Based upon the information contained in the Wall Street Journal article yesterday, I don't see how Wal-Mart can maintain the value and/or meaning of its brand as it purposely fractures that brand's image in to six different pieces this year.
There are now several aspects to the Wal-Mart dilemma. To begin with, for the past five years, the company's stock price has underperformed the S&P500, which rose modestly, as shown in the chart on the left, with a stock price decline. For comparison, Target, a competitor, saw its stock price rise 50% during the same period.
Looking more closely at the last two years, though, as the table on the left shows, Wal-Mart's Net Income After Tax growth underperformed Target's, meaning the former has suffered margin pressure or SG&A costs increases that it can't recover through its low prices.According to the Journal article, Target's same-store sales are now outpacing Wal-Mart's, 6% vs. 3%.
If you think back to mid-2005, the general business media sentiment was that Wal-Mart was in trouble for two reasons. On the one hand, high gasoline prices were thought to be crimping the discretionary purchasing power of the average Wal-Mart customer, who is generally typified as among the lower income groups. On the other hand, when the pundits admitted that there has been a consistently healthy, growing US economy for the past three years or so, they worried that Wal-Mart's customers were moving upmarket to.....Target.
And so it seems they were. In fact, it appears as if both assessments were true.
Around that time, in mid-late 2005, Lee Scott, the CEO of Wal-Mart, heralded the company's commitment to move upmarket, too. There was a presence established on New York City's upper 5th Avenue, in order to tap into America's upscale fashion pulse.
At the time, I wrote this post to go on record opining that it would not work. Nothing in the WSJ piece has changed my mind. If anything, it's made me even more convinced that Wal-Mart is about to commit a marketing disaster of Edsel proportions.
Here's why I think this.
First, the architect of the strategy is Eduardo Castro-Wright, the former chief of Wal-Mart stores in Mexico. He did something similar there, stratifying store types based solely on incomes. Sales rose.
Now, Mr. Castro Wright is attempting to apply consumer marketing from Mexico to the more complex US market. Interesting approach. The article states that Wal-Mart has hired various PhDs in ethnicity and food disciplines. And some types of 'research,' though precisely what type is not mentioned.
I don't think transferring a simple, one-dimensional segmentation scheme, based upon income, from the Mexican market to the much more diverse and sophisticated US market, will work. Adding the simplistic dimension of race.....er...ethnicity, won't do much better. The Journal piece lists the ethnic store variants as including those targeted at Black and Hispanic populations.
Most modern market segmentation work involves oceans of data, immense amounts of sophisticated multivariate analysis and modeling, usually done by a well-respected professor from a reputable Graduate School of Business somewhere in the US, and results in a few, less clear-cut segmentation dimensions. This is what factor analysis does- it loads many relevant segmentation bases onto a few operationally-addressable ones. But never have I seen a segmentation strategy expressed in dimensions so crude and tired as, solely, race and income.
Nevermind that Wal-Mart has enough problems with its images among certain ethnic groups already. And, am I the only person who finds it too ironic that Wal-Mart unveils a racially-oriented segmentation strategy only weeks after their now-departed ethnic ambassador, Andrew Young, embarrassed himself and the company with his on-air ethnic slurs against Koreans and Indians?
My second reason for believing Wal-Mart's new strategy will fail is that it undercuts the company's main competitive weapon, which is low cost supply. With product assortments being tailored by segment, volumes will necessarily fall, and costs, predictably, rise. The WSJ piece refers to a Bain & Co., study concluding just that. So Wal-Mart is departing from its historic strength, in quest of higher sales, while margins have already been under pressure lately.
My third reason for predicting the failure of the new store strategy is that it flies in the face of brand theory. The penultimate reason for the establishment of a brand franchise is to communicate one or two key values as identified with the brand. For Wal-Mart, it has been "every day low prices." Now, it's six different messages. Which means much of the historically-built brand value will be blurred and cease to exist. This would seem to fly in the face of most modern brand management theory.
Another related reason which I believe will lead to the multi-store concept's demise is basic consumer behavior regarding luxury and upscale goods, and "the wheel of retailing." I mentioned this latter concept in my previously linked post from last fall. The concept suggests that there is always a lowest-priced retailer, and others gradually try to move upmarket.
However, as I noted in that prior post, it's rarely, if every, been done successfully. In soft goods, both Sears and K-Mart failed with celebrity designers Cheryl Tiegs, Jaclyn Smith, and Martha Stewart. American consumers don't tend to buy luxury goods on price, or to frequent low-end stores for luxury items. Upscale consumers may, and do, head to Sam's Clubs and Costco for low prices on basic staples. But I doubt many real wine connoisseurs will be rushing to Wal-Mart for their $500 bottles of wine. Last I saw, the big move there is into online, out-of-state purchasing of wine at significant discounts.
I could go on in this vein. And I may in a later post. But for now, let me stop and suggest the following. This is one case in which I'd expect, and approve of, a company like Wal-Mart, with its in-bred, home-grown management, to hire outside market research consultants, social trend seers, and maybe even a team from Bain & Co., or McKinsey & Co., to provide some objective, experienced perspectives on the very important question of if, and how, to become a segment-oriented retailer.
Instead, I seriously believe that all Wal-Mart did was promote its most successful country manager to revamp US operations just like he did in Mexico. And being home-grown and in-bred, the senior executives in Bentonville see nothing wrong in rejiggering their marketing approaches without any outside help.
They seem to be clueless as to just how far they are departing from the formula that made them so successful. It may not be an engine of consistently superior total returns, but it is at least fulfilling its mission of dominating the low-priced retail niche.
Moving out of that niche, willy-nilly, with a crudely-designed, racially-oriented market segmentation strategy, to compete with much more nuanced marketers such as Les Wexner's Limited Brands lines, and others, seems to me like a recipe for disaster.
Nothing about this strategy makes sense to me. Not the segmentation, nor the cost implications, or the consumer behavior assumptions.
Time will tell if I am right.
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