Sudden Impact

JON SPRINGER

Prepare for impact.

Wal-Mart Stores only now is beginning to feel the rumblings of its nascent strategic plan known as Project Impact. But its reverberations will resonate industrywide.

Project Impact, which was officially launched late last year, brings new criteria for selecting products to sell at Wal-Mart Supercenters, and new methods of marketing and merchandising them, showcased in a redesigned store box, and tied together with a new brand message. For the Bentonville, Ark-based giant, the strategy seeks to capture a larger and more economically diverse shopper base, reduce complexity, and grow the company by aligning its investments behind products and categories that also are growing.

Its methods promise to change how product suppliers do business with the world's largest retailer and how customers will shop there. Ripples from these changes will affect the supermarket industry, observers say, so retailers should be aware of the dangers — and opportunities — that Wal-Mart's new posture may present.

While the changes under way at Wal-Mart come with considerable risk for Wal-Mart, the prospect of Project Impact's success — and there are some signs of it already — indicates additional competition with mainstream supermarkets for middle-class shoppers and the products they buy. For an industry that's spent years striving just to survive in the presence of a mammoth low-price leader, slugging it out with a more sophisticated and focused giant could very well be daunting.

“It's the second twist of the knife. For most supermarkets, the first twist was all the supercenters getting built, but now there's just that much more competition from them,” David S. Rogers, president of DSR Marketing Systems, Deerfield, Ill., told SN. “If the supermarket industry is sitting back and relaxing and thinking they know how to handle Wal-Mart, they're deluding themselves.

“The message to the supermarket industry is that competition is becoming more intense.”

Inside Project Impact

Speaking at an investor conference last fall, John Fleming, chief merchandising officer for Wal-Mart, described Project Impact as growing out of the company aligning interests behind the retailer's new “Save Money, Live Better” slogan. That brand message replaced “Always Low Prices. Always” and indicated Wal-Mart was using its equity as a low-price leader to shift its emphasis from price to value.

“I think the single biggest thing driving results today is that we have complete alignment at the most senior levels, that we are the price leader, and we save people money so they can live better,” Fleming said. “And I think that statement has really aligned the whole organization on the things that are important for our customers and important for us to do.”

The new slogan allows Wal-Mart to reach customers beyond those focused most on price, and allows the company to explore different ways to satisfy a shopper who wants to “live better,” Fleming explained. These shoppers may be value-hunters seeking the opening price point; customers who seek specific brands at Wal-Mart prices; or affluent shoppers who are price-sensitive — a growing population at Wal-Mart given the recent economy.

As part of Project Impact, Wal-Mart has begun highlighting local products in its stores. This may help the retailer gain a better reputation for food, but brings added complexity, sources said.

“‘Always Low Prices. Always' was terrific, but it ended up only emotionally connecting with one customer segment,” Fleming said. “For anybody who shopped beyond that, it was a transactional relationship. ‘Save Money, Live Better' [means that] saving money translates everywhere, and living better is defined by what's important to different customers.”

While “Save Money, Live Better” encompasses the branding behind Project Impact, a similar economy of message makes up its merchandising and operations components. The merchandising approach is referred to as “Win, Play, Show” — descriptions of the categories of goods that Wal-Mart sells and its new approach to selling them. In operations, “Fast, Clean, Friendly” describes a new focus on the in-store experience, including store layouts, product adjacencies, displays and employees.

Boiling down the strategy to a few simple descriptions indicates the focus with which Wal-Mart is approaching the project, sources said.

“They can articulate their strategy in 10 words. So few companies can articulate what they are doing as simply and as powerfully,” said Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN.

Win, Play, Show

Perhaps it's apt that the description of Wal-Mart's new approach to merchandising borrows from horse racing. “It sounds like a betting thing,” Fleming said, “but that's what merchandising really is.”

The words refer to one of three categories into which all of the items sold at a Wal-Mart store will fall. Whether a product is deemed Win, Play or Show will affect how Wal-Mart buys, displays and invests in the category, and the degree to which varieties and SKUs are culled from the selection or even pursued at all.

“Win, Play, Show breaks from Wal-Mart's traditional approach of selling everything at the lowest prices as Wal-Mart effectively places bets on the winners,” according to a recent research report from Management Ventures Inc., Cambridge, Mass.

Categories deemed “Win” are those that show high growth, and those in which Wal-Mart possesses scale and credibility. In Win categories — pet food, to name one — Wal-Mart will carry a full range of brands, engage in bold price leadership, and partner with manufacturers in advertising and merchandising support, sources said.

In adopting a strategy of investing behind categories that are growing, Fleming cited research by the consulting firm McKinsey indicating that 43% of companies are successful “because they play where the growth is,” whereas just 22% are successful by out-executing competitors. “We want to continue with the operational excellence that's been the hallmark of Wal-Mart,” Fleming said, “but by being very deliberate about growing market share in growth categories, we think that gives us the ability to grow much faster.”

“Play” categories are those in which Wal-Mart would tend to have high scale and/or credibility, and/or show growth, but not all three. Fleming said denim jeans would be an example of a Play category.

“From a customer perspective, we're not seen as the destination for denim, even though we sell the most denim in the U.S., because we don't have access to the full range,” he explained. “It makes for a great value offering that we have for consumers but we don't have the full range, so we're not going to invest in it the same way we would invest in [a Win category such as] pets.”

Wal-Mart further breaks the Play category down to groups called “Play-Grow” and “Play-Sustain,” indicating categories that currently lack scale or lack high growth, respectively.

Products in the Play-Grow category could receive high in-store support and a relatively wide range of brand and variety offerings, according to a recent research report from JP Morgan, but SKUs could be cut by as much as 15% overall. Play-Sustain categories could shrink in SKU count by as much as 30% as Wal-Mart attempts to balance growth and profit.

The “Show” category includes those products that tend not to show growth, and those which lack credibility and scale at Wal-Mart. These items, such as hardware, need to be retained for Wal-Mart to hold onto its one-stop-shop status, but SKUs will be cut drastically. “It's important we have hammers, and it's important we have tape measures, but we don't need 28 kinds of tape measures, which we actually had at one time,” Fleming said. “This gives us the opportunity to rationalize the assortment and rationalize the supplier base to be able to drive more productivity and invest in the Win categories.”

JP Morgan estimated some categories deemed Show could see SKUs slashed by 80%. These may include grocery categories like spices, bottled water and commodity oils, as the retailer seeks to represent the 20% of items providing 80% of sales in Show categories.

Wal-Mart at the same time will be reaching out to suppliers for a greater share of their marketing dollars, the JP Morgan report said, seeking marketing funds commensurate with suppliers' percentage of sales at the store, and partnerships in cooperative programs. Participation in these so-called “pay-for-play” programs may influence Wal-Mart's decisions as to its Win, Play, Show categories, the report said.

“This pay-to-play model may raise the cost of doing business with Wal-Mart and could change the competitive playing field,” JP Morgan noted.

The relaunch of the Great Value private brand in the meantime will help fill out selections for Wal-Mart and provide the retailer with profitable items at an opening price point. Great Value spans 100 categories in food, beverages and household consumables. Wal-Mart is at work reformulating some 750 items to improve quality, and is expected to roll out more than 80 new items. The rebranded and repackaged goods began arriving in stores this spring.

Fast, Clean, Friendly

The revamped merchandise is coming together in a store that seeks to reduce clutter and showcase products in accordance with their Win, Play, Show designations. Wal-Mart is accomplishing this through an ongoing store renovation program — more than 200 stores have been renovated to date and as many as 700 are expected by year-end — and also through new store builds.

The company is ramping up spending on renovations while easing off the gas pedal on new builds. The company expects to have completed renovations at all of its supercenters by the end of its 2014 fiscal year in January 2014. It will be about one-third of the way complete by the end of this fiscal year.

Other aspects of the store renovations and merchandising changes are arriving throughout the chain as they are implemented, according to Leon Nicholas, director of retail insights for Management Ventures.

“It's important to note that they are rolling out features of Project Impact across all stores — so there are SKU reductions going on at all stores and Impact-like signage across all stores and new marketing across all stores,” Nicholas told SN. “And the advertising is nationwide.”

Hallmarks of the renovated Wal-Mart Supercenters are vastly improved sightlines — designed so that a shopper can stand anywhere in the store and still see across to all of the other departments — and the removal of merchandise on pallets and mid-aisle displays, which opens up the store.

The JP Morgan report noted that some product categories might suffer a bit from the removal of displays. But products in “Win” categories can grow from a greater emphasis on endcaps, including a new tiered display in some renovated stores resembling “a traditional endcap on steroids.”

Other physical changes to the stores as part of Project Impact include better navigation via overhead signs, lower shelves and wider aisles. Certain new product and department adjacencies, such as pharmacy alongside grocery, are also being pursued, MVI said.

Stern of McMillan Doolittle said that the new design is softer and easier to shop than the traditional Wal-Mart Supercenter, but refrains from the “department store feel” of the experimental Plano, Texas, supercenter the retailer opened in 2006.

“If they have a fear with a redesign, it may be that they lose some of that price image they had,” Stern said, “because part of what drives a price image is the very nature of being cluttered, busy and frenetic. That suggests you're low-priced, while cleaning up your act suggests you may be higher-priced. But they are picking up the communication to balance that.”

Edited merchandise selections have allowed Wal-Mart to build its supercenters in smaller boxes, increasing productivity and reducing costs. Rogers of DSR Marketing said he suspects the company may in fact move to execute supercenters in locations for its discount-only stores.

“I think they may be learning how to take a 100,000-square-foot or 120,000-square-foot [discount] store and turn it into a supercenter,” Rogers said. “They still have around 900 of these stores, and I think the changes going on at supercenters complicate the whole market positioning for those stores, since [supercenters are] becoming so food-focused. How do you promote a company where most of the stores are supercenters but 900 of them don't sell meat or produce?”

Wal-Mart said it's also becoming more active in “localizing” selections. According to Fleming, a new customer experience group within the merchandising department is helping Wal-Mart “take advantage of the fact that in Houston, Texas, with a high Hispanic population, we need a bigger baby department, while in Naples, Fla., with a lot of snowbirds, we need a bigger pet department. We can manage the space allocation based on the customer that shops the store.”

Wal-Mart Impact

For Wal-Mart, the myriad changes provide any number of potential benefits — not the least of which is a reversal of same-store sales declines and reduced sales productivity the chain's superstores had suffered earlier this decade. Fewer products — particularly fewer slower-moving items — mean better inventory levels, fewer product markdowns and better labor productivity as stocking and handling demands are reduced.

And those changes have come at a good time for Wal-Mart. The recession is sending more shoppers who seek value to Wal-Mart, giving the chain a chance to win them for good even when the recession eases. Sources told SN they think Wal-Mart can.

“Wal-Mart's success today is driven by two things: They have done a remarkable job of strategically repositioning themselves for the future, along with the fact that the economy came their way,” said Stern. “The question on everyone's mind is that when the economy comes back, do they keep what they've gained? My feeling is they can, because they've done so much from a strategic standpoint to get ready.”

Wal-Mart has tried reaching a higher demographic customer before, but without success. The Plano store was part of an experiment to forcibly “upscale” that included what analysts today consider marketing missteps of advertising in fashion magazines like Vogue and pushing a high-end clothing line called Metro 7.

“The way they are going about today is different,” Joe Feldman, an analyst at Telsey Advisory Group, New York, told SN. “The brands they are doing well with or have relaunched are those that their customers know well or are iconic: Starter, Danskin, OP. Those are names that resonate with the consumer. They've also done a great job with partnerships like AC/DC and Miley Cyrus.”

Nicholas of MVI said the new focus isn't on high fashion as a route to more wealthy shoppers, but on ways to use practicality as an enriching appeal to middle-class shoppers.

“Before, they were trying to step into a space they didn't have a right to be in,” he said. “Today, they are saying, ‘We have the right to offer you value and lower prices — that's something we have equity in. Allow us to show you how you can simplify your life and add some middle-class respectability and solutions for better living.'

“They're squarely after moms with kids, and instead of appealing to them by saying, ‘Wouldn't you rather be 23 and going out to a dance club?' they're being practical. It's not very subtle, and therefore it has relevance for people who'd rather not be tempted.”

Supermarket Impact

It's difficult not to notice how so many aspects of Project Impact — better terms from suppliers, edited SKU selections, boosting private labels, store renovations, brand development — seem torn from the strategic playbook of a supermarket retailer.

And, in fact, some supermarket retailers are already deep into similar strategies. Ahold, for example, has already completed a round of inventory reductions and price renegotiations as part of its VIP program. It is crediting those changes in part to turning around performance at its Giant and Stop & Shop stores. According to JP Morgan, Kroger is about 25% of the way through an SKU rationalization program, noting that the retailer, though proceeding deliberately, has already eliminated roughly 30% of the SKUs in the cereal department.

Supervalu, Publix, Target and Safeway are somewhat further behind in development of a strategy to also reduce selections, but all are at least pursuing the strategy, JP Morgan added. Those retailers, along with Kroger and Wal-Mart, represent about 50% of the U.S. consumer goods business, and as such, their moves to this strategy are expected to hasten the pruning of brands by manufacturers themselves.

Elsewhere, Wal-Mart's new focus provides traditional supermarket rivals with new challenges and opportunities, and may open the door wider for the price- and convenience-focused discounters like dollar stores and Aldi, sources said.

“The traditional supermarket industry is never going to play with Aldi or Dollar General on price, and it doesn't look like Wal-Mart will anymore either,” Rogers said. “That makes competition more intensely crowded in the middle and upper segments.”

Rogers said he sees opportunities for small grocers to compete on the strength of local selections but said he felt a Wal-Mart with a more appealing design and attractiveness to a middle-income demographic would be particularly bad news for a company like Safeway.

“I think they could be in serious trouble because they've lifestyled all their stores but in most markets there is still a nicer store to shop,” Rogers said.

Not all observers agree with that assessment, however. Nicholas of MVI said Safeway had the right idea by seeking to differentiate based on the food experience. The recession may have interrupted that focus, he added, but he predicted it will become critical again.

“I think Wal-Mart will ultimately force supermarkets to get back to what they were thinking about before the recession, which was to think more like Whole Foods,” he said. “They weren't going to compete with Wal-Mart on the commodities, so you have to create some differentiation in food: lifestyle stores, cooking shows, organics, the whole ‘premiumization' of food.

“My guess is that when this recession lifts, supermarkets will see a stronger Wal-Mart but one that still specializes in packaged food,” he added. “It will be a nicer in-store environment but they still won't have the right to sell gourmet food, and they still don't have great credibility in perishables. Let's put it this way: They're saying that seafood is a ‘Show' category. What does that tell you?”

Risks for Wal-Mart

Early results of Project Impact suggest the changes under way at Wal-Mart are having positive effects. During a review of its quarterly financial performance last month, Wal-Mart officials said that customer scores at remodeled stores have risen sharply. Labor efficiency and margins were higher; inventories and employee turnover were lower. Easter sales — designated a “Win” category for Wal-Mart — outperformed overall comps. About 27% of the company's sales growth in February came from new shoppers, the company said.

“From the early read of the Project Impact remodels and new stores, we are pleased with what we see,” said Eduardo Castro-Wright, Wal-Mart's vice chairman.

Observers, however, are leaving room for skepticism, mainly related to how quickly and effectively a company of Wal-Mart's size and scale can drive change and execute subtle shifts in emphasis without surrendering its considerable advantages in scale and efficiency. “They're playing a bit with their DNA,” Nicholas said.

“They have more than 3,000 stores, and by no means is there uniform execution across 3,000 stores,” said Stern. “And there's a big change in culture. It's easy to be aligned at the top, but at the regional level, and the district level, and the store level, there's a lot of people who have to get the message.”

Stern added that the size of the store base could pose problems as remodels proceed, because the stores awaiting changes will increasingly pale in comparison to those stores that have been addressed. “There's a massive base of stores where they need to do remodels, and even if you do it at a pace of 500 a year, that still will take years and years,” he said. “There's a physical manifestation of this new brand stuff, but if the store in your neighborhood doesn't look like the brand, it can cause a problem.”

Feldman agreed, saying, “The quicker they can get these remodels done, the better.”

The advantages in reducing selection won't be necessarily clear to the consumer, Nicholas added, saying Wal-Mart risks detracting from its reputation for breadth and variety by doing so.

“Wal-Mart's go-to-market strategy has always been about availability,” Nicholas said. “They were always saying, ‘We've got every category, every SKU that you'll find in Kroger — but we've got it cheaper.' You might even trade off a crappy experience to get it cheaper here.

“But by removing SKUs from these categories, they are asking America to trust that they'll get it right,” Nicholas continued. “But they've chosen these categories based on Wal-Mart's sense of the categories and their ability to sell them. If, for example, they felt they didn't have the scale and credibility to sell fruit roll-ups and they cut two-thirds of that category, you could have a mom who likes fruit roll-ups for their kids, and they might find that from the consumer's perspective, Wal-Mart made that trip more difficult.”

Others are skeptical that Wal-Mart will ever truly grasp regional merchandising flourishes unless it is willing to surrender some advantages in efficiency.

“I don't think they will ever give away their efficiency advantage, so they will have trouble localizing,” Rogers said.

“They're adding a lot of complexity to their business model,” added Nicholas. “If you're adding complexity in terms of regional pricing, promotional complexity, different media — the cost of serving them from a supplier's perspective goes up. One of the reasons Wal-Mart has such good efficiency is that they had a national EDLP program and a strong replenishment strategy. When you start running unbeatable pricing and rollback pricing and prices that differ by region and their proximity to a Target store, all of a sudden you are creating a lot of exceptions in the system that run counter to the efficiency model.”

For Wal-Mart, though, Project Impact is about changing because change is necessary.

“In 1990, 70% of Wal-Mart's business was done in rural America and today it's less than 35%. So right there, there is a very different customer that we serve, in a very different competitive dynamic, which requires us to be much better in terms of how we go to market, how we meet the needs of the customers, and how we serve them in our stores,” Fleming said.

Fleming recalled a discussion with Lee Scott, the recently retired Wal-Mart chief executive officer and a one-time colleague of Sam Walton, when Scott was asked what the visionary Wal-Mart founder might make of the changes going on at his company today.

“[Scott] said, ‘Sam Walton passed away a long time ago and he left us a great company. And throughout the time between when he passed away and today, there have been a lot of things we tried. Some worked and some didn't. I don't know exactly what Sam would do, but I know one thing. He would be successful.'”