Wal-Mart Stores: Focusing on Home Growth

For some time now Wal-Mart (WMT) has been known for relying on organic growth as an overall strategy in the U.S. and now abroad as well. Overseas, WMT seems to be concentrating on Mexico, United Kingdom and Japan as footholds elsewhere seem to be dormant.

The stock has been stagnant since mid 2005 and senior management has noticed that Wall Street is grading WMT a B- at best. The first step in changing the overall strategy was taken recently when management advertised that it was looking for new ideas or in its own words "multi-format growth strategies".

Historical Trends

Before you get all excited about WMT going out and buying up competitors, if there is anything to be learned from history it is; WMT is not the type of company that goes out and pays top dollar to knock out the competition.

The last time WMT engaged in large scale M&A activity was back in 2003. At the time WMT sold McLane & Co. to Berkshire. In retrospect, WMT correctly saw McLane as cannibalizing its overall super-center strategy as selling wholesale to competitors would just empower them to compete. Either that or raising prices to competitors would last for a short while until they found new supply sources and eventually McLane would falter.

Competition has always been Wal-Mart's strong side. Cannibalization of its traditional stores has always been an issue to avoid. In the current master plan, WMT operates three main store types in the U.S., excluding the traditional store and getting the mix and locations just right has not been an easy task. Likewise, WMT has had to contend with changing demographics, store space availability and politics regarding its super-centers as well. The three musketeers are; Neighborhood Markets, Sam's Club and the super-centers.

Historically WMT has proven to excel at mass merchandising to the middle and lower middle income class. Customers have proven to be more canny shoppers than was originaly expected. Attempts by WMT to sell higher margin apparel and home furnishings have met with limited successes. Some say that this was an attempt to lose the stigma and lure in higher income customers. Others explain the foray into the pricier offerings as an attempt to increase margins. The general perception (in the U.S.) that WMT is a place to go to save a few dollars on every day groceries remains. However, penny pinching customers can cause some hiccups when the economy slows down.

The Dilemma

WMT has noticed that specialty retail chains that cater to the top 10% of income earners have grown faster over the past two years in comparison with its traditional customer base. Compounding the problem is that middle class America is beginning to show signs of financial fatigue.

The potential for growth by entering new geographic locations in the U.S. is limited, though overseas, WMT seems content to pursue its former U.S. strategy by opening up more locations throughout primary markets.

The dilemma for WMT is how to continue growing in the U.S. marketplace. When testing the apparel and home furnishings items in existing stores, WMT had to be careful not to destroy its strongest selling point and that is 'every day low cost'. The term "multi-format growth strategies" coined by WMT suggest to us that WMT wants to maintain the goose that lays the golden egg, yet at the same time develop a new mega chain of higher end items across the board including groceries. This calls for a new master plan strategy of the same magnitude of the original WMT concept.

There are several ways that this can play out. Right now management is looking for ideas and concepts and most likely will want to go with a concept that parallels the current WMT strategy but for a higher income bracket. Some existing stores may eventually be incorporated into the new mega chain.

Trying to be everything to everyone all at once has never worked.

Multi-format Growth Strategies

We envision that the current traditional stores along with the three musketeers will basically get back to basics leaving the all new marketing concepts to the new mega chain. This does not preclude a cosmetic facelift to give the impression of renewal on existing stores.

The new mega chain may or may not be associated with WMT. On the one hand, WMT is a powerful name brand. On the other hand WMT is branded! The challenge is to figure out a way that uses the strengths of the WMT name without the 'negative' associations. This can be achieved by creating a brand that dictates a positive evolution from the former brand. By doing so WMT maintains the name recognition but alienates notions that the new chain is an extension of the old one.

In the television and movie industries, when a brand gets old or tired, the 'all new' program works for a while. Likewise the concept of 'a new season' brings with it a sense of something new and regenerating. This doesn't work for long in mass retail. Once the customer sees that it's basically the same products on the shelves, they usually feel deceived and sometimes get defensive.

Season Change

What Wall-Mart needs is a 'Four Seasons' type of chain that literally changes over to four totally different shopping experiences four times a year. The atmosphere has to change completely down to the employee uniforms and color schemes throughout the store. This would give both the shoppers a sense of renewal and the employees a sense of a fresh start to once again attempt to earn the store's quarterly team division bonus.

Off the cuff, each season would emphasize consumables that are in trend and relate to the season. For instance, the spring season would have more floor space for gardening and the summer season for swimwear etc. In colder climate areas, coffee shop style hot drinks or soup can be sold up front for a nominal charge to create the 'warm winter atmosphere'. The beauty of the new mega chain concept is that what WMT was attempting to achieve within the same stores will now be separated into two separate locations without the cannibalization aspect. The season change concept also reduces the size of the stores.

During the first twelve weeks of each season, the trendy minded and higher income brackets get first crack at the 'new' store. During the last week of the season, everything in the store goes on a 'season change' clearance sale. In fact the store name would actually change eight times a year; Wal-Mart Spring Spot > Season Change > Wal-Mart Summer Hot> Season Change > Wal-Mart Gracious Fall > Season Change > Wall Mart Winter Mall> Season Change. Alternately, the "Season Change" name is maintained throughout the year yet the store sign design and colors change eight times a year. During the season change weeks, the traditional Wal-Mart employee uniforms can be used to emphasize the low cost phase. Recycling the store formats shouldn't be too difficult and customers should develop a sense of looking forward to the next season.

In a nut shell, WMT has to develop further the CrossProfit concept of the disposable format strategy. This is where the trend is. People simply want change, renewal and a sense of adventure while maintaining familiarity when spending for non-essentials. People do not want change when it comes to locating their bread and butter. They want to find it, get it and get out. Shopping for an outfit and picking up a box of cereal are two separate frames of mind that require two distinct separate atmospheres.

Even almighty Wal-Mart can't mess with the dress.

WMT 1-yr chart

Disclosure: No conflicts.