Wal-Mart Grinning Big Through the Tough Times

Sales, Margins and Stock Price All Up -- but What's the Reason Behind the Marketing and Merchandising Miracle?

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BATAVIA, Ohio (AdAge.com) -- Looking for a silver lining in the economy? It's shining brightly from Bentonville, Ark.

Same-store-sales growth for Wal-Mart Stores is well ahead of dismal levels a year ago. Amazingly, Wal-Mart's margins are up too. And the stock has soared more than 30% in the past year, trading at levels not seen since the turn of the millennium, providing hope that CEO Lee Scott can avoid a net loss during his reign. Wal-Mart has become a popular defensive buy for investors and consumers alike.

Fewer shoppers graph
Source: Information Resources Inc.
The big question: Is Wal-Mart's recent run of improved results more about the marketing or the economy? Most signs point to the economy, though economic distress has dovetailed nicely with the marketing.

An acid test will come Oct. 9, when Wal-Mart releases sales numbers for September, in many ways the worst, or at least scariest, month the U.S. economy has seen since the Great Depression.

But so far Wal-Mart looks to have pulled off a marketing and merchandising miracle, raising same-store sales at its namesake U.S. division at rates considerably better than its one-point-at-best improvement during the past two recessions.

Return to value
After flirting with fashion, organics and sushi in 2006, Wal-Mart returned to its price-focused, downscale roots in 2007. In came the Martin Agency and "Save money. Live better." Out went marketing and merchandising executives with more-upscale ambitions, like so much marked-down merchandise.

By this year, the shift appeared to have paid off. Wal-Mart reported 3.1% same-store-sales growth (excluding gasoline) in the 30 weeks ended Aug. 29, more than three times the 0.8% rate a year ago. It's doing far better in the U.S. than all department stores, the vast majority of specialty stores and its nemesis Target, which has seen consistently declining same-store sales this year.

Yet the Wal-Mart marketing miracle starts to fade on closer examination of the numbers. Its gains started to slow in August as economic stimulus checks stopped arriving, and some of its biggest competitors with similar merchandise configurations did far better.

U.S. Wal-Mart stores had same-store-sales growth of 2.8% in August, while Costco's same-store sales were up 5.5% excluding fuel, and BJ's Wholesale Club saw same-store sales rise a whopping 7.7% without gas. Wal-Mart's own Sam's Club -- which, like its competitors, does light to nonexistent media advertising aside from direct mail -- saw same-store sales rise 4.2%.

Even supermarket retailer Kroger Co. saw same-store sales grow 5% in August. Kroger Chairman-CEO David Dillon said on a Sept. 16 conference call that Kroger's year-over-year product-cost inflation was 4.9%, accounting for almost all that gain.

Inflation factor
It's not clear what the overall inflation rate was for Wal-Mart in August, though Eduardo Castro-Wright, CEO of the U.S. Wal-Mart division, said last year that the chain's rate was a percentage point below that of grocery competitors. Even at 3.9%, Wal-Mart would have gotten essentially all of its same-store-sales increase and more from inflation alone. Just applied to Wal-Mart's business in grocery, personal-care and health products, 3.9% inflation would account for 2.2 points of Wal-Mart's 2.8% same-store growth.

And given the acceleration of food and package-goods inflation in the past year, Wal-Mart actually may have started losing ground in August. Its 2.8% same-store gain was the same as it was a year earlier, when inflation was lighter.

But while stagflation is Wal-Mart's friend, its executives say their strategy and execution are helping too. "We are seeing investment made in our three-year strategic plan to strengthen our business pay off," Mr. Castro-Wright said on an August conference call. He added: "Our price-leadership position continues to ensure customer loyalty and drive new customers to Wal-Mart."

A Wal-Mart spokesman declined to comment for this story beyond public statements made by company executives.

Yet it's far from clear Wal-Mart is winning loyalty or new customers, even as it wins more business. A June report by Information Resources Inc. based on consumer-panel data found that household penetration for Wal-Mart Stores declined 0.9 percentage points in the first quarter, accelerating declines that began last year as Wal-Mart began slowing new-store expansion.

Package goods
Even so, Wal-Mart has been gaining substantial and accelerating market share in package-goods categories. After losing share in those categories through most of 2006, Wal-Mart began gaining ground as gas and package-goods prices started rising faster in the second quarter of 2007, IRI found.

Bigger share
Source: Information Resources Inc.
Those improvements in Wal-Mart's consumer-package-goods shares began a quarter before its "Save money. Live better" ads from the Martin Agency, Richmond, Va., launched. Overall improvements in same-store-sales growth didn't begin until early this year -- reflecting in part accelerating inflation but possibly also headway in struggling apparel and housewares sections.

Overall shopping trips to retailers of package goods have been declining steadily since gas prices began soaring in the second quarter of 2007, according to IRI. But trips to supercenters -- primarily Wal-Mart's -- were up sharply, 5.4% in the first quarter alone.

It's not clear whether the shoppers Wal-Mart is wooing through price and the cost efficiency of one-stop shopping will stick if and when the economy improves.

A nationwide survey conducted earlier this year by Colloquy, a consulting group on loyalty marketing, found, not surprisingly, that Wal-Mart was the most frequently shopped retailer across all formats and regions in the U.S. More surprisingly, it generally ranked well below other retailers, particularly Costco, in loyalty.

"The fact that [Wal-Mart's] making changes is clearly part of the reason for their success," said Kelly Hlavinka, managing partner of Colloquy. "But there is a chink in the armor of Wal-Mart, which is these customers are not saying they necessarily feel loyalty."

Of course, winning shoppers on price in a declining economy could be more than a short-term fix. Burt Flickinger, principal of the consulting firm Strategic Resource Group, estimates that the economy is 270 days into a recession likely to last 700 to 1,000 days.

He said Wal-Mart has fixed other things, such as its longstanding fashion problems. And he said he believes Wal-Mart's new advertising, customer-segmentation strategies and focus on sharp pricing on national brands over private label under Chief Marketing Officer Stephen Quinn have helped.

But he said results lagging behind the club stores, Kroger and CVS, as well as being the only major national retailer without a credible premium private-label program, show Wal-Mart still has a long way to go.

"The worst of times have traditionally been the best of times for Wal-Mart," Mr. Flickinger said. "That's why its results through 2007 were so disappointing. Now Wal-Mart's doing well compared to most of this decade."
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