What Scandal? Walmart Rides Low Prices to Regain Mojo

Right Product Mix, Closer Tie Between Merchandising and Marketing Fuel a Return to Growth

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For much of the past seven years, Walmart executives have talked a lot about sustainability and other feel-good initiatives. And its own measures suggest public perceptions improved even as the company's sales growth slowed, then declined.

Walmart growth: Overall and comparable-store sales
Source: Wal-Mart Stores financial filings
For fiscal years ended Jan. 30.

These days, Walmart is getting knocked around on the reputation front, but delivering its best top-line results in three years.

The shift indicates Walmart has finally turned the corner -- and reinforces that consumers care less about a retailer's reputation than its ability to deliver the goods they want at low prices.

Walmart recently received perhaps its biggest black eye ever in the media thanks to extensively documented reports by The New York Times -- which Walmart hasn't denied -- that the company bribed officials in Mexico seven years ago, then suppressed an internal investigation into the matter. Some believe Walmart is focusing less on sustainability too -- something Walmart executives do deny. But either way, it's quieter on that front: the retailer's own site shows a 64% drop in press releases about sustainability in the past year.

By all indications, shoppers couldn't care less. Within weeks of the Times report, Walmart reported its strongest top-line growth in years. Comp-store and overall sales for first quarter grew faster than they have since 2009, when the retailer was buoyed by upscale consumers seeking deals amid a deep recession.

Les Dach, exec VP-corporate affairs, said news of the Mexican bribery investigation shows no signs of tarnishing work the company has done in sustainability or turning shoppers against the retailer.

"We haven't seen that it has any kind of meaningful impact on the way our shoppers or stakeholders view the company," he said.

Data from YouGov Brand Index, which tracks consumer sentiment about brands, finds the Mexican bribery issue made little difference either. Walmart took a 15-point hit in its negative-to-positive buzz rating the day the news broke -- about half the impact Target got from a controversy in 2010 over donations to candidates who oppose gay marriage and half the impact Taco Bell got from a 2011 lawsuit alleging its tacos had too little meat. Walmart also recovered more quickly.

"For the most part, consumers vote with their wallets. If you think of Walmart as a place you save money, nothing in the news about the Mexican bribery is likely to make you change your buying decision," said YouGov CEO Ted Marzilli.

Jim Stengel, former Procter & Gamble Co.global marketing officer and now marketing consultant, said image and sustainbility still matter to Walmart--and he believes the company did a good job of handling the aftermath of the Mexico story, saying it would investigate aggressively.

But what's really driving growth for Walmart right now is a sharper focus on its low-price heritage. While it hasn't given up on improving the shopping experience, he said, it's "back to the basics."

Attempts under former CEO Eduardo Castro-Wright (who was alleged in the Times article to have overseen the Mexican bribes) to improve shopping experience by decluttering aisles and build margin by sacrificing lowest pricing have been erased, and Walmart is in the middle of a two-year program to reduce prices.

Apparel also seems to have responded to a strategy shift, delivering its first positive quarterly comp in six years, Chief Merchandising and Marketing Officer Duncan MacNaughton said. The improvement came largely from clearing the stores of the retailer's attempt at more fashion-forward merchandise, which often didn't sell, in favor of basics, which did.

Walmart's first quarter was also boosted by improving assortments everywhere from fishing tackle to fabrics, Mr. MacNaughton said.

And a realignment in which marketing became part of merchandising under Mr. MacNaughton also is paying dividends, he said, citing such areas as Facebook marketing, where merchandisers increasingly encourage suppliers to get involved in the My Local Walmart program. Now the company turns on localized messaging when local product comes in or the weather changes.

Stephen Quinn
Stephen Quinn

Chief Marketing Officer Stephen Quinn gives Facebook programs some of the credit for Walmart's recent results, though he declined to pinpoint how much. And he counts himself as a fan of Facebook ads.

"I would still say [paid advertising] is the smaller part of it," he said. "The bigger part for us is building our fan base and how we communicate with our fan base." But they are experimenting in ads and are "happy with the results. There have been other marketers out there questioning it, and we're scratching our heads ... because we're certainly seeing a great ROI on our spend."

The bigger factor, however, is just getting the merchandising right, Mr. Quinn said. He cited a 2011 Ad Age story that recounted how Walmart had gotten "stuck in the middle" between dollar stores and hard discounters on the low end and higher-end retailers.

"I think we got ourselves unstuck," he said. "The biggest thing that happened was just our merchants getting their merchandise assortments where they need to be in a lot of categories and our real recommitment to making sure we're the low-price leader."

Walmart's quarterly results did benefit from an additional day thanks to leap year, but all other things being equal, it still had a decent 1.5% same-store sales comp.. And 4.8% overall sales growth--the largest spread between overall sales and comps in more than three years--suggests new store construction is ramping up and finding fertile territory, not adding to cannibalization.

So whatever the impact of the investigation on Walmart, however, it doesn't appear to be hurting the company much with consumers, said Consumer Edge Research analyst Faye Landes. She followed Nike when it was beset by controversy over conditions at its overseas factory, and said that while the issue may have consumed executive time, it doesn't seem to have hurt sales much.

"The bigger issue with Mexico," she said, "is does it spur unwanted management change?" It may also give people who oppose Walmart expansion in the U.S. or internationally new ammunition.

Mr. Dach, however, said the company hasn't yet seen any signs of the FCPA issue affecting expansion. And, while not addressing management change, Walmart did show off a deep bench from a young and remarkably diverse group that included CEO of Walmart Global Doug McMillon, Walmart U.S. Chief Operating Officer Gisel Ruiz, Sam's Club CEO Rosalind Brewer and Global E-Commerce CEO Neil Ashe.

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