By Gad Allon
According to the WSJ, something is rotten in the state of Wal-Mart (NYSE:WMT) (“Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula“)
When it reports earnings on Tuesday, the retailer is widely expected to post its second straight year of declining domestic same-store sales. Wal-Mart’s U.S. comparable-store sales already had fallen for six consecutive quarters, an unprecedented losing streak.
The article puts some on the blame on recent changes at Wal-Mart. In an attempt to attract wealthier customers, it has changed the mix of products it sells with stronger emphasis on organic food and trendy fashion goods. It has also reduced the clutter in the stores and improved what people refer to as servicescape. Wal-Mart also got away from its promise for every-day-low-prices. As growth slowed and Wal-Mart began running out of room to build new supercenters, the chain began running promotions and discounts on select products—Wal-Mart calls them “rollbacks”—while raising prices on other items.
There are several interesting questions here, and many are unrelated to how Wal-Mart operates. The main question is whether this strategic shift toward middle class consumers will succeed without alienating core consumers. However, even if we take this strategic shift as given, the immediate (operational) question is whether Wal-Mart is adjusting its operations properly, making sure its “operating system” is aligned with its strategy. Since the article mentions only a few changes, it is difficult to judge, but one can argue that most of these are aligned. In particular, changing the mix and reducing the clutter are critical for such a shift. So why do we such a decline? As I will argue next, the main issues are associated with the implementation of these changes, as well as the added complexity these changes inflict on the system.
Wal-Mart now is de-emphasizing rollbacks, returning to its claim of daily low prices.
Meanwhile, reduced staffing at many stores has frustrated some Wal-Mart vendors, who say that a retailer once known for efficiency now often has out-of-stock shelves on weekends. Procter & Gamble (NYSE:PG) Co. Chief Executive Robert McDonald recently blamed the consumer-goods maker’s struggles to sell more products at Wal-Mart’s U.S. stores with a succinct explanation: “sheer execution” by the retailer. For instance, P&G and Wal-Mart created a “Family Movie Night” series of made-for-television specials that prominently featured such items as Wal-Mart’s private-label salad dressings and P&G’s Duracell batteries. But “there haven’t been as many displays in-store” spotlighting the products as needed," Mr. McDonald said in a conference call with analysts last month.
The first question is how much of this is driven by staffing and how much is driven by changes in pricing strategy. Moving to hi-low pricing will induce additional variability and thus make managing availability more challenging.
The second question is why they cut staffing. If anything, a job at Wal-Mart over the last three years has to be more attractive than ever. That is, the retailer ought to be able to stay well staffed without having much competition for labor.
It seems that changes such as increasing price variability, reducing shelf space (to reduce clutter) and changing the mix increased the complexity of running the system and increased the exposure of the system to risks without clear benefits. It is too early, however, to determine whether Wal-Mart should revert back to its basic strategy (which will also mean slower growth) or just try to iron out these execution issues, while perhaps alienating its loyal consumers.