WAL-MART EXPERIMENTS WITH TARGETED FORMATS

ELLIOT ZWIEBACH

BENTONVILLE, Ark. - Wal-Mart Stores here said it plans to bring more diversity to its discount and supercenter formats in the coming months in an attempt to do a better job serving a broader base of consumers.

Lee Scott, chairman and chief executive officer, said the company is seeing positive results from two experimental units: a supercenter in Plano, Texas, that offers 2,100 premium food and wine offerings, an expanded organic selection, a fresh sushi bar and a coffee bar, and which is producing gross profit per linear foot that's 24% higher than the average unit; and a discount store in Evergreen Park, in the Chicago area, geared to an urban, multicultural demographic that features the chain's largest expanded food section, a more urban-oriented apparel line, the largest set of ethnic hair care in the company and a music selection heavy on gospel and rap that's producing sales per square foot that are 25% higher than other area stores.

"With more in-depth market research, we are developing a better understanding of our customers," Scott told shareholders. "Our experimental stores are helping with this too."

He said Wal-Mart plans to build more experimental stores in the coming months geared to other demographic groupings, including Hispanic customers, rural shoppers and baby boomers.

Eduardo Castro-Wright, president and CEO of Wal-Mart U.S., said stores in the Houston area geared to Hispanic consumers that devote 152 feet to Hispanic grocery items and use a third-party bakery service are delivering double-digit comp sales.

Speaking to analysts in a presentation following the annual meeting, Castro-Wright said segmenting stores makes Wal-Mart more relevant. "It helps clarify the assortment needs and in-store experience, and it enables us to deliver on customer needs and drive financial results because one size doesn't fit all.

"Customers want lifestyle choices, and the goal is to retain and capture growth opportunities among loyal customers while offering healthier product choices and healthier lifestyle habits to more selective shoppers" - Wal-Mart's term for the affluent shoppers who account for about one-third of the population, Castro-Wright noted.

"Knowing customers' needs helps us drive inventory down and increase turns, and having a better understanding of consumers' shopping patterns enables us to staff the store right," he said.

He said almost 800 stores have been remodeled to reflect the company's localized marketing approach, with 500 more due to be remodeled by the end of the year.

Adrianne Shapira, an analyst with Goldman Sachs, New York, said she believes Wal-Mart is on the right track, with the Plano and Evergreen Park stores outperforming the company's expectations, delivering lifts of more than 20% in sales and profits. "Best practices from both locations will be extrapolated companywide," she added.

She said she believes segmentation initiatives "should help drive top-line growth. Each classification has its own individual needs, which Wal-Mart could better address through store-versioning of product mix."

Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London, told SN he was less impressed, indicating Wal-Mart's efforts to diversify are no more than an attempt to tailor the range of products at each store to the needs of the local consumer base - "a store-of-the-community approach it should have been taking for years," he noted.

He said Wal-Mart indicated it expects sales to continue to be impacted by the economic environment, "though sales are also being impacted by the company's middle-aged store base."

Cross-Shopping

Shapira said she is upbeat about Wal-Mart's attempts to get grocery customers to do more cross-shopping. "The company sees a significant opportunity among selective [affluent] shoppers who typically make 46 trips per year to Wal-Mart, spending 28% of their grocery budget," she said. "Getting those shoppers to 'step across the aisle' and increase general merchandise purchases is the goal."

Among the chain's initiatives, she pointed out, are moving women's apparel adjacent to the grocery department at remodeled stores "to encourage cross-selling among predominantly female food shoppers"; introducing new products in the food, apparel and home categories to help boost market share, particularly among more affluent suburban shoppers; and initiating new marketing programs designed to transform the company's image among more affluent grocery shoppers by showing customers who come to purchase consumables that the stores also carry an attractive offering of general merchandise.

In remarks to the annual meeting, Scott said Wal-Mart is undergoing a transformation that grew out of its experience following Hurricane Katrina last year, when it reached out to help the local communities it serves. Scott said he calls the effort "Wal-Mart Out in Front," based on a comment by the late Sam Walton that a company must stay out in front of change to succeed.

The Out in Front program has five pillars, Scott said:

Broadening the chain's appeal to all customers by opening experimental stores, by communicating more effectively with customers and by updating merchandise and offering more exclusive merchandise.

Making Wal-Mart a better place to work by providing opportunities for advancement and offering affordable and accessible health care.

Improving business operations and efficiency by improving inventory management, including eliminating clutter in the store aisles; reducing backroom inventory; eliminating inventory on shelves that are out of customers' reach; and shortening the time it takes for merchandise to get from suppliers to customers. He said inventory has dropped nearly 2% since April 2005.

Driving growth in its international business, including better overseas sourcing and putting more U.S. products in international markets.

Improving its community outreach with more in-store clinics and more efforts to be environmentally friendly.