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Looking Upscale,
Wal-Mart Begins a Big Makeover
As American Economy Shifts,
Retailer Redesigns Stores
And Tries to Be Trendier
By ANN ZIMMERMAN and KRIS HUDSON
Staff Reporters of the Wall Street Journal
September 17, 2005; Page A1
Wal-Mart Stores Inc. has begun a fundamental rethinking of the formula that made it the world's largest retailer.
Wal-Mart grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.
This month, Wal-Mart unveiled an eight-page advertising spread in Vogue that uncharacteristically emphasized fashion, such as a leopard-print tank top with pink lace, instead of price. On Monday night, the huge public screen in Times Square will display video from Wal-Mart's first New York fashion show. The Bentonville, Ark., company even has a trend-spotting outpost now in the U.S. fashion capital.
Wal-Mart has created a store prototype with wider aisles, lower shelves and more elegant displays of pricey products. The retailer once prided itself on selling the first DVD player under $100. Now it also offers 42-inch flat-panel plasma TVs for $1,648 to $1,998.
It's a significant gamble, because lower-income rural shoppers have always been the core customers of this nearly $300 billion-a-year company -- bigger than any other nonoil company, measured by sales. In 2004, Wal-Mart sales represented 7.58% of all nonauto U.S. retail sales. William Cody, managing director of the Baker Retailing Initiative at the University of Pennsylvania's Wharton School, says Wal-Mart is the most dominant retailer in U.S. history in terms of sales as a percentage of gross domestic product.
But Wal-Mart needs to shake things up. Its sales at stores open at least a year, a key measure of retailing performance, have been lagging. Over the past year, such sales at more fashionable Target Corp. have been rising twice as fast as those at Wal-Mart. Wal-Mart's share price, which hit a 52-week low yesterday, is down 17% in the past year, while Target's has risen 18%.
The sense of crisis sank in last holiday season. During December, Wal-Mart stores were instructed to display items under $2 in the prominent places at the end of aisles, in an appeal to financially squeezed shoppers. But sales were disappointing. "We went the wrong direction," Wal-Mart Chief Executive Lee Scott told analysts this June, reflecting on the failure. "You can't just spend all your time chasing a customer who is going through that economic cycle."
Across its 3,100-store empire, Wal-Mart is deploying a 340-person squad to enforce new "rack rules." In a Wal-Mart supercenter in Cullman, Ala., Joel Ewing recently snatched a group of peach-colored, beaded tunics from a circular rack and put them on a rack with four outspread arms.
The four-way racks hold fewer items but allow shoppers to glimpse a garment's style and detail. "Putting out less merchandise can translate into more sales, because customers can really see what you have," explained Mr. Ewing as he surveyed departments with the store manager in tow. "But here, that is not an easy lesson to teach."
Wal-Mart's predicament reflects broader changes in the U.S. The country's uneven economic recovery over the past couple of years has benefited high-income Americans more than the traditional Wal-Mart customer, who values price over image. Even before Hurricane Katrina pushed gasoline over $3 a gallon, rising pump prices were having a disproportionate effect on working-class Americans because fuel represents a much bigger slice of their budgets.
Executives now say Wal-Mart needs to appeal to the shopper who loves a great deal on socks but also can splurge on merchandise with fatter profit margins, such as 400-thread-count sheets or a stereo.
Where Wal-Mart's mantra was once "stack it high, watch it fly," its fashion police have a new set of rules. There's the "one-hand rule": Racks shouldn't be stuffed so full that shoppers have to tug at a hanger with both hands. All racks should be 4-feet, 6-inches tall, so shoppers can see over them to apparel hanging on the walls. Thirty-six inches should separate one rack from another.
After surveying its customers and concluding they were "starved for fashion," Wal-Mart has started to bring in more stylish merchandise. The company still does all its apparel buying out of Bentonville. But two years ago, it opened the New York office, located on Fifth Avenue near the Empire State Building, to spot hot styles. Last year, the office persuaded headquarters to take a chance on long, patterned skirts embellished with sequins. They sold out in all stores within weeks.
"Fashion and creativity are not centered in Bentonville," says Celia Clancy, a Wellesley College graduate and former employee of Filene's Department Store, who runs strategic planning for the New York office. "To excel and be credible in apparel and home furnishings, this had to happen."
In the current Vogue ads -- part of a two-year, $12 million deal -- real-life customers pair fashionable Wal-Mart clothes with their own accessories.
Still, the company must be careful not to alienate its traditional base. Other retailers have flopped in pursuing growth outside their areas of expertise. A decade ago, J.C. Penney, the midmarket department-store chain, failed to woo new customers and alienated old ones when it tried to go upscale. Wal-Mart may also face a challenge squeezing suppliers for the last dollar of savings as it sells a plusher image.
Wal-Mart has been trying to improve the quality and style of its apparel and home furnishings for years, but its efforts seem to come in fits and starts. Three years ago, it introduced the George line of apparel from its unit in Britain, where it had sold briskly for a decade. But the company never promoted George here and buried the stylish office and weekend wear in disorderly apparel sections.
"We did focus groups with thousands of women and their biggest dislike was the mess on the floor," says Claire Watts, executive vice president of product development in apparel and home furnishings.
Many shoppers simply don't associate Wal-Mart with fashionable clothes. Caroline Geppert, a 36-year-old stay-at-home mom from McKinney, Texas, regularly shops at Wal-Mart for clothing for her daughters, but not for herself or her husband. "I've been surprised going to Target and seeing some things that I would buy and wear, whereas in Wal-Mart I usually wouldn't buy anything other than socks or underwear or a basic T-shirt," says Ms. Geppert, who formerly worked as a lawyer.
Wal-Mart has been slow to get all the pieces of fashion merchandising in place. Most apparel retailers have fashion planners whose job is to quickly halt production of styles that aren't selling well and rush to get more of popular items. Wal-Mart didn't have such planners until it recently hired 33 of them. It long treated all apparel in the same way as underwear or polyester pants with elastic waistbands, where demand is fairly steady. As it began hawking clothes in more trend-sensitive categories, the absence of planning led to a buildup of inventory and a rash of markdowns that hurt 2004 sales and profits.
This summer Lisa Waltuch, the New York office's top design guru, spotted young women in long, knit gaucho pants on 34th Street in Manhattan. Ms. Waltuch checked local stores in New York and found the garments were sold out. She put out a bulletin to Wal-Mart's Late Developing Items team in Bentonville. The gauchos will hit Wal-Mart stores this fall, faster than the typical six-month lead time.
Surveying shoppers, the trend office identified a customer Wal-Mart isn't reaching. They call her Gracie. She's at least 25 and spends a high percentage of her disposable income on fashion apparel. This month, a new private label brand of high fashion targeting Gracie will arrive in 500 urban Wal-Mart stores.
For years, Wal-Mart advertised relatively little, believing that low prices spoke louder than any commercial. What advertising it did emphasized "everyday low prices" and "rollbacks," or permanent price cuts. Television ads featured a yellow smiley-face character bouncing around the store and slashing prices. That approach seemed to work as Wal-Mart devastated retailers such as Sears and Kmart that had higher costs and less-efficient distribution.
But the constant emphasis on bargains turned off many affluent shoppers. And the frenzied advertising seemed to echo the long lines and busy aisles that can make shopping at Wal-Mart an ordeal.
One spot last holiday season featured the Gingerbread Man character from the movie Shrek 2 careening around a store. The ad hit all the themes Wal-Mart told its ad agencies to reflect -- low prices, happy employees, a wide selection -- but it made Julie Lyle, a vice president of marketing at Wal-Mart, feel exhausted. She feared weary holiday shoppers would feel the same.
Under Ms. Lyle, who is now on leave, and a new chief marketing officer, John Fleming, Wal-Mart crafted calmer ads. One spot shows small girls walking down their bedroom hallway wrapped in oversize towels. Another features Trish, a customer in her home, describing how she found low-priced yet contemporary decorating materials at Wal-Mart.
With the ads now running nationally, the challenge is to make the stores match the image. If higher-income shoppers are lured to the stores only to find the familiar drabness, they're not likely to give Wal-Mart a second chance.
In early June, Wal-Mart opened a prototype supercenter in Rogers, Ark., that targets the new demographic. Among the changes: wider aisles, mock hardwood floors and skylights. Stereo systems are on display rather than left in boxes.
Then there are the shelves. In older stores, all are 7-feet high, sometimes with merchandise stacked above that. The new prototype in Rogers strategically places 4-foot, 6-inch shelves among higher displays. One shelf of small kitchen appliances is kept low so shoppers can see over it to the aisle of pans and kitchen utensils.
"The aisles are wider and it's not as crowded," said Amy Cooper, a Rogers homemaker, loading her 8-year-old son and 6-year-old daughter into a minivan. "It seems cleaner."
Wal-Mart says the new store stocks just as many items as older ones. To make up for the extra space on the sales floor, it slashed backroom space by tweaking its delivery schedule so the store only needed one receiving dock instead of the usual two.
The new sales strategy is showing early results, Wal-Mart says. In McKinney, Texas, a suburb of Dallas, Wal-Mart manager Brent Allen says his two-month-old supercenter has seen a "high-double-digit percentage increase" in its sales of big-screen and flat-screen television sets, compared with a smaller store that used to be across the street. The sets are easy to see on a wall with less merchandise packed around them. Mr. Allen has noticed healthy sales of artichoke hearts and filet mignon. He doubled the floor space in his wine department after customers kept emptying the shelves.
"I think we have a more well-rounded income level that is visiting the store now," Mr. Allen said.
Wal-Mart's immense size, however, means it will be a long time before the prototype store is the norm. Wal-Mart plans to open roughly 100 supercenters modeled on the prototype this year, just 3% of the total.
That's why the retailer is trying to shake up old stores too. In the Cullman, Ala., store, Mr. Ewing, the fashion merchandiser, noticed a violation of the "rack rule" that says clothing bottoms should be placed directly under tops. He spotted a wall where $22.82 jewel-toned blouses were displayed above matching $17.57 plaid skirts, but the skirts were facing sideways. He straightened them out.
Wal-Mart Begins a Big Makeover
As American Economy Shifts,
Retailer Redesigns Stores
And Tries to Be Trendier
By ANN ZIMMERMAN and KRIS HUDSON
Staff Reporters of the Wall Street Journal
September 17, 2005; Page A1
Wal-Mart Stores Inc. has begun a fundamental rethinking of the formula that made it the world's largest retailer.
Wal-Mart grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.
This month, Wal-Mart unveiled an eight-page advertising spread in Vogue that uncharacteristically emphasized fashion, such as a leopard-print tank top with pink lace, instead of price. On Monday night, the huge public screen in Times Square will display video from Wal-Mart's first New York fashion show. The Bentonville, Ark., company even has a trend-spotting outpost now in the U.S. fashion capital.
Wal-Mart has created a store prototype with wider aisles, lower shelves and more elegant displays of pricey products. The retailer once prided itself on selling the first DVD player under $100. Now it also offers 42-inch flat-panel plasma TVs for $1,648 to $1,998.
It's a significant gamble, because lower-income rural shoppers have always been the core customers of this nearly $300 billion-a-year company -- bigger than any other nonoil company, measured by sales. In 2004, Wal-Mart sales represented 7.58% of all nonauto U.S. retail sales. William Cody, managing director of the Baker Retailing Initiative at the University of Pennsylvania's Wharton School, says Wal-Mart is the most dominant retailer in U.S. history in terms of sales as a percentage of gross domestic product.
But Wal-Mart needs to shake things up. Its sales at stores open at least a year, a key measure of retailing performance, have been lagging. Over the past year, such sales at more fashionable Target Corp. have been rising twice as fast as those at Wal-Mart. Wal-Mart's share price, which hit a 52-week low yesterday, is down 17% in the past year, while Target's has risen 18%.
The sense of crisis sank in last holiday season. During December, Wal-Mart stores were instructed to display items under $2 in the prominent places at the end of aisles, in an appeal to financially squeezed shoppers. But sales were disappointing. "We went the wrong direction," Wal-Mart Chief Executive Lee Scott told analysts this June, reflecting on the failure. "You can't just spend all your time chasing a customer who is going through that economic cycle."
Across its 3,100-store empire, Wal-Mart is deploying a 340-person squad to enforce new "rack rules." In a Wal-Mart supercenter in Cullman, Ala., Joel Ewing recently snatched a group of peach-colored, beaded tunics from a circular rack and put them on a rack with four outspread arms.
The four-way racks hold fewer items but allow shoppers to glimpse a garment's style and detail. "Putting out less merchandise can translate into more sales, because customers can really see what you have," explained Mr. Ewing as he surveyed departments with the store manager in tow. "But here, that is not an easy lesson to teach."
Wal-Mart's predicament reflects broader changes in the U.S. The country's uneven economic recovery over the past couple of years has benefited high-income Americans more than the traditional Wal-Mart customer, who values price over image. Even before Hurricane Katrina pushed gasoline over $3 a gallon, rising pump prices were having a disproportionate effect on working-class Americans because fuel represents a much bigger slice of their budgets.
Executives now say Wal-Mart needs to appeal to the shopper who loves a great deal on socks but also can splurge on merchandise with fatter profit margins, such as 400-thread-count sheets or a stereo.
Where Wal-Mart's mantra was once "stack it high, watch it fly," its fashion police have a new set of rules. There's the "one-hand rule": Racks shouldn't be stuffed so full that shoppers have to tug at a hanger with both hands. All racks should be 4-feet, 6-inches tall, so shoppers can see over them to apparel hanging on the walls. Thirty-six inches should separate one rack from another.
After surveying its customers and concluding they were "starved for fashion," Wal-Mart has started to bring in more stylish merchandise. The company still does all its apparel buying out of Bentonville. But two years ago, it opened the New York office, located on Fifth Avenue near the Empire State Building, to spot hot styles. Last year, the office persuaded headquarters to take a chance on long, patterned skirts embellished with sequins. They sold out in all stores within weeks.
"Fashion and creativity are not centered in Bentonville," says Celia Clancy, a Wellesley College graduate and former employee of Filene's Department Store, who runs strategic planning for the New York office. "To excel and be credible in apparel and home furnishings, this had to happen."
In the current Vogue ads -- part of a two-year, $12 million deal -- real-life customers pair fashionable Wal-Mart clothes with their own accessories.
Still, the company must be careful not to alienate its traditional base. Other retailers have flopped in pursuing growth outside their areas of expertise. A decade ago, J.C. Penney, the midmarket department-store chain, failed to woo new customers and alienated old ones when it tried to go upscale. Wal-Mart may also face a challenge squeezing suppliers for the last dollar of savings as it sells a plusher image.
Wal-Mart has been trying to improve the quality and style of its apparel and home furnishings for years, but its efforts seem to come in fits and starts. Three years ago, it introduced the George line of apparel from its unit in Britain, where it had sold briskly for a decade. But the company never promoted George here and buried the stylish office and weekend wear in disorderly apparel sections.
"We did focus groups with thousands of women and their biggest dislike was the mess on the floor," says Claire Watts, executive vice president of product development in apparel and home furnishings.
Many shoppers simply don't associate Wal-Mart with fashionable clothes. Caroline Geppert, a 36-year-old stay-at-home mom from McKinney, Texas, regularly shops at Wal-Mart for clothing for her daughters, but not for herself or her husband. "I've been surprised going to Target and seeing some things that I would buy and wear, whereas in Wal-Mart I usually wouldn't buy anything other than socks or underwear or a basic T-shirt," says Ms. Geppert, who formerly worked as a lawyer.
Wal-Mart has been slow to get all the pieces of fashion merchandising in place. Most apparel retailers have fashion planners whose job is to quickly halt production of styles that aren't selling well and rush to get more of popular items. Wal-Mart didn't have such planners until it recently hired 33 of them. It long treated all apparel in the same way as underwear or polyester pants with elastic waistbands, where demand is fairly steady. As it began hawking clothes in more trend-sensitive categories, the absence of planning led to a buildup of inventory and a rash of markdowns that hurt 2004 sales and profits.
This summer Lisa Waltuch, the New York office's top design guru, spotted young women in long, knit gaucho pants on 34th Street in Manhattan. Ms. Waltuch checked local stores in New York and found the garments were sold out. She put out a bulletin to Wal-Mart's Late Developing Items team in Bentonville. The gauchos will hit Wal-Mart stores this fall, faster than the typical six-month lead time.
Surveying shoppers, the trend office identified a customer Wal-Mart isn't reaching. They call her Gracie. She's at least 25 and spends a high percentage of her disposable income on fashion apparel. This month, a new private label brand of high fashion targeting Gracie will arrive in 500 urban Wal-Mart stores.
For years, Wal-Mart advertised relatively little, believing that low prices spoke louder than any commercial. What advertising it did emphasized "everyday low prices" and "rollbacks," or permanent price cuts. Television ads featured a yellow smiley-face character bouncing around the store and slashing prices. That approach seemed to work as Wal-Mart devastated retailers such as Sears and Kmart that had higher costs and less-efficient distribution.
But the constant emphasis on bargains turned off many affluent shoppers. And the frenzied advertising seemed to echo the long lines and busy aisles that can make shopping at Wal-Mart an ordeal.
One spot last holiday season featured the Gingerbread Man character from the movie Shrek 2 careening around a store. The ad hit all the themes Wal-Mart told its ad agencies to reflect -- low prices, happy employees, a wide selection -- but it made Julie Lyle, a vice president of marketing at Wal-Mart, feel exhausted. She feared weary holiday shoppers would feel the same.
Under Ms. Lyle, who is now on leave, and a new chief marketing officer, John Fleming, Wal-Mart crafted calmer ads. One spot shows small girls walking down their bedroom hallway wrapped in oversize towels. Another features Trish, a customer in her home, describing how she found low-priced yet contemporary decorating materials at Wal-Mart.
With the ads now running nationally, the challenge is to make the stores match the image. If higher-income shoppers are lured to the stores only to find the familiar drabness, they're not likely to give Wal-Mart a second chance.
In early June, Wal-Mart opened a prototype supercenter in Rogers, Ark., that targets the new demographic. Among the changes: wider aisles, mock hardwood floors and skylights. Stereo systems are on display rather than left in boxes.
Then there are the shelves. In older stores, all are 7-feet high, sometimes with merchandise stacked above that. The new prototype in Rogers strategically places 4-foot, 6-inch shelves among higher displays. One shelf of small kitchen appliances is kept low so shoppers can see over it to the aisle of pans and kitchen utensils.
"The aisles are wider and it's not as crowded," said Amy Cooper, a Rogers homemaker, loading her 8-year-old son and 6-year-old daughter into a minivan. "It seems cleaner."
Wal-Mart says the new store stocks just as many items as older ones. To make up for the extra space on the sales floor, it slashed backroom space by tweaking its delivery schedule so the store only needed one receiving dock instead of the usual two.
The new sales strategy is showing early results, Wal-Mart says. In McKinney, Texas, a suburb of Dallas, Wal-Mart manager Brent Allen says his two-month-old supercenter has seen a "high-double-digit percentage increase" in its sales of big-screen and flat-screen television sets, compared with a smaller store that used to be across the street. The sets are easy to see on a wall with less merchandise packed around them. Mr. Allen has noticed healthy sales of artichoke hearts and filet mignon. He doubled the floor space in his wine department after customers kept emptying the shelves.
"I think we have a more well-rounded income level that is visiting the store now," Mr. Allen said.
Wal-Mart's immense size, however, means it will be a long time before the prototype store is the norm. Wal-Mart plans to open roughly 100 supercenters modeled on the prototype this year, just 3% of the total.
That's why the retailer is trying to shake up old stores too. In the Cullman, Ala., store, Mr. Ewing, the fashion merchandiser, noticed a violation of the "rack rule" that says clothing bottoms should be placed directly under tops. He spotted a wall where $22.82 jewel-toned blouses were displayed above matching $17.57 plaid skirts, but the skirts were facing sideways. He straightened them out.
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