Rafi Mohammed

Lower Prices, Flat Sales Growth…What’s Going On at Wal-Mart?

Posted on December 18th, 2006 (0 Comments)

This year Wal-Mart is leading the traditional holiday discounting frenzy amongst retailers. The company served the initial volley in October by chopping prices on this season’s hottest toys and followed-up with steep discounts on high definition televisions, digital cameras, and cell phones in early November. Varying an old adage, the early discounter gets the shoppers, right? Here’s the anomaly: despite deep discounts, Wal-Mart’s November same store sales dropped by 0.1% (the company’s first negative growth in over a decade) and same store growth is forecasted flat to 1% in December. While these numbers sound bleak, Wal-Mart is still selling a heck of a lot of merchandise – $28.57 billion worth of merchandise in November alone!

Pundits attribute Wal-Mart’s lackluster sales to two key points: (1) Consumers are buying more gift cards – so sales will increase after the holidays, and (2) Consumers have become conditioned to wait for last minute discounting. Sounds plausible, but why aren’t other retailers in the same boat? Target’s same store sales are growing (5.9% in November, estimated 5.7% in December), Costco’s November same store sales were up 5% in November, Nordstrom’s November same store sales were up 5.4%, and Limited Brands November same store sales were up 14%. I could go on, but you get the picture…gift cards and waiting out lower prices don’t seem to be hurting other retailers. So, what’s really going on at Wal-Mart?

First, let’s do a check up on the American Consumer. Unemployment rates are at 4.4% (the lowest since May 2001), consumer confidence is strong, and the stock market is at an all-time high. Overall, things are looking pretty good for the American Consumer.

I believe Wal-Mart has fallen victim to what economists call the “income effect.” I’ll skip the economist gobbly gook explanation of the “income effect” (that involves consumers reaching a higher indifference curve) in favor of one we all can relate to. The “income effect” basically says since consumers feel good now (and about the future) and have more money in their pockets, they want to trade-up to higher quality goods. I’ve experienced the income effect myself lately. Instead of ordering my usual $1.00 “Dollar Menu” double cheeseburger at McDonald’s, I’ve found myself upgrading to the restaurant’s signature $2.79 Big Mac sandwich.

Okay, given that consumers want to “trade up” to higher quality products, why is this negatively affecting Wal-Mart? Three key reasons:

  1. Limited Upscale Merchandise. Wal-Mart has a limited selection of upscale products. For example, Best Buy offers well over double the number of plasma televisions models (with more higher-end features) compared to Wal-Mart. And while Wal-Mart made a splash by offering a 42 inch plasma flat panel television for $988, it was a Viore brand television – not exactly the best known brand.

Wal-Mart’s efforts to “upscale” its home furnishing (Martha Stewart style) and apparel lines (e.g., its high-end “Metro 7” clothing line) have been disappointments. The company acknowledges that home furnishing and apparel are among its worst performers.

Wal-Mart implicitly acknowledges its upscale challenge. While careful not to use the word “upscale,” the company is starting to include products that are more “tailored” to its local customer base. For example, Wal-Mart recently opened a prototype store in Plano Texas that offers higher-end electronics, wines ranging in price up to $500, and even a sushi bar…quite a difference from the Wal-Mart we know today.

  1. Unable to Send a Clear Marketing Message. A recent Wall Street Journal article written by Gary McWilliams, Suzanne Vranica, and Neal E. Boudette titled How a Highflier in Marketing Fell at Wal-Mart highlights the marketing crossroad the company is at. While Wal-Mart owes its success to low prices, some senior executives are beginning to feel the key to future growth lies in attracting higher-end customers. The fact that Wal-Mart does not have a clear message on its product line does not bode well in these “income effect” times.
  1. Losing at its Own Game. Wal-Mart shocked the electronics industry by lowering the price of a 42 inch Panasonic flat panel by $500 to $1,294. Quick to recover, category killers Circuit City and Best Buy responded with new prices on the same model ($1,199 and $999 respectively), leaving Wal-Mart in third place.

In my opinion, Wal-Mart’s future is spelled out by this basic equation: Income Effect + Wal-Mart’s Current Strategy = Stagnation.

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