried to educate patients about the fine print on the deal and stayed the course on pricing. Still, the generic pricing cut is being closely watched and could have a big impact on pharmacy business in the future.
But, what is clear from the reaction of other retailers is that Wal-Mart still is the price king and that when Wal-Mart comes to town, the first thing retailers do is blink…and slice prices. What it all boils down to is Wal-Mart is still perceived as the low price option.
Discussion
Questions: Can Wal-Mart effectively move into the area of competing with
strategies above and beyond price? If Wal-Mart is successful in doing this,
does that shut off a competitive option for many retailers who cannot succeed
in price competition alone vis-à-vis Wal-Mart?
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Wal-Mart = low prices. These are synonyms. That doesn’t stop Wal-Mart from improving the customer experience or expanding organics or presenting more creative apparel. Dressing greeters in khakis and polo shirts won’t raise the overhead or turn Wal-Mart into Nordstrom. IKEA has everyday low prices, yet their children’s play areas and creative cafeterias enhance the shopping experience. Shopping in a low-price store doesn’t have to be humiliating.
I note that Carter Cast, formerly with Wal-Mart’s online store, has just moved to lead the U.S. business strategy function for the company. I don’t know whether this is a recognition of how the online shopping experience parallels the in-store shopping experience or not, but if Wal-Mart thinks an online expert can teach them a thing or two about in-store, their vision is well in advance of “pricing only.”
Whether Cast’s online expertise played a role in this move, or if it was just demonstrated management and strategic competence, we can’t say. But at least we should take note.
Wal-Mart should not only look to IKEA for ideas on how to make the shopping experience more fun, but also see IKEA as an example of a retailer that is ALL ABOUT good design at low prices. Virtually nothing they sell is an off-the-shelf commodity. They have proven that good design does not have to cost more, and they have the ability to often create products that are appealing to consumers around the globe.
If I were a top Wal-Mart merchant, these would be my priorities:
1) Continue to focus on low-price leadership.
2) Define who we are from a product standpoint globally, across categories. Watch the competition and respond within this context. Evolve consciously.
3) Don’t give up on good design–challenge suppliers (with clear direction) to improve aesthetics and product function without increasing prices. Don’t respond to fads. Identify mega-trends. Think mainstream.
Expertise in assortment execution, store operations and product development are not excluded by being the low price leader. The range of the assortment, the type of stores operated and the fixtures used, as well as the type of products developed…yes, those are limited by being the low price leader.
The limiting factor for WM is that the low price leader strategy results in lower gross margins than other strategies might. Higher volume, but overall, lower gross margins. Certainly buying power offsets this, but not proportionately. The implications are that WM has to be more efficient and more effective to be excellent in some of these other areas than competitors with higher margins. Sheer scale does overcome this to some degree.
The point here is that executional excellence isn’t precluded by a low price strategy. In fact, it’s almost required.
There is no doubt in my mind that pricing (along with low cost of distribution) are Wal-Mart’s key points of competitive advantage.
I believe as Wal-Mart becomes more focused on its urban locations it must examine the demographics of these locations and find the optimal product assortment that meets the needs of the consumers in these stores. Moving up in fashion, organics, cosmetics, etc. is a natural step forward for Wal-Mart (similar to its move in electronics) but it must offer these product categories at a significant savings to its competitors if it wants to continue to follow its heritage and success model. Obviously, the assortments that worked in the past in rural America will need to change…their selection of a key Target executive to lead this effort is a great move!
I have to agree that for the most part, the only reason to shop Wal-Mart is price. I think Wal-Mart would be wasting their time trying to be something they are not. They just don’t have the same quality of labor to execute a nicer image. They would need to hire Costco-level type employees to pull of some of these things and we know that’s not going to happen.
Having succeeded in its efforts to be all about price, they don’t have the customer’s “permission” to be other than that. Trouble is, the emphasis on price (and DIY, for that matter) is off-trend in retail now, especially given rising incomes and Boomers turning 60. The price “cycle” in retail is past its peak. A new banner would be the right step, as the existing banner is burned into the consumer’s mind as a no-frills, cheap format to buy stuff at a lower price than the other guy. No promises about how you’ll feel about yourself by the time you leave.
As for tinkering around the edges, the ancient Greeks would tell Wal-Mart, “To thine own self be true” or “Know thyself.” Nothing other than a new “self” (i.e., banner), in my view, would fly….
Mark got it exactly right. Wal-Mart’s key competitive difference is price, and if it loses focus in the pursuit of other strategies it’s going to lose its core consumer. But this shouldn’t prevent other strategic development–such as cleaning up the assortments and the stores, doing a better job staying in stock on basics, continuing to use technology as a lever to drive down costs–as long as the new direction supports the “key selling proposition” of low prices. If anything, becoming known as the low price leader on emerging businesses such as organic foods and fluorescent bulbs can put Wal-Mart in a more cutting edge position than it’s seen in years.
Herb spotted the key WM development, and it wasn’t about John Fleming. Carter Cast’s appointment to lead WM’s U.S. business strategy, after heading Walmart.com, is a significant indicator of their intentions. Few realize the broadness of WM’s internet stance, which will be the foundation of an important new development in retailing. Imagine Amazon.com with storefronts and Godzilla-like manufacturer leverage. Get the picture?
I see a few issues here:
1. Merchandising as marketing.
Will management hold new, more fashionable departments and displays to the same revenue/margin standards as the rest of the store, or will a forward-looking group at the top recognize that the urban WM needs a way to tell its core audience that, as Mark put it, being seen in WM won’t be humiliating?
In that case, the new, hipper departments probably should stick around as part of the marketing budget–maybe the focus (and funding source) of a viral/social/mobile effort aimed at the under-35 set in urban markets.
And those departments’ success metrics would be how they contributed to the stores’ overall growth–just like:
2. Customer set equals revenue growth? In a competitive situation, absolutely. Does the urban WM realize it has any competition, or does it think it can ignore the customer experience as it does (in some ways) in its rural monopoly environment?
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Wal-Mart = low prices. These are synonyms. That doesn’t stop Wal-Mart from improving the customer experience or expanding organics or presenting more creative apparel. Dressing greeters in khakis and polo shirts won’t raise the overhead or turn Wal-Mart into Nordstrom. IKEA has everyday low prices, yet their children’s play areas and creative cafeterias enhance the shopping experience. Shopping in a low-price store doesn’t have to be humiliating.
I note that Carter Cast, formerly with Wal-Mart’s online store, has just moved to lead the U.S. business strategy function for the company. I don’t know whether this is a recognition of how the online shopping experience parallels the in-store shopping experience or not, but if Wal-Mart thinks an online expert can teach them a thing or two about in-store, their vision is well in advance of “pricing only.”
Whether Cast’s online expertise played a role in this move, or if it was just demonstrated management and strategic competence, we can’t say. But at least we should take note.
Wal-Mart should not only look to IKEA for ideas on how to make the shopping experience more fun, but also see IKEA as an example of a retailer that is ALL ABOUT good design at low prices. Virtually nothing they sell is an off-the-shelf commodity. They have proven that good design does not have to cost more, and they have the ability to often create products that are appealing to consumers around the globe.
If I were a top Wal-Mart merchant, these would be my priorities:
1) Continue to focus on low-price leadership.
2) Define who we are from a product standpoint globally, across categories. Watch the competition and respond within this context. Evolve consciously.
3) Don’t give up on good design–challenge suppliers (with clear direction) to improve aesthetics and product function without increasing prices. Don’t respond to fads. Identify mega-trends. Think mainstream.
Expertise in assortment execution, store operations and product development are not excluded by being the low price leader. The range of the assortment, the type of stores operated and the fixtures used, as well as the type of products developed…yes, those are limited by being the low price leader.
The limiting factor for WM is that the low price leader strategy results in lower gross margins than other strategies might. Higher volume, but overall, lower gross margins. Certainly buying power offsets this, but not proportionately. The implications are that WM has to be more efficient and more effective to be excellent in some of these other areas than competitors with higher margins. Sheer scale does overcome this to some degree.
The point here is that executional excellence isn’t precluded by a low price strategy. In fact, it’s almost required.
There is no doubt in my mind that pricing (along with low cost of distribution) are Wal-Mart’s key points of competitive advantage.
I believe as Wal-Mart becomes more focused on its urban locations it must examine the demographics of these locations and find the optimal product assortment that meets the needs of the consumers in these stores. Moving up in fashion, organics, cosmetics, etc. is a natural step forward for Wal-Mart (similar to its move in electronics) but it must offer these product categories at a significant savings to its competitors if it wants to continue to follow its heritage and success model. Obviously, the assortments that worked in the past in rural America will need to change…their selection of a key Target executive to lead this effort is a great move!
I have to agree that for the most part, the only reason to shop Wal-Mart is price. I think Wal-Mart would be wasting their time trying to be something they are not. They just don’t have the same quality of labor to execute a nicer image. They would need to hire Costco-level type employees to pull of some of these things and we know that’s not going to happen.
Having succeeded in its efforts to be all about price, they don’t have the customer’s “permission” to be other than that. Trouble is, the emphasis on price (and DIY, for that matter) is off-trend in retail now, especially given rising incomes and Boomers turning 60. The price “cycle” in retail is past its peak. A new banner would be the right step, as the existing banner is burned into the consumer’s mind as a no-frills, cheap format to buy stuff at a lower price than the other guy. No promises about how you’ll feel about yourself by the time you leave.
As for tinkering around the edges, the ancient Greeks would tell Wal-Mart, “To thine own self be true” or “Know thyself.” Nothing other than a new “self” (i.e., banner), in my view, would fly….
Mark got it exactly right. Wal-Mart’s key competitive difference is price, and if it loses focus in the pursuit of other strategies it’s going to lose its core consumer. But this shouldn’t prevent other strategic development–such as cleaning up the assortments and the stores, doing a better job staying in stock on basics, continuing to use technology as a lever to drive down costs–as long as the new direction supports the “key selling proposition” of low prices. If anything, becoming known as the low price leader on emerging businesses such as organic foods and fluorescent bulbs can put Wal-Mart in a more cutting edge position than it’s seen in years.
Herb spotted the key WM development, and it wasn’t about John Fleming. Carter Cast’s appointment to lead WM’s U.S. business strategy, after heading Walmart.com, is a significant indicator of their intentions. Few realize the broadness of WM’s internet stance, which will be the foundation of an important new development in retailing. Imagine Amazon.com with storefronts and Godzilla-like manufacturer leverage. Get the picture?
I see a few issues here:
1. Merchandising as marketing.
Will management hold new, more fashionable departments and displays to the same revenue/margin standards as the rest of the store, or will a forward-looking group at the top recognize that the urban WM needs a way to tell its core audience that, as Mark put it, being seen in WM won’t be humiliating?
In that case, the new, hipper departments probably should stick around as part of the marketing budget–maybe the focus (and funding source) of a viral/social/mobile effort aimed at the under-35 set in urban markets.
And those departments’ success metrics would be how they contributed to the stores’ overall growth–just like:
2. Customer set equals revenue growth? In a competitive situation, absolutely. Does the urban WM realize it has any competition, or does it think it can ignore the customer experience as it does (in some ways) in its rural monopoly environment?