Just about any purveyor of mass-market merchandise knows that if it wants to launch a new product or bump up sales on a flagship brand, it needs to check in with the Arkansas empire Sam Walton built. Wal-Mart increasingly determines what new products consumers see, when they see them and how they're priced, packaged and promoted--even outside Wal-Mart's walls. The retailer's influence also extends to how, where and when marketers spend their ad money.
Its power is reshaping organization charts, politics and entire industries among its 20,000 suppliers and cutting a widening swath through the marketing-services world, even at companies that once led industries on their own.
Top executives at Procter & Gamble Co., the company that taught the U.S. market how to build brands into powerhouses, have recently taken to consulting the Wal-Mart Stores Associate Handbook for inspiration.
On P. 6 is founder Sam Walton's "The Customer Is Boss" slogan. When P&G Chairman-CEO A.G. Lafley wanted to refocus his flock amid a disastrous 2000, he used his own version: "The Consumer Is Boss," which today flows as readily from P&Gers as the "The Customer!" refrain springs from Wal-Mart associates when managers ask "Who's No. 1?"
Mr. Lafley's predecessor, Durk Jager, took a different page from Wal-Mart's book--P. 7, on "Every Day Low Prices." Wal-Mart's approach inspired P&G's own "value pricing" policy, as it cut spending on trade-promotion deals hated by Wal-Mart but loved by many other retailers.
P&G now gets 18% of its $43 billion global business from Wal-Mart, selling as much there as through its next nine leading retail customers combined. P&G's $8 billion global Wal-Mart revenue outstrips the entire U.S. business of any P&G competitor except Unilever.
Who's Really the Boss?
But while P&G was an early adopter, almost everyone these days is learning to do things the Wal-Mart way. Walt Disney Co. has a VP-retail business development stationed near Wal-Mart's Bentonville headquarters and marketed an exclusive line of "Kim Possible" toys there. Fashionistas may be surprised to learn that Wal-Mart is the biggest fashion retailer in the country, accounting for 87% of sales for Berkshire Hathaway's Garan. Such power raises some doubts about who's really the boss in marketing these days.
"We would not care to speculate on our broader impact on marketing," said a Wal-Mart spokesman, who declined to comment on most aspects of supplier relationships. "We see ourselves as customer-driven. We sell what our customers want us to sell. That has been the philosophy Mr. Sam started with. After that he said `Price it right and they`ll come."'
And come they have. Wal-Mart has an estimated 118 million unduplicated shoppers each month, according to Mark Mitchell, exec VP-sales for Premier Retail Networks, operator of the Wal-Mart TV Network. Some of its suppliers have come to see Wal-Mart the store as a medium, too.
"The in-store gross rating points [at Wal-Mart] are significant," said Randy Rose, former president-North America of Energizer Holdings, who has dealt with Wal-Mart since the 1980s there, and at Ralston Purina and P&G. He is now as CEO of Enzymatic Therapy, a nutritional-supplement marketer. "They have a sense that they're creating a lot of the future of package-goods marketing. And I think there's a great degree of truth in that."
`A Force for Good'
For all its size and power, Wal-Mart's suppliers often describe its impact on marketing glowingly.
"Wal-Mart likes strong consumer brands, and thus hopes they are supported through consumer advertising," said a former senior P&G executive. "I have often been asked by the traditional trade to transfer advertising money to them, claiming they can do a better job. I have never faced that request from Wal-Mart ... underscoring that the traditional grocer believes profits have to be attained from the vendor, whereas Wal-Mart believes they make profits if they give the consumer a better choice."
Because traditional high-low promotion and in-store merchandising deals often don't work at Wal-Mart, it forces marketers to spend more on advertising and other consumer "pull" marketing, said Jeffrey Nugent, former CEO of Revlon and a former executive with Johnson & Johnson's Neutrogena. "You've got to use your money intelligently to drive product off the shelf."
"They're a force for good in the world," said another package-goods chief marketing officer, who credits Wal-Mart with wringing wasteful promotion spending from marketing and encouraging advertising. "I just wish someone could challenge them."
Few expect that. Wal-Mart will cross the quarter-trillion-dollar sales mark in 2003, following sales of $245 billion last year. And competitors and suppliers are already resigned to it getting much bigger. Asked when Wal-Mart sales will hit $1 trillion, 65% of the roughly 400 executives gathered at an International Mass Retail Association convention in Orlando, Fla., in September said within 10 years. Only 8% said "never."
Still, marketers seize on hopes that a serious challenger will emerge. When former General Electric Co. CEO Jack Welch during an interview on CNBC last year asked Mr. Lafley about implications of Wal-Mart's dominance, he responded: "There are always new competitors showing up on the retail side, right? As big and strong as Wal-Mart is--and they're a great operation--there's Costco growing on one side, there's the dollar stores serving a rural market on the other side. There's Home Depot ... doing terrifically. So I think as long as there's competition, it's good for everybody, especially consumers."
But Wal-Mart has started to squash even some of these challenges. Long the weak link in Wal-Mart's empire, Sam's Club has picked up steam under new management in recent quarters as Costco stumbled.
Dollar stores, the only retail format growing faster than Wal-Mart in recent years, ironically have thrived in part on convenience shopping trips left unserved by small-town retailers Wal-Mart drives out of business. "We're benefiting from the black hole that's being created," said David Perdue, chairman-CEO of Dollar General Corp., at the IMRA meeting. Yet dollar stores' symbiotic buzz may be about to provoke a swat. Wal-Mart earlier this year began testing dollar-store sections in 17 stores.
Included in the rest of P&G's 10 biggest retail customers are Carrefour, which only in the second quarter broke a streak of five consecutive quarterly sales declines, and Royal Dutch Ahold, battered by an accounting scandal in its U.S. food-service unit. None of the other nine in P&G's top 10 grew at Wal-Mart's pace last year.
Said one agency executive: "Package goods is a snapshot of the future for a lot of other industries. ... If you're a manufacturer, it's almost your duty to help the other retailers in this country, because you don't want Wal-Mart to get to the point that they can dictate your future."
Getting other retailers to accept that help rather than making fruitless efforts to match Wal-Mart on price, he conceded, is usually difficult.
When marketers aren't yearning for a challenger, they're downplaying Wal-Mart's threat while positioning themselves to survive it.
"The U.S. [where Wal-Mart is strongest] is less consolidated than most of the markets in which we operate," Niall FitzGerald, Unilever co-chairman, said in a September investor conference. "Trade consolidation is not something that's new to us, not something we fear, but something which is a huge opportunity."
Unilever's business with Wal-Mart grew 12% last year, he said, about in line with Wal-Mart's 12.2% growth rate, despite Unilever's 6% overall revenue decline caused by divestitures of non-strategic brands.
Yet, there's clearly a down side, too. When Unilever announced disappointing top-line results for the first and second quarters, one factor was lower sales of its Slim-Fast diet brand, something Unilever blamed mainly on the strength of the Atkins diet but partially on the launch of a Wal-Mart private-label version of Slim-Fast drinks.
Despite Unilever's relative strength in European and Asian markets that Wal-Mart has yet to enter, it still gets 6% of its sales from Wal-Mart, $3 billion in all. That makes Wal-Mart Unilever's biggest customer and Unilever Wal-Mart's second-biggest supplier, after P&G. With Unilever's sales down another 6% so far in 2003 and Wal-Mart sales continuing to rise double digits, Wal-Mart's share of Unilever business could hit 8% this year.
Like many other marketers in recent years, such as Johnson & Johnson, Nestle and Sara Lee Corp., Unilever has worked to make a decentralized structure fit the growing concentration of its business at Wal-Mart and other global retailers.
Though Unilever is Wal-Mart's No. 2 supplier, its Home and Personal Care and Unilever Bestfoods divisions--run largely separately--each rank only in the top 15, said Tom van der Laan, the company's head of global customer development, at a June investor conference. To give it a unified presence in the eyes of Wal-Mart and other big retailers, Unilever has set up a global customer-development board of executives from all its businesses and "intra-company networks" to manage strategy.
In all, Unilever has 100 employees "co-located" with all these retailers globally. But Unilever's Wal-Mart team still includes no companywide point person in North America, according to executives familiar with the company.
By comparison, P&G has 300 people assigned strictly to its global Wal-Mart team, more than 200 in Arkansas alone. Among those are a global Wal-Mart marketing director and a Cincinnati-based public relations person just for P&G-Wal-Mart business. The 300 doesn't even count some other executives for brands based at P&G's Cincinnati headquarters or elsewhere whose jobs primarily include handling relations with the giant retailer, according to executives familiar with the situation.
Most of P&G's Wal-Mart team, like those of other marketers, centers around non-marketing functions, including logistics and data analysis. "One of the reasons why P&G and Wal-Mart have had such a positive relationship is that they both are strongly data-driven," said the former senior P&G executive.
Wal-Mart's Retail Link system, unparalleled among retailers for its scope and speed, can track product sales in all stores or any one store in real time. Wal-Mart makes Retail Link available to suppliers for free, but wants lots of free analysis in return."Every vendor has many people who are really Wal-Mart employees on [their] payrolls just for data analysis," said one package-goods executive.
The growing army of Wal-Mart workers foreshadows life for food marketers, many of which have seen Wal-Mart top 10% of their sales in recent years--with industry projections that Wal-Mart will reach 20% of the U.S. food business within five years. Food companies need to reach the $15 billion sales threshold to get the critical mass they need for a significant presence in Bentonville, said one former industry CEO. But only a handful of food players, such as Kraft, Nestle, Coca-Cola Co. and PepsiCo, have such scale.
low cost, high profit
Wal-Mart attracts the hearts, minds and marketing budgets of suppliers, not just because it's the biggest or fastest-growing, but also because it's the most profitable retailer to deal with, said Christopher Hoyt, principal of Scottsdale, Ariz., consulting firm Hoyt & Co.
For example, Wal-Mart never pressured P&G to adopt value pricing, executives familiar with the situation said. P&G initiated the program after discovering it made better profit margins at Wal-Mart than elsewhere.
Among the big costs Wal-Mart squeezes out are most traditional trade promotion, which amounts, on average, to 17% of manufacturers' gross sales, according to Cannondale Associates, and sometimes much more. Wal-Mart takes the savings generally straight to lower prices. But the combination of Wal-Mart's vastly superior operating margins and trade-promotion cuts leaves plenty of room for Wal-Mart to offer lower prices and marketers to still make more money than at supermarkets, by Mr. Hoyt's analysis. Even Wal-Mart's least enthusiastic suppliers tend to agree.
While marketers often classify traditional trade deals as marketing, much of the money goes straight to retailers' bottom lines. While Wal-Mart wants and gets trade promotion, too, it tends to get less. And funds are more likely to go toward genuine marketing, such as Disney's airing a premiere broadcast of the cartoon series "Kim Possible" at Wal-Mart in September in connection with an exclusive product rollout.
Wal-Mart also charges no slotting fees and deals fairly on return allowances, suppliers report. At some supermarket chains, bill-backs for returns alone can consume nearly all profit for marketers. But suppliers say returns from Wal-Mart are negligible.
Wal-Mart has brought more fairness into trade relations other ways, too. Its buyers shun free samples, gifts, drinks, lunches and dinners, and Wal-Mart rotates them out of categories every two to three years, lest they develop attachments.
For years Wal-Mart even resisted suppliers locating staff in Bentonville for fear social entanglements might influence their executives, industry veterans said. When P&G founded its Wal-Mart team in the late 1980s, it put the office 20 miles away in Fayetteville for that reason.
Even after vendors started moving to Bentonville in droves and the "Vendorville" kept drawing nearer, Wal-Mart executives tried to keep some distance. One former Wal-Mart executive recalled "a particularly pushy [package-goods executive], who I liked immensely," who kept wanting to talk business over their sons' soccer games, until the Wal-Mart executive put a stop to it.
Not that Wal-Mart executives are beyond being charmed. When Unilever launched its Axe men's body spray in the U.S. last year, the first stop for its "Axe Angels," a group of young, attractive female product samplers, was to one of Wal-Mart's annual store managers' meetings. The result: Axe got secondary display in many Wal-Mart auto, music and sporting goods sections, said Esther Lem, Unilever's VP-brand development for antiperspirants and deodorants, at an analyst conference in June.
Longstanding relationships don't hurt. John Kahl, CEO of Henkel Consumer Adhesives, was a hunting buddy of the late Mr. Walton's, and his Wal-Mart ties still run deep. Vice Chairman-President of the Wal-Mart Stores Division Tom Coughlin has twice selected Henkel's Duck Tape as his personal "Volume Producing Item" in 1997 and 2002. The program aims to kindle the flame of merchandising by encouraging every associate to select a promising item to promote each year. When Mr. Coughlin made Duck Tape his VPI, its Wal-Mart sales tripled or quadrupled each time.
VPI "happens at all levels of the organization," said Mark Somers, director-category development for Henkel Adhesives. "In dealing with the executives, they have a broader span of influence." Henkel helped by running display contests for associates to drive "retail-tainment."
Duck Tape Castles
"When you have a castle built out of Duck Tape, you're certainly going to draw people into that area of the store and get them to purchase additional rolls," said Melanie Amato, Henkel's director-advertising and research.
Dealing with Wal-Mart is an "open-book test," both ways, according to suppliers. "They say what they do and do what they say," one said. In return, Wal-Mart buyers want open books from their suppliers. They want to see suppliers' margins and scout expenses that can be squeezed to spawn the next "Roll Back."
"I never perceived them as trying to pick our pockets," Mr. Rose said recalling his Energizer days. "But in the absence of a better idea for building the business, you're always going to get forced on price."
Building scale broadly in Bentonville has been many marketers' primary strategy for dealing with Wal-Mart. But the retailer's drive for innovative products also has created a meritocracy where small companies can thrive without paying millions in slotting fees.
Wal-Mart was the first stop when Orange Glo International, maker of Oxi Clean and Orange Clean household cleaners, sought national retail distribution after years of direct marketing. Wal-Mart also encouraged and helped Orange Glo to expand overseas, said Orange Glo President-CEO Joel Appel. Three years later, Orange Glo still enjoys stronger shelf presence relative to its far-bigger competitors at Wal-Mart than at most other retailers, which are more likely to base displays on trade deals.
"Any company that comes to them, whether large or small, with a new way to drive sales or bring people into a category, that's where Wal-Mart really seems to shine," Mr. Appel said. "I've had a number of situations where brands run into trouble," said Revlon's Mr. Nugent, "and you go down to Bentonville and open up with people and tell them what you're trying to do, and they'll work with you. They want you to be successful."
Success at Wal-Mart often boils down to new products, and the giant retailer's role has expanded in recent years from chief staging ground to instigator of innovation.
"For a long time, they would not be that outgoing, even in soliciting new-product information, much less having input," Mr. Nugent said. "But in the past five years or so, they're really hungry for that information."
Mr. Nugent said it's now common to discuss new-product ideas with Wal-Mart as much as five years before a launch. "You've got a much better chance of being successful if you've got Wal-Mart working with you. Whether it's packaging decisions, or how to communicate the new product or benefit, or merchandising or even advertising--they'll have input on all of it."
Rather than resenting the input as intrusive, several marketing executives said they welcome it. "They're so big now," said one, "that their shoppers pretty well represent the country."
Vendorville increasingly has evolved to maximize Wal-Mart's input. Newell Rubbermaid's Wal-Mart division, a 50-employee focal point for the conglomerate's 16 companies ranging from Goody hair-care implements to Levelor blinds, includes exact replicas of Wal-Mart store sets. So Wal-Mart executives will feel at home, the interior decor of Newell's offices matches Wal-Mart's warehouse-turned-global headquarters, right down to the carpet on the floor and pictures of Sam Walton on the wall.
A few miles away at Thompson Murray, the agency opened an addition this year that includes mock-ups of four Wal-Mart store formats, so Wal-Mart, supplier executives and consumer research subjects can evaluate products and displays in their natural habitat.
For LPK, Cincinnati, a principal design firm for P&G and several other marketers, a Bentonville review is an increasingly common part of projects, said CEO Jerry Kathman. He credits the growing power of national retailers generally, and Wal-Mart specifically, with making package design a rising priority. Without any major new accounts, LPK's own revenue was up 43% through the first half of 2003 as it hired 24 more designers, he said.
"One thing I've never seen from Wal-Mart was to challenge what you were doing with your ad copy or your campaign," Mr. Rose said. "They are trying at every turn not to be arrogant."
Regardless of the attitude, marketers know they increasingly have to build initiatives around Wal-Mart's wishes and schedule.
"When you're selling a new product, Wal-Mart is all over the media budget," said one package-goods chief marketing officer. "They'll evaluate you based on your track record [on supporting brands and following through with media plans]. They understand the power of advertising, because their folks are obsessed with new products."
Wal-Mart's stated goal is to get 100% of the first two weeks' sales of any new product and 70% of the first four weeks, supplier executives report. Because of Wal-Mart's efficiency at getting new products through its system, that's often not far-fetched. Wal-Mart has cut by half or more the traditional eight-week lag between when a new product ships and when it appears on store shelves.
As a result, Wal-Mart is pressuring marketers to break ad campaigns faster, too. "They want you to start TV advertising the day they're ready ... not wait for all their competitors," the chief marketing officer said. "When companies won't start advertising when they want, that's when they really start demanding [they buy] Wal-Mart TV." Buyers frequently bring up Wal-Mart TV anyway, he said, but will take no for an answer.
"Wal-Mart, because they're so efficient, will often have a new product in their stores before the other retail chains," said PRN's Mr. Mitchell. "Because of that, there's not likely to be national media awareness. ... We create programming to instantaneously build awareness."
Beyond the network, Wal-Mart buyers also push for in-store demos and entertainment--even in such categories as toilet paper, detergent and paper towels, where entertainment can be hard to deliver. "I'm not sure as a consumer you really get anything out of [the demos]," said a former P&G brand manager. "But if demonstrating in the store drives [Wal-Mart] to merchandise the product better, that's what drives business."
While senior Wal-Mart management still preaches the gospel of lowest net cost, package-goods executives said buyers increasingly push special and bonus packs. One reason buyers want special packs is that Wal-Mart's everyday low price policy means beating deep discounts by local competitors, often supermarkets that use high-low merchandising. But supermarkets are less likely to carry large or special packs.
Wal-Mart buyers have grown especially fond of shrink-wrapped buy-one-get-one-free offers. But the retailer has banned the word "free," deeming it misleading, since the whole package isn't free. For efficiency's sake, many marketers have stopped using the word on packaging everywhere. "They have enough clout to eliminate a word from the English vocabulary," the chief marketing officer said.
Only at Wal-Mart
Beyond special packs, Wal-Mart also increasingly wants special products, either pushing concepts for products that consumers request or looking for exclusive deals from suppliers.
Sara Lee Corp. recently exclusively launched Hanes Her Way at Home sleepwear at Wal-Mart, to be followed by a men's line next year. "It's actually displaced five other vendors," said Sara Lee Chairman-CEO Steven McMillan proudly of the sleepwear launch in a September investor meeting, adding he expects to generate $30 million from the deal in 2004.
Power of suggestion
Georgia-Pacific developed Brawny Fresh-kins moist towelettes and Heavy Duty Cleaning Towels at Wal-Mart's suggestion earlier this year and marketed them there exclusively for several months before rolling the products broadly.
Wal-Mart urged Cadbury Schweppes to launch Mott's Hawaiian Punch Lite with McNeil Nutritional's sugar substitute Splenda in July, six months before a full national rollout.
But Wal-Mart's suggestions don't always pan out. Orange Glo tried an Oxi Clean automatic dishwasher detergent at Wal-Mart's behest in some stores before pulling the plug, though the product still sells with die-hard brand fans via direct-response TV, said marketing director Kristin Nordstrom.
Beyond speeding new products to market, Wal-Mart policies have fundamentally reshaped the package-goods industry, analysts believe. The retailer's growing power and price focus may be making any other proposition less relevant. Deutsche Bank Securities analyst Andrew Shore's research shows widespread and growing deflation in most package-goods categories globally for the past decade, and he believes Wal-Mart is mainly responsible.
Ominously, suppliers believe a global Wal-Mart is starting to compare prices globally, asking why the same product can't sell for the same price in the U.S. as China or Mexico.
Wal-Mart's business model may encourage more advertising--as gains in the past year in ad spending as a percent of sales by such major vendors as P&G, Unilever, Clorox Co. and Gillette Co. indicate. But Mr. Shore believes Wal-Mart's growing footprint and overriding emphasis on price is rendering that advertising less effective. "Wal-Mart has created a deflationary environment, which creates more price-based decisions by consumers," he said. "That hurts the ability of conventional advertising to gain traction."
Budget-minded as it may be, Wal-Mart's media spending has grown to the point where brand Wal-Mart has spent more on U.S. media than any single brand sold in its stores during the 21st century, according to data from TNS Media Intelligence/CMR. Its media budget only barely edges such smaller national rivals as Target and J.C. Penney. But because it shuns newspaper inserts that gobble up competitors' budgets, more than 80% of Wal-Mart media dollars go to TV, where its share of voice beats suppliers and competitors alike.
The message is always clear. "Always low prices. Always."