Wal-Mart looks to improve the shopping experience
That old adage in retail about it being easier to keep an existing customer than attract a new one is being put to the test by Wal-Mart. The company has gained millions of new customers in the past few years thanks in large part to a downturn in the economy that made people more price conscious just as Wal-Mart was hitting the market with its new “save money, live better,” brand promise.
A host of operational improvements and in-store changes to better the shopping experience played a major role too and by the end of last year the company had generated record revenues of $405.6 billion and net income of $13.4 billion. Wal-Mart easily outdistanced its competitors last year and that proved to be the case again in the first quarter even though sales declined slightly to $98.3 billion and profits were essentially flat at $4 billion. That was a considered a good showing given the state of the global economy during the first quarter and accounting for the negative impact of such variables as currency conversion and leap year. When combined with last year’s results Wal-Mart executives have a compelling story to tell shareholders at the company’s annual meeting in early June. Nowhere is this truer than the Walmart stores division where first quarter sales increased 3.8% to $$61.2 billion, operating income increased 3.3% to $4.5 billion and same store sales advanced 3.6%. Continued success is expected during the remainder of this year as consumers remain under duress in a challenging economic climate. That makes them receptive to Walmart’s value messaging while the company continues to upgrade and streamline products assortments, relaunch the Great Value private brands, further reduce inventories and continue to correcting deficiencies that crept into its operation over the years and made stores undesirable to customers who had the means to shop elsewhere.
Despite the strong recent performance and progress on a wide range of initiatives, the unresolved question is whether all those new customers who have been attracted to Walmart will stick around when the economy improves. As senior executives look ahead to the remainder of the current fiscal year and beyond, their vision of the future is one in which price and value will matter even more and Wal-Mart’s alignment with those attributes will ensure the new customers it has attracted during the recession will remain loyal when economic conditions improve.
To make its case, Wal-Mart recently disclosed that in addition to customer traffic at its U.S. stores hitting levels not seen in several years, a large percentage of that growth is coming from new customers. At the end of the company’s first quarter, vice chairman Eduardo Castro-Wright said 17% of the measurable growth in customer traffic came from new customers and their average transaction size was 40% higher than the overall average.
“We are committed to retaining these new customers through our new assortments and the way they experience the (Walmart) brand in our stores,” Castro Wright said.
Of course, some leakage is to be expected when economic conditions improve and consumers feel better about their personal finances. Along the road to economic recovery, they will inevitably reassess where they shop, their motivations for doing so and evaluate alternatives. It’s just the nature of consumers to be fickle and when the means is available to do so they typically gravitate to the highest tier of products and those retailers that sell them that their disposable incomes can withstand.
At least that has been the case in the past, and then some, as consumers lived beyond their means thanks to inflated housing values and unfettered access to credit. However, there is school of thought that the recent economic difficulties experienced by the nation extended far enough and deep enough to instill a newfound frugality that won’t quickly fade even if the economy returns to a mid-single digit unemployment rate and positive GDP growth. Wal-Mart executives are among those who share this belief.
“Customers have changed their behavior and their mindset. They’re proud to tell people that they shop at Wal-Mart,” Duke said. He credits improvements the company has made in areas such as merchandising, marketing and operations and believes the trends are sustainable. “Customers will always be interested in saving money and they will always appreciate the value of getting better value.”
Duke’s assertion is that Wal-Mart stands for better value, no matter the country or language and that the company’s enduring brand strength and trust with customers has never been stronger and therefore the company will continue to gain market share. To illustrate this point, Wal-Mart highlights customer experience scores it says have increased for six consecutive quarters and serve as an indicator of future sales performance.
Scores have improved as Walmart has implemented operational changes to clean up stores, shorten checkout wait times and improve benefits for employees so they are happier and consequently friendlier when dealing with customers. The next big advance in customer experience scores and financial performance, promises to come from the accelerated rollout of the company’s Project Impact store format which began in earnest this year. More than 500 stores are slated for conversion to the colorful, clutter free concept enroute to the entire U.S. store base being converted within five years, according to plans disclosed last fall.
“From our early read of the Project Impact remodels and new stores, we are pleased with what we see,” Castro-Wright said. “Sales are exceeding our expectations and outperforming the respective control group.”
In addition, customer experience scores in converted store are growing at twice the rate of those at control stores and inventory improvements are five to six times higher in Project Impact stores, according to Castro-Wright.
“We are making every effort to ensure that customers continue to believe that when the economy recovers, Walmart continues to be the best alternative for them to shop across multiple categories,” Castro-Wright said.
If Wal-Mart feels good about what it is seeing in its U.S. operations it has become more challenging for investors to draw the same conclusion as their access to information has been cut back. Earlier this year, Wal-Mart stopped issuing monthly updates to same store sales guidance. The move was understandable at the time and a lot of retailers took similar action as a very uncertain economic outlook hindered their ability to generate reliable sales estimates. More recently though, the company decided it would stop providing monthly sales altogether, leaving investors and others interested in the company’s performance with only quarterly financial results, guidance updates and a recorded message from management on which to base their opinions.
Regarding Project Impact specifically, very little information was available to begin with concerning the performance of the format. Wal-Mart has provided few specifics regarding the sales lift generated when a store is remodeled, the impact on transaction size, shopper frequency or the margin mix of the basket. Such details may be forthcoming, but for now investors only know that Project Impact is a major initiative that is hugely important to Wal-Mart’s largest division and are basing opinions on original research.
“Looking ahead, the implementation of Project Impact should help Walmart successfully retain many of the company’s new customers that have recently shopped at Walmart and could be a significant same store sales and margin enhancer for the U.S. segment ove the next few years,” according to a recent J.P. Morgan research report authored by Charles Grom and several of the firm’s other analysts.
The focus of Grom and others in the financial community is heavily skewed toward the U.S. business as it represents the largest driver of near term sales and profits and has been the focus of considerable activity during the past three years. Going forward though, the international division, under the new leadership of president and CEO Doug McMillon and the Sam’s Club division, under the new leadership of president and CEO Brian Cornell, can expect to receive increased scrutiny. McMillon has inherited a well-established international division where the underlying performance is masked by the strengthened U.S. dollar. Meanwhile, Cornell takes on an interesting challenge as he looks to restore growth at Sam’s Club with a new senior leadership team consisting of EVP operations Ignacio Perez and EVP merchandising Linda Heffner.
McMillon and Cornell and vice chairman Castro-Wright and Wal-Mart president and CEO Mike Duke are all in new roles since the beginning of the year and will be addressing shareholders for the first time in those roles. It promises to make Wal-Mart’s annual meeting an even more interesting event than normal.
In year’s past, whether it was former president and CEO Lee Scott or especially his predecessor David Glass, one thing shareholders always heard at the meeting, no matter how solid the prior year’s performance, was that the company could do better. The company’s new senior leadership faces the challenge of convincing shareholders that remains the case. However, as Wal-Mart moves into uncharted territory beyond the $400 billion mark, it does so with the wind at its back, a steady hand at the tiller and clearly plotted course.
Retailing Today ©2009 Lebhar-Friedman, Inc.
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