2016 Retailer of the Year: The sleeping giant awakens

Long before James Wright Chanel sung the praises of the “Patti Pie,” Shawn Baldwin did. The SVP of fresh for Walmart U.S., in an interview with SN in October of 2015, was explaining how the big retailer was evolving the quality and assortment of its food offerings to better meet changing consumer demands — and pies happened to be playing a significant role. Walmart had only recently reformulated nearly all of its existing fruit pies and introduced an exclusive sweet potato pie under singer Patti LaBelle’s Good Life label.

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“What I can say about that,” Baldwin said of the Patti LaBelle pie, “is that recipe is fantastic.”

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About the Award

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SN’s Retailer of the Year Award recognizes outstanding accomplishment by a food retailer that boosts its business and serves as an example to the wider industry. SN has recognized the following companies since the award’s inception in 2003.

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• 2003: H-E-B
• 2004: Kroger Co.
• 2005: Hannaford
• 2006: Hy-Vee
• 2007: Safeway
• 2008: Kroger Co.
• 2009: Stop & Shop/Giant-Landover
• 2010: Publix Super Markets
• 2011: Wakefern Food Corp.
• 2012: Hy-Vee
• 2013: Sprouts Farmers Market
• 2014: Mariano’s
• 2015: Aldi
• 2016: Wal-Mart Stores

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Within weeks, Baldwin’s plainspoken testimony would be expressed uproariously, musically, and at times profanely, in a video review destined to be viewed by millions. Chanel’s singing YouTube testimony to the Patti Pie took on a life of its own, triggering demand that emptied the shelves of Walmart stores nationwide and briefly created a secondary market where the $3.48 item was being offered on eBay for upwards of $40.

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Like a lot of social media sensations, the #PattiPie story had a short but white-hot moment in the national consciousness, but it may also have a longer tail than most. It arguably marked the first time since Wal-Mart Stores first started stocking groceries in 1988 that it had become a destination for food in a way that transcended its heritage as a place to save a few bucks on ubiquitous branded packaged goods.

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And it was only one slice of the pie.

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In the two-plus years since taking over leadership of Walmart U.S., international retailing veterans Greg Foran and Judith McKenna have changed the trajectory of the company by attacking its weaknesses, and there were many of them. Stores were dirty and frequently out of stock. Checkout lines were slow. Workers were surly and often impossible to find. Assortment, presentation and quality of food in particular were indifferent. Even longstanding advantages like pricing had gotten out of whack, as Walmart focused too hard on leveraging its giant size, and worried too little about strides its competitors were making. Not coincidentally, sales were flat.

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Though it can be argued the big retailer had itself to blame for many of those issues, there is little doubt the massive effort to address them gained traction this year. Analysts frequently invoke the turning-around-an-aircraft-carrier metaphor for Walmart but this change, considering its comprehensiveness and Walmart’s size, has been rapid enough to have encouraged a return to price investments this year that took the industry by surprise and by most accounts seemed to have delighted its shoppers.

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Walmart is far from perfect. Officials contend there is considerable progress still to make. Analysts worry whether Wall Street can bear the margin damage the turnaround requires. Its competitors are strong. And the company’s public perception remains ever tenuous: In addition to the requisite pressure from labor, Walmart absorbed two separate damning investigations into the public hazards of crime at its stores this year.

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But in a year where momentum was very tough to come by, Walmart gained plenty, and for those reasons is SN’s choice for its 2016 Retailer of the Year.

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Fresh start

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Foran, a New Zealand native named Walmart’s U.S. CEO in 2014, is a food merchant at heart and there was no mistaking his path to change at Walmart went directly through the stomach. “I’m a fresh food person,” Foran declared in October of 2014, his first public remarks since joining Walmart that summer.

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Foran was hardly the first Walmart leader to have such an ambition, but none of his predecessors ever demonstrated it by critiquing the coloring on the edges of a head of iceberg lettuce found at a Walmart store, as Foran went on to do in that first appearance. The message: Addressing food at Walmart was a matter of getting the details right, and here was a guy who knew how to do that.

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Could Walmart afford to sweat the details? Maybe not if Foran’s boss, CEO Doug McMillon, hadn’t radically reset Walmart’s capital spending priorities at around the same time. New store growth — and near-term price investment — were drastically reeled in, while eye-popping investments went toward developing internet shopping and employee wages and training. The former trained eyes on becoming as significant in the growing virtual shopping world as it was in the physical one; the latter helped to motivate and prepare workers for the myriad of changes Foran would be bringing down the line.

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Shortly after the wage and training initiative was announced in early 2015, Foran challenged those workers to get their stores in a better state of cleanliness and customer service as measured by customer scores by the start of the 2015 holiday season. They did so, and he raised the score target again. Worker training — an initiative officials are hopeful can have efficiency benefits down the line in both developing better bench strength and reducing turnover — is now being supported in a series of regional training academies being raised nationwide.

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In the meantime, Foran got to work on the details of better fresh food merchandising and presentation — and because it’s Walmart, more efficiency also. This was something the retailer hadn’t done a very good job of previously, he confessed. Even Walmart’s most loyal customers, Foran said in 2014, devoted just 40% of their weekly spend on fresh items at Walmart. And despite running comp-store sales figures that might make other food retailers envious, Walmart’s Neighborhood Market grocery stores were not performing nearly as well when competing against supermarkets that themselves had strong fresh presentations, he said.

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The effort began with basics like produce rotation, and over time moved toward rearranging presentations in low-slung and shallow fixtures that did both a better job of showcasing loose produce and maintaining freshness by “looking” more abundant without actually holding more items. This reduced strain on the items (no more six-deep stacks) and kept inventories low. Dubbed the “Fresh Angle” initiative, it was expected to be rolled out in some 3,100 Walmart stores this year.

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“The fact is, looking fresh only goes so far,” Travis Moore, a Walmart store manager, explained in a blog post on the retailer’s website. “The key is making sure the fresh produce our customers buy in our stores continues to look and taste the same when they pull it out of the fridge three days later. That’s the real driving force behind this new approach.

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“By reducing the depth of our fixtures, we’ve reduced the volume of product we’re holding on the sales floor at any given time,” Moore continued. “And, given the clock on freshness begins ticking the moment fresh fruit and vegetables are picked, we’re essentially passing increased freshness on to our customers — and working even harder to reduce food waste.”

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Although officials declined SN’s request to update the percentage spent on fresh by their loyal shoppers, Foran in a presentation for investors in October said customer impressions of fresh departments at Walmart stores were up by 7% from a year ago. Inventories in fruits and vegetables in that period have come down on an average of one-and-a-half days.

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A similar combination of assortment and process changes is transforming Walmart’s bakery beyond the Patti Pie. For example, the company is prepping more items in-store, but doing so by simplifying processes so it can bake different items at the same temperature.

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To ensure the company continues to execute in fresh, Walmart this year hired some 150 new fresh operations managers — in most cases, experienced grocery professionals whose responsibilities include working alongside hourly associates over groups of stores to teach and train. Many left managerial jobs at Walmart’s supermarket competitors for the opportunity: Kroger, Harris Teeter, Bi-Lo, Mariano’s, H-E-B, Food Lion and Safeway among them,

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Walmart’s efforts in fresh still stop short of in-store meat cutters — a tangle with a unionization effort among butchers many years ago hastened a move to case-ready meat from which the company hasn’t and won’t likely back off — but Foran noted that sourcing in that area could also improve. Certain cuts, he noticed, weren’t as uniform as they needed to be and wouldn’t lay flat on the grill.

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“I’m pleased with our growth,” Foran said of Walmart’s overall performance this year during the October investor conference. “We’re seeing it with some better traffic, comps, bigger basket sizes. And it’s happening quite simply because customers are seeing better quality.”

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There goes the Neighborhood

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The Neighborhood Market — Walmart’s small-supermarket-sized food-and-drugstore — has been a versatile tool for Walmart over the years: A growth vehicle, a market-gap-filler and a dollar and drug format fighter. But not until very recently would it have been described most accurately as a supermarket.

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Last spring, Walmart unveiled a new look for the store that moves it in that direction. The new prototype in Fayetteville, Ark., showcased a bright, whimsical design that complemented efforts to highlight service departments like deli while allowing plenty of room to make a strong fresh impression. In the aisles is evidence of a “top stocking” effort that keeps workers out of the back room and on the sales floor.

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The selection of products in the meantime is something less of a moderately cheaper replication of competitors but instead intends to cut a more distinct profile behind local and unique products, and trend-right selections like natural and organic.

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Parts of this effort are being supported by work at a new Culinary & Innovation Center that opened last spring alongside Walmart’s corporate headquarters in Bentonville, Ark. The center includes test kitchens resembling those in customers’ homes; replica store prep areas that help improve worker execution in stores; and a sensory lab where new and exclusive products are tested and developed.

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Walmart will operate close to 700 Neighborhood Markets by the end of the year, and has pared growth to about 20 new units next year, Foran said.

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“We need to get more of the existing stores starting to look like this [Fayetteville prototype], and I can tell you, that takes quite a bit of capital,” he said in October. Around 500 U.S. stores — Supercenters and Neighborhood Markets together — will get renovations next year, and another 500 will add internet grocery pickup.

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Around 600 stores will offer “click-and-collect” online grocery by the end of this year, Foran noted. While not sharing specific details about performance of the offering, enthusiasm for it is high: Foran in October said that stores that have launched the service have tended to see a sales boost across the box.

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“We are asked quite often, do we see a halo effect? Well, trust me, we do,” he said. “When we add online grocery, it improves the rest of the store, not just food, but [general merchandise] as well.”

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Walmart is ready to rumble — again

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Turning these changes into better sales accompanied a return to price competitiveness last spring. Although Foran had telegraphed “billions” would be invested in price over three years following work to address conditions in stores and worker salaries, their arrival still appeared to catch competitors by surprise and seemed to signal the dawn of a new level of competition coming to the industry.

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If anything, analysts said, Walmart until last summer had been a benign competitor and maybe something of an ally to its supermarket rivals. Kroger, for example, appeared to delight in highlighting when it gained more share in markets where Walmart was a competitor than where it was not. Yet as price actions moved in over the summer — and conventional rivals wrestled with effects of supply-led deflation — evidence mounted that shoppers were reacting to lower prices briskly, and that share shed by competitors was coming Walmart’s way.

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 “I think there is a risk that you’re seeing evidence that the sleeping giant is starting to awaken,” Ajay Jain, an analyst with Pivotal Research, remarked during SN’s annual Financial Analysts Roundtable in September. “And that could have some sustained impact on Kroger. If they finally make some serious efforts to improve their price positioning, then I think Kroger’s price leadership could get diminished.”

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Although the margin investments are underway, questions remain about how committed Walmart can be to them, particularly as the company will also be required to support transformation of its e-commerce offering under the newly acquired Jet.com team. There’s also the expectation that competitors will respond in kind. Scott Mushkin of Wolfe Research, who estimates Walmart intends to invest between $4 billion and $5 billion in price, asked McMillon at the October meeting if Walmart was willing to go even further on price cuts if conditions warrant.

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“That’s not a question I think we want to answer,” McMillon responded.

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“We’ve got a balancing act going on between … the choices we make in e-commerce and the investments that we make in price,” McMillon explained. “And part of what is happening is that we’re trying to share an appropriate amount of information with you [analysts and investors] and also preserve some flexibility to make different choices, depending on how the customer is responding.”

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McMillon added he was meeting with Foran once or twice a week to discuss when and where to direct strategic price investments.

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To date, those efforts have primarily been in the cauldron of the U.S. Southeast and Middle Atlantic states, from Philadelphia to Atlanta, as well as select markets in the South, sources said. Not coincidentally, the former area is expected to see an invasion next year from Lidl, the German discounter that was a major culprit in punishing Walmart’s struggling Asda banner in the United Kingdom.

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