Wal-Mart Stores Inc. executives are taking the retailer back to its roots - low-cost underwear, garbage bags and groceries - after almost two years of lapses that have left U.S. sales sagging.
A new executive team at the world's largest merchant is facing its problems head-on, vowing to fix them, but the fix won't come quickly.
"Some of the pricing and merchandising issues in Wal-Mart U.S. ran deeper than we initially expected, and they require a response that will take time to see results," chief executive officer Mike Duke said on Tuesday after unveiling disappointing sales for the holiday period. "There is no greater priority for me ... than getting sales back into positive territory."
Wal-Mart's challenge lies in its core U.S. market, which makes up almost two-thirds of its total business. During the recession, the mammoth discounter tried to attract a more upscale shopper by adding trendier products and scrapping other ones. As a result, it stocked less merchandise over all, which caused some frustrated customers to defect to rivals. Dollar stores were among the key beneficiaries.
Now the Bentonville, Ark.-based retailer is returning to the fundamentals that founder Sam Walton established almost five decades ago: Offer low-income consumers "everyday low pricing," which means steady low prices, rather than higher prices on some items with frequent deep discounting to lure them back.
The new strategy entails borrowing from the dollar store playbook of getting suppliers to shrink package sizes so that goods can have lower price tags. It will also launch smaller stores called Wal-Mart Express later this year, which are aimed at getting into urban centres and rural outposts that can't support a superstore. As the chain's executives re-fashion their business model, they are under tremendous pressure to woo back customers before they flee for good.
"While the large-scale changes that Wal-Mart is implementing may be challenging, we still believe that there is a need to reverse flawed merchandising decisions that caused self-inflicted pain and negative [same-store]sales over the past several quarters," Daniel Binder, an analyst at Jefferies & Co., said late last week. "Logic would suggest that adding ... inventory back to the stores should ultimately result in improved sales trends."
Wal-Mart needs the lift. In its fourth quarter, its U.S. same-store sales fell 1.8 per cent from a year earlier, its seventh successive quarter of declines at outlets open a year or more. The discounter had forecast "positive" U.S. same-store sales in the quarter, which includes the heavy holiday shopping period. The outlook for the first quarter isn't much better: It expects same-store sales of between zero and minus-2 per cent.
"Worst fears confirmed," Neil Currie, an analyst at UBS Securities, wrote of the fourth-quarter report. "On balance, we expect the market to focus on the weak sales performance at the Wal-Mart U.S. division and the uncertain outlook for this metric could pressure the shares."
Wal-Mart shares have barely moved over the past decade; on Tuesday, they fell more than 3 per cent. Even the discounter's fourth-quarter business in Canada, where it faces less competition, was soft, although better than in the United States. Same-store sales in this country picked up 0.4 per cent while customer traffic slipped 0.2 per cent.
Over all, Wal-Mart's fourth-quarter profit jumped 27 per cent to $6.06-billion (U.S.) or $1.70 a share while total revenue grew 2.4 per cent to $116.4-billion. (Sales abroad rose 6.6 per cent on a constant currency basis, led by Brazil, Mexico and China.)
Nevertheless, not everyone sees management's missteps as responsible for all of the troubles. Murray Leith at Odlum Brown said the retailer's biggest roadblock is a weak U.S. economy and high unemployment that are squeezing its low- and mid-income customers. He attributed just 25 per cent of Wal-Mart's problems to its own miscues.
"I think the real story is that their core customer is really hurting," Mr. Leith said. The other part of the story is that Wal-Mart executives need to execute their strategy more sharply.
Wal-Mart is rushing to restock thousands of products it pulled from its shelves over the past two years. For example, it recently re-introduced a one-pound bag of brown rice that it had pulled because it carried two smaller sizes that were more popular. It found that enough customers wanted the one-pound bag and headed somewhere else for it, along with the rest of their groceries, Wal-Mart spokesman Greg Rossiter said. "We were giving them a reason to go to another store."