WAL-MART'S NEW WAY: SIX DEGREES OF DEMOGRAPHICS

David Merrefield

Localized marketing is now the gold standard in food retailing.

That must be the case since Wal-Mart Stores - the quintessential cookie-cutter operator - now intends to tailor assortments in its domestic stores, virtually all of which are fated to become supercenters, in accordance with the needs of the surrounding community.

Or, to be more precise, Wal-Mart intends to use six cookie cutters to stamp out stores that will appeal to six different demographics, as appropriate. They are: Hispanics, African Americans, empty nesters, affluent, suburban and rural. (Notice: no urban.) We'll see how that works since it's possible for any given individual to occupy more than one of those demographics at once.

In any event, this is epic. After all, Wal-Mart's traditional approach to business has been to hurl out stores at a fast rate and power them to success by means of low prices. The way to do that is to make each new store nearly identical to all those that preceded it in product, operations and more. Wal-Mart's marketing intentions were made known by Eduardo Castro-Wright, president and chief executive officer, during a talk at this month's Goldman Sachs Global Retailing Conference in New York.

He said the decision to customize product mix was taken in the wake of sales success seen at test stores. He cited stores in Texas and Illinois that have registered increased sales as a result of tailored mixes. (See Page 6.)

However, no matter how wildly successful a few test stores have been, they are slender reeds upon which to buttress a decision to change nearly 3,300 stores over the course of a couple of years, and doubtless at high cost. Is more than store tests afoot?

That must be the case since many food retailers learned long ago that adjusting assortment to fit a store's locality is an obvious and successful strategy. That fact must have been long obvious to Wal-Mart too, but it just didn't comport with Wal-Mart's way of doing business. The Wal-Mart way worked fine until it didn't.

Why did the Wal-Mart way falter? The process might have started and grown as a result of a batch of public relations fumbles in recent years. But let's look beyond cause to effect. Metrics in a couple of Merrill Lynch analysts' reports show troubling effects:

o For the past eight quarters, Wal-Mart has invested capital to a degree that outpaces revenue. Investment will increase to implement the new strategy and to maintain returns. Margins or sharp pricing will erode.

o Wal-Mart is entering areas of greater household incomes and denser population. New-door productivity has declined, probably as a result. That's the measure of sales generated by a new store compared to sales of the preceding store base. It was 86% in 2001; it is 71% so far this year. That measure, coupled with declining comps (6.1% in 2001 to an estimated 2.5% this year), suggests the fading utility of Wal-Mart's rapid-rollout strategy.

o Wal-Mart's food comps have leveled at 5% for the last several quarters. Food comps at Kroger have outstripped those of Wal-Mart in two recent quarters (5.1% and 5.8%).

Wal-Mart's six degrees of demographics plan has much heavy lifting in front of it.

By David Merrefield

VP, Editorial Director

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