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By Ken Gronbach

Wal-Mart Stores Inc. (NYSE:WMT) sought to capitalize on the recession in 2008 by upping their ad spending by a whopping 15.9 percent over 2007 according to analysis by Ad Age Data Center. Total U.S. ad spending by Wal-Mart in 2008 was reported to be $1.66 billion, and measured media spending on its flagship Wal-mart chain soared 66.4 percent, making the giant discount retailer the fifth-most advertised brand in the U.S. (Procter & Gamble (NYSE:PG), which spent almost $5 billion, is the largest U.S. advertiser).

Wal-Mart is receiving marginal returns from this big increase in advertising spending, with sales up 3 percent in the first quarter of 2009 for U.S. stores, but down significantly for international stores. But shouldn’t Wal-Mart’s U.S. sales be up more than marginally? After all the company is a “discount” retailer and the U.S. has been in the midst of a recession. One would think that heavy advertising and discount prices should lead to bigger sales increases during a recession.

“Save Money, Live Better” is the theme of their message and who could question that Wal-Mart sells what they sell for less than anyone? And in a bad economy everyone should be flocking to the retailer who sells for less than anyone, but apparently, they’re not. Can the bad economy be blamed for the company’s meager sales increases?

We don’t think so. In fact, we believe that demographics may be playing a significant role in Wal-Mart’s lackluster performance.

Wal-Mart’s best customer, the Baby Boomer, is aging and as they age their consumption is dropping precipitously and very predictably. And no matter how much money Wal-Mart spends to chase this shrinking market, the returns are always going to be marginal.

Why? Because the worse mistake one can make in marketing is to use good money to chase bad. A shrinking market is death, and the most efficient ad/marketing dollars are spent on expanding markets.

Is Wal-Mart paying attention? Probably not. If it did it would realize that a retail business model built primarily on low price is extremely vulnerable. Wal-Mart’s retail concept is called “Cheap and Deep” by the retail trade. It always has depth in a limited assortment of merchandise at a very low price. In Wal-Mart’s case this cheap merchandise is manufactured in China by near slave labor.

This retail concept is not about selection or breadth of assortment and it is certainly not about short runs of anything. This concept, therefore, would struggle with the fashion tastes of a new market and therein lies the problem. Generation Y, born 1985-2004 and currently between the ages of 5-24 and the biggest generation in U.S. history is the new market. And new markets generally have very fickle tastes. If they don’t want something, it doesn’t matter if it is free–they just don’t want it.

Wal-Mart is very used to dictating what their customers should buy–large quantities of very cheap retailer’s choice items. Remember the gallon jug of Vlasic pickles?

Wal-Mart is a Baby Boomer-based company. Boomers were born 1945 to 1964, and Wal-Mart has decades of experience catering to the clearly defined tastes of this generation who are currently 45- to 64-years-old. Wal-Mart has figured out what the mature Boomer market buys. They have also refined this demand to the narrowest selection possible, almost telling Boomers what they will buy. Boomers in turn are okay with this because when you are between 45- and 64-years-old you have pretty defined tastes and preferences that influence your buying of stuff. If Wal-Mart does not have what a Boomer really wants, but does have something close at a very low price, the Boomer will buy it.

So where is the rub? It’s simple. When consumers hit about 50 years old, according to the U.S. Bureau of Labor Statistics, their demand for stuff begins to subside. At 60 years old a person pretty much has all the stuff he or she needs and then some. At 60, one’s body has stopped changing so one can wear clothes longer, a lot longer. If you want to see what was fashionable thirty years ago go to a Miami retirement community. The point here is that the bloom is off the rose of the Boomers’ consumption of things. The Boomer population is a huge bell shaped curve with many Boomers turning sixty at its leading edge and with its very top cresting at 50-years-old in 2007. All of this means that Wal-Mart needs to find a new market fast if it wants to continue doing business.

But where does Wal-Mart turn? The two U.S. generations over 60 do not have the critical mass to serve their infrastructure, and besides, for the most part they have stopped consuming. The U.S. population now 25- to 44-years-old is a non-homogeneous combination of the small native born Gen. X (nine million fewer than the Boomers) and the free standing market of Latino immigrants. (Latinos are not evenly dispersed through out the United States but live in geographical pockets in about nine states)

So who’s left? It is Gen. Y, the largest and most powerful generation of consumers this nation has ever seen. Will they be the solution to Wal-Mart’s sales problems?

No. Gen. Y is an emerging market, a huge bell-shaped curve with its peak at age 19. They are inhaling entertainment products, fashion, food, electronics and transportation. Selection is everything to them. They do not care about low price unless it is exactly the item they want. Their tastes change daily. They don’t know what they will want six months from now. Wal-Mart’s limited selection, low price offering to the Boomer will not and cannot translate to Gen. Y.

Wal-Mart has other issues that will play into their business success or failure. Wal-Mart and China are joined at the hip. Despite popular belief, China’s economy is not healthy or stable. China’s one child policy has devastated its emerging labor force. It is much smaller because by their own official estimation China has prevented 400 million births in the last 30 years. A smaller labor force in China means higher labor costs and higher–much higher–product costs for Wal-Mart. Couple this with higher shipping costs, a falling U.S. dollar, a slowing U.S. economy and Wal-Mart will have to find a new trading partner that can produce goods as cheap as China once did because China’s prices are going to go up. And guess what? That trading partner doesn’t exist. India? We don’t think so. India has its own problems.

Oh yes, and one more thing. Gen. Y is on track to become the greenest and most humanitarian generation in U.S. history. If one wants to do business with them they had better be very green and very nice to their fellow mankind. And popular perception is that Wal-Mart has a dismal record on both accounts. Perception is reality. This fact could seriously injure Wal-Mart’s business all by itself.

Disclosure: No positions

Source: Can Wal-Mart Survive Generation Y?