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The Wal-Mart Weekly: Growth still being fueled by 'low prices'

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Welcome to the 27th installment of The Wal-Mart Weekly, a column dedicated to bringing you insight, wit, facts, results, opinions and just a bit of everything else when it comes down to a very hot topic these days: Wal-Mart.

This past week, I discussed Wal-Mart Stores Inc. (NYSE: WMT) possible move away from the "do it all" Supercenter and toward smaller and more customizable stores. Customers are wanting a more personal, customized experience when shopping these days, and the "circus bazaar" shopping feeling a standard Wal-Mart Supercenter gives off is falling out of favor.

But, that's been Wal-Mart's bread-and-butter recipe for growth since the early 1990s -- and the retailer shouldn't alter this successful recipe just because it's growth has slowed. Tell that to investors, though. The market continually clamors for more growth, and this is causing Wal-Mart to look at other store formats to make that growth happen.


Is "low prices" the only strategy Wal-Mart has left?

Wal-Mart reported stronger than expected August same-store sales results, won on the back of "reduced prices" during the back-to-school shopping season. Good news, to be sure, but also problematic.

Wal-Mart U.S. sales chief Eduardo Castro-Wright said almost a year ago that Wal-Mart would seek other avenues of growth besides its famous "lower prices" strategy, which has worked fabulously for more than a decade (almost two), but no longer cuts the mustard.

Of course there is a loyal customer segment that are Wal-Mart shoppers for the long haul, those who will always shop Wal-Mart because they believe it always has lower prices than anyone else. Add to that oil changes, gasoline discounts, haircuts and banking, and Wal-Mart is doing just fine with tens of millions of customers every day.

The only problem is that those loyal customers aren't buying higher-margin products in droves, nor are more millions signing up every day to become discount-frenzied Wal-Mart shoppers. Many customers now require a cleaner, more customized and glitzier shopping experience, and they're willing to pay a little premium to get it. Witness Target Corp.'s (NYSE: TGT) strategy. It's one of the few success stories against the Bentonville-based retailing behemoth recently, and we can expect to see more in the future.

Why is it that Wal-Mart always falls back to its core strength? What else does it have?

When Wal-Mart stated that August same-store sales increased by a larger-than-expected 3.1%, company officials attributed the increase to lowered prices on back-to-school items. Wal-Mart often uses loss leaders (items sold at near or below cost) to get feet in the door, only to upsell those customers with well-placed additional merchandise in the obstacle course of a standard shopping trip. Endcaps, impulse and other displays silently scream "buy me!" to those customers, and many put excess items into those shopping carts, especially if the price is perceived as low.

Of course, Wal-Mart is not the only retailer to employ a strategy like this -- all retailers do it to some degree. But, when one of the larger sales months of the year increases sales due to a strategy revolving around price drops, it flies in the face of Castro- Wright's promise to try and seek customers who will buy higher-margin goods, and who will fill their baskets with items that are not loss leaders.

The coming holiday shopping season will seal the deal

With the upcoming winter holiday shopping season, we'll see if Wal-Mart has the moxy to try and sell all those goods with the panache of a specialty retailer and reap the consequent higher margins. Or will it fall back into its comfort zone of promoting low prices on anything and everything to get as many shoppers as possible in the door.

More shoppers equals more sales volume, and that can equal increasing margin if the product mix is set up for it. Problem is, I am not sure the retailer can sway as many customers as it would like into those higher-margin goods that would finally give Castro-Wright something to crow about. Wal-Mart's current public image and brand definitely is not reflective of a strategy shift like Castro-Wright has been publicly stating.

It takes guts to challenge a winning (if stagnant) formula. In the case of Wal-Mart, it will take a long time as the retailer experiments with changes to see how customers react. Maybe we're all too anxious for these changes. But my end question is: are they even coming?

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Last updated: November 24, 2009: 08:59 PM

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