With national brand grocery product increasingly available through pure-play e-commerce retailers such as Amazon, Walmart sees its private label brands, such as Great Value, playing a bigger role in the company’s success going forward.
The widespread availability of name-brand products online will compress the margins of those products over time, said Doug McMillon, president and CEO of Walmart, speaking at the Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference in New York on Tuesday.
“Having a private brand from a margin mix point of view has always been important, but it is even more important now,” McMillon (left) said.
Walmart has undertaken a significant effort to improve its sourcing capabilities in private label, an effort led by David Cheesewright, president and CEO of WalMart International, as the company seeks to improve both the quality and the profit margins of those items.
The company, which has long relied on offering “name brands for less,” is increasingly looking for its private labels to drive loyalty, he explained.
“If we have engineered our specs so that you really love our granola, then there’s a loyalty there that passes not just through the store but into the e-commerce business as well,” said McMillon. “Product-driven loyalty becomes even more important than it was in the past.”
Product attributes including quality and package size are also key to battling the expected rollout of German discounter Lidl in the U.S., McMillon said, citing Walmart’s experience competing against hard-discounter Aldi in the U.S. and against both Aldi and Lidl in the U.K.
“It starts with assortment,” he said. “We’ve got to make sure that the quality of our merchandise is right, not just the price.”
Product package sizes are important, “so it is easy for a customer to compare one item against another,” McMillon added. “Product engineering has to come first, and pricing has to come second.”
In addition, shopping has to be quick and easy for customers, even in large Supercenters, he said, so they can better compete against the small, easy-to-shop formats of Aldi and Lidl.
“We need to innovate for speed, so people can find the item they need to get in and out of the store quickly,” he said. “We are going to try to take away the advantages the discounters have, and then play to our strengths.”
Responding to a question about how Wal-Mart is working with its suppliers to achieve its efforts around price reductions, McMillon said that cutting back on advertising and promotions will help. He said the company had “drifted away” from its core EDLP model and was running too many promotions in print ads.
By cutting back on promotions, Walmart is asking its vendors for less ad funding and instead focusing on negotiating off-invoice pricing, McMillon said.
Improving store pickup
Walmart is also refining its click-and-collect grocery operations to make them more efficient at the store level, he said.
“Our customers love [store] pickup,” McMillon said, citing high customer-satisfaction scores around the service.
Now that Walmart has been providing the service for a while — it has expanded to more than 600 locations — it has learned how to better organize its stores to manage the offering, he said.
“The physical store is improving as it relates to pickup,” said McMillon. “We are learning how to manage the outside experience so it’s faster, and we are learning how to build the back room so inventory can be moved from in-store pickup to exterior pickup quickly and easily.”
Stores have also begun locating refrigeration close to the pickup area to improve speed of service, he said.
Those same refinements are also helping the company as it gears up to expand home delivery, he said. McMillon noted, however, that delivery will likely only account for a small percentage of orders. In the U.K., where Walmart’s ASDA banner has been offering delivery for more than 15 years, “well over 90%” of sales volume is still done in-store, he said.
Walmart has also learned that click-and-collect and delivery services need scale to be economically viable. In some areas, the company has found that using a single store to supply pickup and home delivery for other nearby locations is more efficient.
“It actually does make sense in some cases to have a hub, picking and delivering to other stores, and to the home,” McMillon said. “We are figuring out where to do it, and where not to do it.”
Walmart still sees its Supercenters as the backbone of the company’s success, he said, noting that the company continues to experiment with different Supercenter formats and designs.
Two of the newest Supercenter prototypes in Lake Nona, Fla., near Orlando, and in Tomball, Texas, in the Houston market, display features that will be incorporated in other stores going forward, McMillon said, although he did not reveal which specific features would be rolled out further.
As previously reported, the Lake Nona store includes an organic restaurant, called Grown, offers a mobile “scan-and-go” app, in-store order kiosks and includes enhancements around store pickup. The stores also feature a bright, modern layout and an expanded offering of perishables.
These newest stores “represent some of our latest thinking in supercenter design, and that might give you some idea of where we might allocate some of our remodel dollars going forward,” McMillon said.