June, 2011

Fruits of Thought

Wal-Mart's Low Price Struggle

“We have lost our customer confidence ... in having the lowest price...” So acknowledged Duncan MacNaughton, chief merchandising officer at Wal-Mart, in a startling admission during an interview with The Associated Press.

The enormity of this problem for Wal-Mart cannot be over-estimated. The value of a business is not solely or even primarily the value of its physical assets — in Wal-Mart’s case the stores, trucks and warehouses, etc. One could argue that the name and formula of Coca-Cola is more valuable than all the bottling companies, etc. Why? Because it is the intellectual property that entitles the vendor to shelf space in stores around the world.

So with Wal-Mart, it is the value perception of consumers that makes it the go-to spot for a good deal. To lose this consumer perception is to lose something more vital than a physical asset... and it is to lose something that, once lost, is incredibly difficult to regain.

Wal-Mart is moving to recapture what it has lost. Some of the initiatives, such as restocking its “Action Alley” with bargains and widening assortment by once again stocking items that had been removed from the store despite customer demand, are no-brainers. These actions are attempts to rectify management mistakes. It boggles the mind to think that a retailer such as Wal-Mart made these kinds of changes out of Target-envy without carefully testing them with its own customers.

The core value at Wal-Mart, though, is price, and here, although professing understanding of the problem, Wal-Mart executives have choked, relying on marketing gimmicks rather than substance in addressing the Wal-Mart value proposition.

The centerpiece of the program is what Wal-Mart is calling the “Strongest Ad Match Policy in the Market.” In the press release announcing the program, Wal-Mart defines it this way: “Wal-Mart will match the price of any local competitor’s printed ad for an identical product.” In separate documentation, Wal-Mart lays out all kinds of caveats, such as that Wal-Mart will honor a Buy One Get One Free promotion only if the ad gives a price. Crucially, Wal-Mart will not honor private label price promotions. On produce and meat, Wal-Mart will honor the match only if Wal-Mart sells in the same unit as the competitor — say by the pound or by the each.

The first problem is that it is not clear that the ad match is an advance for consumers. It was under Sam Walton’s watch that Wal-Mart instituted a program in which Wal-Mart would “match” any advertised price and “beat” any everyday price. The new program mentions nothing about beating competitor’s everyday prices, so the whole program seems a step backward for consumers — and for Wal-Mart’s low price image.

A second issue is that Wal-Mart’s explanation of how the program will work just doesn’t make sense. In its press release, Wal-Mart explains, “Customers do not have to bring in a competitor’s advertisement. If customers find a lower advertised price, we’ll match it at the register.” This seems like a recipe for disaster. How are the cashiers supposed to know everyone’s advertised price on the enormous assortment that Wal-Mart sells? One imagines long lines while managers are called and research is done to verify these claims.

Third, there is a logical fallacy in the way in which Wal-Mart is positioning this policy. Wal-Mart explains in its press release that this policy “...is the most competitive in the market, eliminating the need to shop around to save money.” In reality, the ad match policy is the exact opposite. The ad match policy does absolutely nothing for any consumer who does not shop around. The whole point is that the consumer needs to shop around so he can tell the cashier that someone else is offering a lower price.

Back in the Sam Walton days and for a long time after, not only did Wal-Mart have its “match” and “beat” price program but Wal-Mart circulated a “never be beat” list composed of hundreds of items, and the job of the store manager was to make sure that Wal-Mart was always cheapest on those items. Although there is a vague reference made by Wal-Mart to “checking the competition more often,” there is no reference to any commitment by Wal-Mart to not be underpriced.

There is a clear desire by Wal-Mart executives to see Wal-Mart once again perceived by customers as the low price leader; there is little indication that Wal-Mart executives actually have decided to be the low price leader.

Wal-Mart has started doing some test marketing. It is inserting a folder in local Sunday newspapers that has a printed message: “Bring the ads from this paper to Walmart, and we’ll match their price.”  Someone thinks this clever. In reality, it just broadcasts the message that if one is not going to shop around and do a lot of work, one will overpay at Wal-Mart.

With gas prices high, Wal-Mart has an opportunity to sell consumers on one-stop shopping. To do so, it just needs to assure people that Wal-Mart has checked around and its prices are low. It doesn’t have to beat every special, but if someone buys bread... or bananas... or bagged salad... or grapes 52 weeks a year at Wal-Mart, over the course of the year consumers should pay less than had they bought those products anywhere else. Then, of course, the products have to be of good quality. 

The executives in Bentonville once knew this. They placed on every store these words: “We Sell for Less” and “Satisfaction Guaranteed.” If Wal-Mart’s executives want to win back a consumer perception of value, they just have to put those words on the storefront once more... and let the store managers and associates know that they really mean it.    pb