We’re back. And we’re coming after you.
That’s the message from Bentonville, Ark., where Wal-Mart Stores has finally shaken off a lengthy stretch of negative sales and is aiming for more growth by taking on its competitors in the food retailing space more directly than ever. The retailer this spring began an aggressive campaign comparing prices on like items between its stores and the leading grocer in up to 20 U.S. markets. Early reports indicate the campaign — dubbed “See for Yourself” — is already having an effect, and industry observers contacted by SN believe Wal-Mart has considerably more progress still to make. And a healthier, hungrier Wal-Mart indicates that at best the pressure is back on for the supermarket industry. At worst, the death knell is creeping closer for weaker and undercapitalized food retailers.
“Wal-Mart lost their game for a while, but now they’ve got the mojo back,” said Craig Johnson, president of Customer Growth Partners, New Canaan, Conn., told SN. “They’ve really raised the bar competitively, and their biggest target is the grocery stores, that’s their competition. If you’re one of the really good operators out there, a Wegmans or an H-E-B, you have to know the bar has been raised competitively again, and not just from a regional competitor, but from the big guy. So you’re going to have to raise your performance level just to stay even.
“Everyone knows it’s competitive out there, but when it’s Wal-Mart, with all the stores they have and the square footage they can throw at this market, it’s going to be a real challenge for anyone selling food and consumables,” he added.
Wal-Mart’s sales turnaround — its comps turned positive late last year after more than two years of consecutive quarterly declines — happened more or less on schedule and for the reasons its executives said they would a year ago. Namely, the company reestablished its historic emphasis on everyday low prices, selection and new-store builds after an attempt to shift its merchandising focus under 2009’s “Project Impact” program flopped amid a souring economy, and a round of heavy sales promotions in 2010 failed to relight the fire. A tailwind of food-price inflation helped too, observers noted.
Wal-Mart’s search for consistency in recent years allowed its competitors, including supermarkets, the opportunity to serve shoppers who might otherwise have turned to Wal-Mart in a tough economy, sources said, but with inflation ebbing and the economy still recovering slowly, the timing could be right for Wal-Mart now.
“I think they realized they could not appeal to the upper-middle-class customer, and they recognized the competition from dollar stores that they encouraged when they tried to go up-market,” David S. Rogers, president of DSR Marketing Systems, Northbrook, Ill., told SN. “Now they’ve rediscovered their customer and the economy is a wind at their back because the anemic recovery is keeping people focused on low prices.”
Bill Simon (right), named Walmart U.S.’s chief executive officer in 2010, said he believed that restoring EDLP and product selections would trigger more sales, creating leverage the company could then invest in lower prices, which in turn would spark more sales. The company, he said, doesn’t require anything more complicated than that, and insisted the economy shouldn’t necessarily matter for its strategy to succeed.
“The success we’re feeling today is driven by us sort of exercising the biggest muscle that we have, not from us having to transform into something else,” Simon told investors in a recent presentation. “We’re just nailing what we do best and continuing to do that over and over and over again. So almost regardless of what’s happening in the external environment, I have a lot of confidence that our ability to execute our plan is what’s driving our current success, and as long as we continue to do that, we feel like the trends can continue.”
Wal-Mart, which had pared selections during Project Impact to capitalize on product categories that were also growing, spent much of the last year returning thousands of those items to shelves. In the meantime, stores that took on a sleeker, cleaner look saw the return of price-focused endcaps and “action alley” promotional displays. In departments like apparel, an emphasis on fashion items returned to a staid — but steady — selection behind basics like socks and underwear.
While observers acknowledge Wal-Mart’s new momentum, they caution it is still early in the rebound and that Wal-Mart might be getting help from struggling competitors, particularly on the general merchandise side, and also from inflation and a low like-sales base. Efforts in technology, including its growing site-to-store Internet shopping component, are also helping.
“There clearly have been losers in the market,” Dave Marcotte, an analyst at Kantar Retail, Cambridge, Mass., told SN. “You could make a pretty good argument that the crossover between JC Penney and Wal-Mart is somewhere in terms of customers, and it’s difficult to imagine JC Penney losing any more sales than they have already and those shoppers have to be going someplace. Sears is still hemorrhaging shoppers as well.
“And Wal-Mart appears to have found a way not to be losing business to Amazon, at least not noticeably,” he continued. “If you put your finger on the one thing they’re doing that might have the greatest impact, it could be site-to-store. It’s paying off, and negating Amazon if not winning against them.”
Johnson noted that food-price inflation — at least until its recent ebb — also helped to get comps going in the right direction, but said he believes that Wal-Mart’s renewed emphasis on EDLP has had the biggest effect.
“The overarching thing is better day-to-day execution around the core value proposition,” he said. “They’re really hitting it home from a price perspective, and that has been the single biggest thing of their doing. Taking price investment — it hasn’t come cost-free — and hammering it home in very clear, red-letter type of price messaging at the endcaps, the aisles and communication.”
Once shoppers returned to the stores, Wal-Mart has been able to showcase improvements in nonfood departments, which have also made a difference, Johnson believes.
“The turn began in food and consumables, but is now extended elsewhere by doing a much better job at individual departments in hardlines and sporting goods, which have been positive, and they’ve done every well in the mobility area with smartphones and accessories. Their most troubled area is apparel but even that’s started to turn, because of the price message and sharper merchandising of the basics there,” Johnson said. “It might just be socks and underwear, kids’ clothes and active wear, but it’s better than it used to be. It was a debacle, but now it’s crawling its way back.”
Simon said the merchandising shifts and price investment have been equally important in getting traffic back at the stores — and that telling that story to shoppers has only just begun. He said shoppers noticing items that have been returned to shelves bought them — and now have begun coming back for them.
“We believed when we started down this journey that we would see ticket move before we would see traffic move,” he said during Wal-Mart’s meeting with analysts as part of its annual meeting earlier this month. “And I think when we were here last year, we had started to see ticket move. So as you go back and deliver a consistent EDLP offering, and you get the breadth back to where the customer has trust in your price and trust in your assortment, the customers that are there see it, and they buy your items.
“We didn’t lose customers per se; we lost trips,” he explained. “And once we saw the ticket go up, we believed we would get the frequency of the trip back, which is what closely followed. … And once we got the business back to where we wanted it, we would start with a very crisp communication on price, which is where we are today.”
That price communication is now getting awfully specific for competitors in the supermarket field. Wal-Mart this year has beefed up its “ad-match” guarantee with a “See for Yourself” advertising campaign (see image below), which highlights its price-gap with market-leading supermarkets on the same items. Print ads show side-by-side images of register receipts from Wal-Mart and its regional competitors, often the leading grocer in the trade area, and highlight overall percent savings on the basket of items represented on the tape. Television ads highlight actual shoppers who said they switched from a conventional store to Wal-Mart on the strength of its lower prices on the same items.
While the program launched in select markets this spring, it should reach 20 markets in the next few months, according to Edward Kelly, an analyst covering Wal-Mart for Credit Suisse. Kelly in a recent research note termed Wal-Mart’s growth a threat for the food retailing landscape in general, saying the specter of an expanding price-comparison program could trigger promotional activity and resulting profit risk.
“We believe this campaign has been highly successful and see it as a threat to supermarkets, especially those with high price gaps,” Kelly said.
Roundy’s, the Milwaukee-based supermarket chain, identified price competition from Wal-Mart affecting its Minneapolis-area stores during the first quarter. The increased competition was a factor in a downward adjustment in its sales and earnings guidance for the year.
Robert Mariano, Roundy’s CEO, said in a conference call last month that it was Cub Foods, and not Roundy’s Rainbow banner, targeted by Wal-Mart’s “See for Yourself” ads in the Twin Cities. But he said Rainbow had to adjust prices along with Cub to keep its competitive edge. Mariano said price checks indicated that Wal-Mart was not lowering prices in the market — but merely calling out selected differences.
“In our price checks, we don’t see any evidence of [Wal-Mart taking prices down],” he said. “But they have started this business with the register receipts. … And once they started that, there was a reaction clearly in Minnesota to Wal-Mart’s advertising.”
Kelly identified 16 “near-term” markets for Wal-Mart’s “See for Yourself” campaign — stretching from Miami to Las Vegas — indicating few large supermarket companies will escape without feeling at least some effects.
David Dillon (right), CEO of Kroger Co., in a conference call earlier this month declined to comment specifically on competitors when asked about Wal-Mart’s activities but said Kroger was prepared to defend its share against such comparison ads because of its ability to compete on more than just price.
“We’ve invested a lot in price, certainly, but what we’ve tried to do was neutralize price from being the main issue to where the main issue for us is our people, our products and our shopping experience,” Dillon said.
Jon Hauptman, partner at Willard Bishop, Barrington, Ill., warned supermarkets against being drawn into price wars with Wal-Mart, recommending instead that they launch their own communications highlighting their attributes as the best defense.
“The first thing you have to do is round out any rough edges in your pricing. Traditional supermarkets today can’t have prices that are sticking out as excessively high in the marketplace. You don’t have to match Wal-Mart, but they have to ensure the prices are not disruptively high. Similarly, it’s important to make sure there are no rough edges on the low side either, so you’re not giving away margin without getting credit.
“The second thing you have to do is get credit for the great prices and values that you do have in your store,” Hauptman continued. “Similar to how Wal-Mart is getting credit for what they do well. While I’d never recommend you can’t go head-to-head on prices with Wal-Mart, what you can do is communicate an internally focused response, showing shoppers all the ways they can save in their store, and how to be a smart shopper in their store.
“These gaps we’re seeing in the Wal-Mart ads today are really no different than the gaps we’ve been seeing when we’ve done analysis over the last several years,” he continued. “Wal-Mart is just doing a better job of communicating them.”
Simon during the recent investor event said Wal-Mart was not focused necessarily on widening the price gap with supermarkets, but on driving sales by investing in items with price elasticity. The company said last year that it would make $2 billion in price investments over the coming two years, funded entirely by cost reductions.
Service Still an Issue
Burt P. Flickinger III, managing director at Strategic Resource Group, New York, said he was skeptical of the Wal-Mart threat, saying his recent research indicated that its pricing advantages could be blunted by poor service at stores, including out-of-stocks and lengthy checkout lines during peak shopping periods.
“What we’re seeing is that between when the shopper gets out of work Friday through shopping Saturday and Sunday, the shelves are just decimated,” he said. “They’ve cut labor more than I’ve ever seen, with the ratio of part-timers to full-timers probably the highest and worst in the industry. The execution at store level makes it real challenging for their store directors and department managers.”
Not all observers agree with this point of view, however. Johnson of Customer Growth Partners acknowledged that staffing had been an issue at Wal-Mart but he saw it as an aspect of the experience that was improving there.
“A reason for the discontent with supercenters was that the lines were long and shoppers couldn’t find an open aisle, but I think Wal-Mart has gotten better at that,” he said. “The cadre of store managers and regional managers has gotten better, and from a speed point of view they’ve improved operational execution.”
Smaller stores and a revamped real estate strategy have likely helped as well. Wal-Mart last year detailed a new plan to grow market share by filling in spaces even in markets where it already has a high share, acknowledging that pulling back self-cannibalization in recent years led to share losses in markets like Dallas. The company was also building smaller stores, including more in smaller formats, and finding ways to reduce supercenters from 180,000 square feet to models of 120,000 or 150,000 square feet instead. This also supported the company’s desire to build stores more economically by acquiring less land.
Simon in his remarks earlier this month said new stores were saving money, for example, by pouring bare concrete floors instead of colored concrete. The former, he said, was less expensive to buy and to clean.
Marcotte of Kantar Retail said he believes that the economy would continue to help Wal-Mart as long the recovery remains bumpy, but that improving economic results could cost it shoppers once again.
“There’s an argument to be made that Wal-Mart does best when the economy is uncertain or negative, and when times get good it affects shopping trips. Wal-Mart’s designed to be a one-stop shop. That’s what they’re all about. When people have alternatives — which they will when things get better — that’s when Wal-Mart will run into issues. You could argue that when times get better a good amount of Wal-Mart shoppers might reconsider whether it’s a good idea to invest in a Costco membership.”
Supermarkets in the meantime should prepare to face a rejuvenated competitor. “I’m a big believer in competition, I think it makes everyone better, and the winner here could be the consumer,” said Johnson. “But if you’re financially constrained or a company whose management isn’t ready to raise the bar, you’re going to have problems.”