Today Wal-Mart announced that its U.S. division is continuing to slump. For the seventh consecutive quarter, same store sales declined. This of course is not good news.
There are many factors behind the move, but I suspect one of the primary issues driving the decline is Wal-Mart’s growing focus on private label products.
Wal-Mart grew with a very smart brand strategy: sell well-known brands at incredibly low prices. The Wal-Mart brand stands for cheap. Ask anyone why they go to Wal-Mart and the answer will almost always be the same: “Wal-Mart is cheap.” Of course, low prices also indicate low quality; pricing is a powerful signal. Wal-Mart addressed this problem by selling respected brands. Buying Crest at Wal-Mart is the perfect combination; the quality of Crest at a Wal-Mart price.
This all breaks down, however, when Wal-Mart begins to sell private label products. A product sold under the Wal-Mart brand will presumably be cheap and low quality. This proposition is not all that appealing. Since Wal-Mart has the lowest prices, so one can reasonably assume it also has the lowest quality products.
Wal-Mart can’t easily address this issue. Telling people that Wal-Mart products are high quality isn’t believable given the prices. Increasing prices is inconsistent with the Wal-Mart brand.
In recent years Wal-Mart has dramatically ramped up its private label presence. I’m certain this move looked good on paper. But the move is inconsistent with Wal-Mart’s historical branding strategy and it isn’t likely to work. The more Wal-Mart focuses on private label products the more likely its overall result will erode.
edit:
“Further, it looks like Walmart has picked up a ‘financing’ benefit – their version of ‘float’. By returning to **brands** Walmart is returning to the higher store inventory levels of yesteryear, “
For the past six months or so Walmart has moved sharply towards building inventory levels, particularly moving away from private label offerings and into brands. They’ve explained that while they are always able to offer low cost and good value – ie, their private label offering might be equivalent in quality to national brands – that this was confusing their customers. Simon used the ‘Oreo’ example: it didn’t matter that they might have an equivalent-quality offering, customers
only really recognized value if they saw the Oreo brand at Walmart’s better price.
Hanesbrands, on their Q3 2010 analysts’ conference call, confirmed and discussed Walmart’s re-direction, and are expecting a solid 2011 now that Walmart is back into brands. It’s worth a listen.
Further, it looks like Walmart has picked up a ‘financing’ benefit – their version of ‘float’. By returning to private label Walmart is returning to the higher store inventory levels of yesteryear, with virtually no increase in net working capital. Their accounts payable levels now exceed 90% of inventory levels – meaning that with the increased sourcing of brand they are getting vendor funding they couldn’t get through private label. Two years ago, the the A/P to Inventory percentage was closer to 80%. What Walmart has given up in margin, if anything, it may have compensated for in vendor financing. ROE has improved accordingly.
My own suspicion is that Walmart’s domestic ‘same-store sales problem’ (an industry-inconsistent measurement I’ll cover in a moment) is more a combination of their own merchandising gaffs – and economic trends in general – than the KKR-funded (and now maybe Peltz) rejuvenation of dollar stores, which are transforming themselves into America’s newest convenience store concept.
Specifically, the problem may have been more ex-Walmart merchandising chief (and prior to that ex-Target) Fleming’s failed new merchandising direction, together with Walmart’s ill-conceived ‘un-cluttering’ of their stores, at precisely the wrong time, together with that private label shift they’ve since abandoned.
https://chicagobreakingbusiness.com/2011/02/wal-mart-in-its-worst-ever-sales-slump.html
(Costco, on the other hand, might be a private label beacon of ‘how to do it right’).
As to same store sales: it’s an inconsistent, often-manipulated benchmark for public (and analyst) consumption. Walmart’s own definition has evolved over the last several years. Walmart does not include its internet sales for example, nor most remodeled or ‘replacement’ stores (commendably).
Target, Macy’s, Kohls and others, however, do include all these in ‘same store’. Internet is a big part of Kohl’s comps, especially. (Further, Walmart doesn’t include its strong existing international stores – that’s ok – but it would be nice to see.) Not to minimize Walmart’s domestic sales slump – but let’s look at it rationally.
It is interesting to see that a rush into private label, especially if PL is all about cheap and not value, can actually harm a brand if I follow your line of argument.
If we look at some of Europe’s very successful (mainly grocery) retailers and see that their private labels are core to their success (think Aldi or Tesco) then it may become clear that building PL, just like building any other brand, takes time – time to gain trust of consumers and make them loyal customers. This arguably also requires to build a story around your products and emphasize that their quality is not any worse than A brands and that there may be variations/innovation that A brands do not have. The low price can also be justified – to a certain extent – by eliminating those billion dollar marketing budgets from your product P&L. This will at least sound reasonable to customers and could help to establish that image of value rather than low price = low quality. Unless US consumers are far too much in love with their A brands….
Sir – I love your blog and I’m always happy to see new posts! In response to your post, I would say, however, that I think that Walmart’s issue is actually the opposite of what you’re speaking of. Specifically, I’ve seen in a few categories that the drug channel is luring away Walmart shoppers with very hot promotional pricing. In addition, the Dollar General, who’s playing in Walmart’s geographies, has been growing aggressively and luring shoppers from Walmart. So, to me, Walmart is losing its grip on the Always Low Prices perception.
Where Walmart (arguably) stumbled in recent history was trying too hard to compete with Target. They eliminated the clutter of action alley in favor of a clean store layout. They also eliminated many SKUs. I think these initiatives (which are in the process of being righted) turned some of Walmart’s core (price sensitive) shoppers away (to drug and Dollar General for instance) rather than making Walmart socially acceptable among higher income individuals.
Thanks for the comment. I completely agree that Walmart is feeling pressure from dollar stores and recent moves to reduce clutter and items haven’t worked well.
I think Walmart will particularly struggle with private label items; it is very tough to have the lowest price on a private label product.
Walmart is at risk of getting caught in the middle between Target and dollar stores and Aldi. Expanding private label doesn’t seem like the solution to me.