At Walmart (WMT), the lowest price is once again the law.
After its advertising drifted away from reinforcing that pledge – over and over again, to the point where television audiences were ready to scream for mercy – its customers also began to drift away. Many opted to shop instead at “dollar stores” like Dollar General (DG), which continued to make explicit “lowest price” promises. Others have begun shopping online, even for staples like cat food, shampoo, jeans and sneakers – the kinds of things they would have snapped up at Walmart. They are streaming video from Netflix (NFLX) or Amazon (AMZN) rather than buying DVDs.
The folks over at Motley Fool took note of this trend recently, suggesting that investors might prefer to snap up stock in Amazon or Costco (COST) instead, as two of the companies that have won the allegiance of customers who typically did the vast majority of their shopping at Walmart. Owning Amazon may be a bit of a stretch – the company’s stock price growth has outstripped the earnings growth that many analysts expect the online retailer to be able to deliver, as illustrated by a recent earnings “miss” – but the underlying point is valid.
As the retail world has evolved, and as the recession took its toll, shopping habits changed in recent years. In the same way that television broadcasting has changed dramatically over the last decade, as cable channels now compete with the NBCs and CBSs of the world to offer original shows and miniseries, so retail has morphed and fragmented. If you want cheap shampoo, you can go to a dollar store or buy in bulk at Costco; if you want great produce, you can join a local CSA (community supported agriculture) program for a nominal annual fee that is adjusted based on income levels. Consumers may want to save money on t-shirts in order to spend more on a pair of designer jeans that Walmart is never likely to stock. At the same time, shoppers across every income bracket have become more accustomed to buying online.
The era of megastores offering one-stop shopping for a consumer’s every need may be drawing to a close. The question now is whether Walmart’s plan to broaden its product offerings and “invest” $2 billion over two years in lower prices – especially in food and other “consumables” like health and beauty products – can help it battle back. The store is introducing more high-end food and trying to tailor its offerings to appeal to groups like Latinos, Asian-Americans and African-Americans, who may avoid Walmart today simply because it doesn’t offer particular products. Tell those groups that they can get everything they want there and won’t have to make an extra trip, the thinking goes, and brand loyalty to Walmart will follow.
Nutrition conscious? Walmart will now offer you beef rated USDA choice – and match low prices advertised by competitors. Duncan MacNaughton, the company’s chief merchandising officer, told a recent investment conference that while steps like this will put a dent in Walmart’s margins in the short term, the company expects to make up for this through higher productivity.
Walmart is a giant company with a still-enviable brand name – but it can’t change on a dime. To some extent, it is gambling that the economic outlook remains uncertain enough that consumers stay focused on low prices – and also respond favorably to the company’s attempt to woo them away from the dollar stores with higher-quality but still bargain-priced merchandise. At the same time, they hope the economy strengthens just enough for those consumers to gradually increase the amount they spend on each visit to a Walmart.
Yes, it’s all a gamble. But it’s one that Walmart will need to win. The company isn’t about to vanish into the ether any time soon, but if it is to avoid the fate of Sears (SHLD), Kmart or any of the other formerly dominant retailers who have watched as their pre-eminence has been eroded, it needs to find some kind of magic bullet. A more coherent ad campaign, low prices and a better product mix may be the solution, but odds are that it will take more innovations to convince shoppers that Walmart offers not only low prices but a unique shopping experience.