Stuck-in-middle Walmart Starts to Lose Share

Recession-Resistant Retailer Squeezed by Deep Discounters and Higher-End Stores, Calling Some Strategies Into Doubt

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BATAVIA, Ohio (AdAge.com) -- Recessionary darling Walmart saw the first down sales quarter in its history and a surprisingly weak top-line over the holidays as aggressively expanding dollar stores and hard discounters swiped at its positioning. Additionally, last year it lost modest market share in package-goods sales for the first time since Information Resources Inc. began tracking the data -- while supermarkets, dollar and club stores all gained.

In short, Walmart is increasingly finding itself caught in the middle between higher-end retailers and value players and, at least in recent quarters, is losing share to both. That has some suppliers and market watchers wondering if Bentonville's strategies -- which have included a bigger focus on margin expansion, culling assortments and promotional display space, and increasingly playing marketers off against one another in category reviews -- are flawed.

Much of the competitive threat to Bentonville, Ark.-based Walmart has little to do with affluent shoppers that "discovered" it during the downturn abandoning the bargain retailer when the economy recovers. Rather, it's more about burgeoning threats from multiple rivals to Walmart's core positioning as a low-price leader.

Price comparisons
Despite its hard-hitting "Save money. Live better" ad campaign and recent ads claiming Walmart can save shoppers $55 a week compared to supermarkets, Target recently beat Walmart in a nationwide head-to-head price comparison, and a recent survey by WSL Strategic Retail showed that three-quarters of dollar-store shoppers believe those stores are cheaper than Walmart.

Kantar Retail's Management Ventures began a competitive pricing-tracking survey last year covering 40 items at Target and Walmart, with the former beating Walmart in two of the three surveys so far. Taken every six months, the latest comparison released last month showed Target besting Walmart by 2.5%, or $7. It marked the first time it underpriced Walmart in each of three departments -- edible, non-edible dry grocery and health and beauty, said Leon Nicholas, director of retail insights for WPP's Kantar Retail. Walmart actually raised prices on average across all three segments from six months ago, Mr. Nicholas said, while Target cut prices in health and beauty and nonedibles while raising them in edible grocery.

1. excludes fuel sales Source: Kantar Retail-Management Ventures Inc., Advertising Age research
1. excludes fuel sales Source: Kantar Retail-Management Ventures Inc., Advertising Age research
Target's pricing win was driven by a relatively small number of items, Mr. Nicholas said, but as with the Walmart/dollar-store comparison, prices were generally close. At least some categories where Walmart has been losing price battles aren't its high-priority "win" categories, Mr. Nicholas said, "so it's the strategy. The question becomes whether they can keep their low-price image intact if the overall basket is more expensive."

Burt Flickinger, principal of consulting firm Strategic Resource Group, who's also in the midst of a nationwide pricing study of Walmart vs. competitors, finds Walmart increasingly losing out in pricing battles to conventional supermarket operators in addition to dollar stores, hard discounters, clubs and Target, particularly on key beverage items -- such as milk and soft drinks -- whose prices consumers watch most closely. "It's the competition much more than the economy," he said.

Project Impact experience
About five years ago, some suppliers say that Walmart, by focusing too much on the value threat from dollar stores, left an opening for Target and Costco in particular to beat it on shopper experience. Now, however, with Walmart trying to improve experience by investing heavily in "Project Impact" store remodels and clearing aisles of promotional pallets, it's been distracted from dollar stores and other challengers trying to beat it on price.

"The Project Impact stores are a big success," Mr. Flickinger said. "But the consumer has figured out that Walmart's prices are too high in key categories. ... The consumer is confused. When Sam Walton and Doug Degn [who formerly ran merchandising for Walmart's grocery products] ran things, the consumer understood she would save in every category every day."

Supplier executives say that Walmart is still pressing for savings harder than ever, but less often passing the full savings on to consumers.

Walmart U.S. CEO Eduardo Castro-Wright, in a pre-recorded earnings conference call last month, blamed economic factors, particularly grocery-price deflation, for most of the sales decline last quarter, which ended Jan. 31. He also blamed a continued tough economy for Walmart's core shoppers, and noted that while traffic count was down slightly, Walmart had posted its highest customer satisfaction scores ever.

The disruptions caused by an aggressive store-remodeling program may also have played a role. And many competitors, such as Target and department stores, benefited from comparisons to big sales declines a year ago, while Walmart was up against comparisons to among the best results posted by any retailer a year ago. Some, however, such as Costco and Dollar General, have been posting sales growth in recent quarters against similar growth a year ago and beating Walmart on the combined two years.

Despite rising margins amid falling sales, Walmart hasn't taken its eye off price competitiveness, a spokesman said. Citing comments by Chief Financial Officer Tom Schoewe, he said that Walmart's "intent is to continue to be the price leader. ... The reality is if we do things right, our margins will expand. Lower prices do not equal smaller margins."

Smelling blood
Regardless, rivals are smelling blood in the water. Top executives of Target and Kroger Co. have indicated a willingness recently to sacrifice margin if necessary to avoid losing share to Walmart. And Target Chairman-CEO Gregg Steinhafel has vowed to step up advertising aimed at addressing many consumers' impression that Target's prices are still higher than Walmart's.

One of Walmart's challenges is that while it's benefited from trade down, it's also being hurt by its own shoppers trading down to dollar stores, hard discounters such as Aldi and Super Valu's Save-A-Lot and even Goodwill thrift stores, which have been improving their appearance in an effort to hold onto shoppers who've come since the recession, Mr. Nicholas said.

The dollar stores and hard discounters, while a relatively small threat today, collectively making up less than 15% of Walmart's U.S. sales, are by far the fastest-growing threat. Dollar General, the leader in the segment, posted 9.2% same-store-sales growth in its most recently reported quarter vs. 10.6% growth a year ago.

And while Walmart keeps paring its U.S. store-expansion plans, dollar stores and hard discounters are sharply ramping up theirs. As a result, the major dollar and hard-discount chains appear poised to add more square footage in the U.S. this year than Walmart for the first time ever. Aldi and Save-A-Lot executives have both outlined plans to double their store counts within five years -- which would, combined, give them more stores than Walmart has today.

While a recent WSL survey found 65% of consumers with incomes of under $50,000 or less had shopped at a dollar store in the past three months, 47% of households with incomes over $100,000 had done so, too.  

 

Walmart and Brand Marketers

   

Dollar stores and deep discounters are often seen as a threat to Walmart, but they pose perhaps an equally large threat to national brands.

Dollar stores generally carry a far more limited assortment than Walmart or supermarkets, and Family Dollar has announced plans to increase the private-label share of its sales from 19% to 25%. Hard discounters such as Aldi, Save-A-Lot and Winco (another fast-growing player in Western states) carry predominantly private labels and have long been the bane of brand marketers in Europe, where they played the key role in driving Walmart Stores out of Germany.

All this should make Walmart, which remains primarily a retailer of national brands, a natural ally of brand marketers. But marketers have a growing list of complaints about Walmart, thanks to everything from its aggressive moves to expand its own Great Value private-label line (which grew "mid-single-digits" last quarter while overall grocery sales were flat, according to Walmart) to reducing promotional space by clearing its aisles of "action alley" pallet displays and stepping up category-assortment reviews that pit brands against one another in a battle for survival.

Even beyond increasingly common category reviews, Walmart has institutionalized ways of pitting marketers against one another regularly. Appointments with buyers are now made so that every player in a category appears back-to-back on the same day, suppliers say, in a move designed to step-up pressure on them to provide better deals.  

Ironically, some people close to Walmart say merchandisers have said they feel emboldened to press harder for concessions in part because the retailer's PR efforts have succeeded in improving its former image as a bully.

Just last week, Walmart won points with environmentalists with its announced goal of getting suppliers to reduce greenhouse gas emissions from their supply chains and bring more locally grown produce to consumers nationwide.

But, image or no, some suppliers believe Walmart's efforts to cull assortments may be contributing to its troubles. The effort has knocked some local and regional brands off shelves, which can put Walmart at a disadvantage to local supermarket competition. And assortment remains a primary differentiator between Walmart and clubs, dollar stores and hard discounters.

Pricing may be a factor in Walmart's slowing sales, said Leon Nicholas, retail insights director at Kantar Retail, "but a bigger concern I have is assortment, whether they've cut so far." Walmart has cut assortment particularly in low-priority "play" categories, but some of them may drive store traffic, Mr. Nicholas said. "It wouldn't surprise me to see them selectively bringing [items] back."

Club and dollar stores in particular have used limited assortment to their advantage as leverage with suppliers for years, and drug giants CVS and Walgreens are increasingly stepping up such efforts, too. The difference with Walmart, however, is that it makes up 20% to 50% of sales for many brands, far more than any other retailer. So a marketer or brand has little choice when it loses its space on Walmart shelves but to promote aggressively elsewhere.

-- Jack Neff

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