July, 2011

Research Perspective and Comments & Analysis

More Rollbacks: Wal-Mart Challenges Continue

by Diane frederick, CEO of Blueocean Market Intelligence

 Wal-Mart’s same store sales in the United States fell 1.1 percent in the first quarter of this year, making it the 8th straight quarter of declining same-store sales for Wal-Mart. The company’s own sales data and projections are not fully accessible to suppliers, leaving many to wonder, “What’s happening at Wal-Mart?”

As such, the team at Blueocean Market Intelligence created a Shopper Behavior Monitor to investigate how and why Wal-Mart shoppers are changing their shopping habits.

In the first wave of the study, fielded in September, 2010, Blueocean found that customer loss, price competition and Project Impact, a remodeling and reorganizing effort designed to streamline the store and attract more affluent shoppers, negatively affected 2010 sales compared to 2009. The second wave, fielded in April, 2011, was conducted to discover how Wal-Mart customers were responding to efforts to reverse Project Impact, as well as the continued slow economic recovery.

In Wave 2, we asked Wal-Mart customers if their shopping habits have or will change from the fourth quarter in 2010 versus the first quarter in 2011, and the next six months versus current period.

Our study found that the overall state of the economy continued to negatively affect customers’ willingness to shop and spend. Additionally, high gas prices, increasing price pressure and negative impressions about the Wal-Mart shopping experience are all impacting Wal-Mart shopping behavior.

Wal-Mart Goes The Way Of The Greater Economy

When asked why they are spending less at Wal-Mart, the majority of customers cite universal spending cuts as their main reason. Also, many shoppers, including Wal-Mart’s top customers, are reducing their Wal-Mart shopping trips, in part due to high gas prices and an ability to find bargains closer to home.

Customers remain pessimistic about the state of the economy and don’t expect much improvement in the next six months. Most expect to maintain spending at Wal-Mart, but many plan cuts at other channels, including grocery stores.

Wal-Mart Is Facing Price Pressure Across Departments,Especially In Grocery

The majority of Wal-Mart’s Grocery shoppers maintained their grocery spending in the first quarter of 2011, compared to the previous quarter. Among those making changes to their spending habits, a greater number increased spending than decreased. This is positive news for Wal-Mart, especially compared to significant spending and trip frequency reductions noted in other more discretionary departments.

However, Wal-Mart customers also increased their grocery spending at rival low-priced outlets, including dollar stores and limited assortment retailers. While these channels represent a small share of total grocery spending, Wal-Mart’s customers made bigger spending increases in these channels compared to their increases at Wal-Mart. Grocery stores also saw a small gain in share.

Opinions about Wal-Mart’s price competitiveness weakened in this wave compared to the last. Fewer grocery shoppers call the store the “low price leader” or say Wal-Mart offers “good value for money,” compared to the 2010 wave of the study. Additionally, nearly a quarter of those who made grocery department spending cuts said that other retailers’ pricing and promotions are attracting them to their stores more often. A third of these shoppers say competitors are more affordable, up nearly 10 percent.

Maintaining grocery customers’ loyalty and responding quickly to attempts to undercut prices will be critical to Wal-Mart’s future success. While customers expect their spending at dollar and limited assortment stores to moderate in the next six months, prolonged economic difficulties provide opportunities for these channels to gain share.

Customers Don’t See Improvements To Wal-Mart Shopping Experience

In the fall of 2010, Wal-Mart began reversing its Project Impact program. Since then, the company has reintroduced items taken off the shelves, refocused signage on price rollbacks, and runs TV ads touting their commitment to employee satisfaction and opportunity. Despite these efforts, customers’ impressions of the Wal-Mart shopping experience haven’t improved. Ratings for Wal-Mart’s variety, organization and customer service remain low. Only about one in three think Wal-Mart is better organized or more fun to shop than other retailers. Less than half think Wal-Mart has a better variety of brands in stock.

Wal-Mart’s Future Performance

Wal-Mart’s ability to continue to capture market growth in the grocery sector is dependent on its  ability to quickly respond to aggressive pricing at other local stores, including dollar, limited assortment and grocery outlets. If the economy continues to falter and personal finances remain tight, Wal-Mart will have difficulty reversing negative sales trends. Building brand loyalty and showcasing the advantages of buying groceries and other goods at Wal-Mart, versus other stores, is critical as Wal-Mart’s price leadership continues to be challenged. 

 

 Wal-Mart’s Era of Great Confusion

The BlueOcean Market Intelligence Report on Wal-Mart is insightful, but, as with all studies that focus on interviewing consumers, it can only give us insight into the class of consumers that are actually interviewed. This is a shame because it is, of course, not surprising that Wal-Mart should find its customers affected by the national economy. When Ms. Fredrick explains that “...the overall state of the economy continued to negatively affect customers’ willingness to shop and spend,” it sounds perfectly reasonable.

What it doesn’t do, though, is translate into an explanation for why Wal-Mart’s same-store sales have been declining for two years. After all, times are tough not just for Wal-Mart’s customers but for many, indeed most, Americans.

So what one would expect is that as Wal-Mart’s customers — typically the consumers living paycheck-to-paycheck — suffer, one would think that the next socio-economic class up, also hurt by the recession, would abandon more pricy venues and migrate their shopping to Wal-Mart. Yet that doesn’t seem to have happened, or at least not enough to compensate for the pocketbook contraction among Wal-Mart’s core customers. The intriguing question, of course, is why? Why haven’t consumers traded down to shop at Wal-Mart?

BlueOcean surveyed only those who shop at Wal-Mart, so we can’t say for sure, but there are hints in its two studies of why things are not happening for Wal-Mart as the company once expected they would.

For example, the study points out that high gas prices are inducing consumers to reduce their shopping trips to Wal-Mart. This is a shocking development. Since the development of the Wal-Mart Supercenter, high gas prices have been a plus for Wal-Mart and a disaster for everyone else. Why? Simple... the giant Wal-Mart Supercenter, with its promise of one-stop-shopping, encouraged consumers to consolidate shopping trips to save on gas and save on the purchase price of their shopping items.

If high gas prices no longer work in Wal-Mart’s favor, and both sales statistics and the BlueOcean study say they do not, that is a sea change and the study provides an inkling as to what, precisely, has changed.

Ms. Frederick writes: “...many shoppers, including Wal-Mart’s top customers, are reducing their Wal-Mart shopping trips, in part due to high gas prices and an ability to find bargains closer to home.”

High gas prices wouldn’t necessarily reduce shopping trips or spending at Wal-Mart; it is high gas prices COMBINED with the “ability to find bargains closer to home” that does the trick. Anyone know how to spell Aldi, Save-a-Lot, dollar stores, etc.?

Many of Wal-Mart’s problems are unforced errors. The decision to impose Project Impact —basically a rationalization of SKU count without extensive testing — simply boggles the mind.

It is clear that the executives high up in the ranks at Wal-Mart were confused about the core appeal of the supercenter concept. They must have been blind to the fact that the big advantage a supercenter had over an Aldi was the supercenter’s grand scale, and thus,  its ability to handle an extensive variety.

Perhaps the most disturbing finding for Wal-Mart in the BlueOcean study is that in the second wave of the study, consumer assessments of Wal-Mart’s price competitiveness continued to decline. As Ms Frederick puts it: “Opinions about Wal-Mart’s price competitiveness weakened in this wave compared to the last. Fewer grocery shoppers call the store the ‘low price leader’ or say Wal-Mart offers ‘good value for the money,’ compared to the 2010 wave of the study. Additionally, nearly a quarter of those who made grocery department spending cuts said that other retailers’ pricing and promotions are attracting them to their stores more often. A third of these shoppers say competitors are more affordable, up nearly 10 percent.”

So there you have it. The issue is not whether Wal-Mart can rearrange the fixtures to be more appealing or whether Wal-Mart can tweak its assortment to better satisfy customer needs. The issue is whether Wal-Mart is prepared to lose its crown as America’s value leader.

There are many signs that this is the case. While Wal-Mart’s same-store sales have been declining for two years, its profits have been rising. This indicates that Sam Walton’s old notion that Wal-Mart should be a buying agent for the consumer and that efficiencies should be passed along to the shopper has been cast aside.

Store managers, who in days gone by would send their employees into a competitor to buy up a sale item if Wal-Mart couldn’t match it, have been reigned in. They no longer have marching orders to make sure Wal-Mart is never beaten on price for key items.

Wal-Mart has lost a lot. On items such as produce, it used to have vendors who bled Wal-Mart blue; then Wal-Mart abandoned its old relationships so vendors care less. It used to have employees who loved the place; then Wal-Mart abandoned its profit share plan that made everyone a stockholder. Now its employees care less. Consumers used to know that Wal-Mart offered the best value; now the old banners about Satisfaction Guaranteed and Always Low Prices have disappeared. So consumers are not as committed.

To lose the loyalty of even one of these three groups — vendors, employees or consumers — can be catastrophic to any retailer. To lose the loyalty and enthusiasm of all three is quite a blow.

Wal-Mart still has many advantages, but this BlueOcean Report shows it has far fewer than it once did.