WAL-MART TO SEGMENT ASSORTMENTS

ELLIOT ZWIEBACH

NEW YORK - The decision by Wal-Mart here to customize assortments is an idea whose time has come, industry observers told SN last week.

Their comments came in response to the announcement by Eduardo Castro-Wright, president and chief executive officer of Wal-Mart Stores USA, Bentonville, Ark., at the Goldman Sachs Global Retailing Conference here this month, that the chain plans to segment its store assortments at all 3,200-plus discount stores and supercenters by ethnicity, income levels and geography.

"Customizing assortments is an idea that's being implemented by a lot of companies," said Jay Whitmer, an analyst for Cleveland Research Co. "It's what companies like Kroger are doing - using data to apply knowledge down to store-level merchandising and capital investment- and even the consumer packaged goods companies are using consumer insights to develop their business strategies.

"But for a company the size of Wal-Mart to do it is quite a challenge, especially in terms of execution. But given how diverse consumers are getting, this move [by Wal-Mart] is a sign that this is the way everyone will have to go."

Castro-Wright said the re-merchandising process of certain locations to fit the needs of one of six consumer segments, encompassing Hispanics, African Americans, baby boomers/empty nesters, affluent shoppers, suburban shoppers and rural shoppers, should be completed within 18-24 months - time enough for Wal-Mart to achieve its goals, Whitmer said.

"These changes will be gradual, rather than a quick result from turning on a switch," Whitmer explained, "and I hope that over two years Wal-Mart can do more good than not relative to its expectations and find success in merchandising to the stores efficiently based on demographics and customer type."

The process may come at some added cost to Wal-Mart, he said, "and it may need to invest in more field people to improve store conditions and the store experience in tandem and to make this program really fly, though investing in head counts, training and service has not been Wal-Mart's forte."

Jonathan Ziegler, Santa Barbara, Calif.-based analyst for J.M. Dutton Associates, El Dorado Hills, Calif., said the changes "certainly won't help Wal-Mart's cost structure at all because it will be less efficient, but it will drive sales, which will help the company leverage its fixed costs."

Ziegler also said the decision to customize assortments "is probably one Wal-Mart had to make because the U.S. population is so varied that one size no longer fits all, and to grow your business, you must analyze the demographics around your store and merchandise accordingly. Given its size, Wal-Mart can't grow anymore without recognizing it must appeal to different audiences; and to drive same-store sales, which have been negligible for the last year or so, Wal-Mart must do the same thing supermarkets are doing."

Art Turock, principal at Art Turock & Associates, Kirkland, Wash., said Wal-Mart has been customizing its stores to some degree for years, using point-of-sale data to adapt assortments, "and its suppliers have done a terrific job working with category managers by store, region and cluster, so the stores have not been cookie-cutters."

His only concern, he said, is the effort to appeal to affluent shoppers "because Wal-Mart has been so successful in getting across the message that it makes necessities affordable, which may make it difficult to go after a more upscale shopper - not so much in groceries as on fashion items - though that could be less of a problem if Wal-Mart would consider a different name on certain stores."

Castro-Wright said that it might consider operating a segmented store under another name. "We will look at every option," he indicated.

According to Castro-Wright, merchandising to various segments is more a matter of editing a store's existing assortment than adding a lot of new merchandise, which is what Wal-Mart did in designing its upscale-oriented discount store in Plano, Texas.

"Once we define a segment and what drives its purchase behavior, we have to define the assortment and the strategy for merchandising it and then we have to buy it," he pointed out - a progression that has prompted Wal-Mart to change the role of its buyers, effective Sept. 1, to simple procurement while assigning their former responsibilities for product development, sourcing and execution to other managers.

Castro-Wright said Wal-Mart has already seen a positive impact from its initial forays into customized assortments, noting that segmentation at pilot stores has produced improved results at the 20-30 community stores "that are at one stage or another of redefining their assortments to meet customer needs."

For example, gross margins are up 156 basis points at a Hispanic-oriented supercenter in Houston, where sales per square foot have grown 7.6% above the rest of Wal-Mart's supercenters in the Houston marketplace, "with triple-digit increases in profits before tax," he noted; while gross margins at an African American-oriented discount store in Evergreen Park, Ill., are up 250 basis points over the chain's other Chicago-area stores, he added.

"You will see a lot of emphasis on margin enhancement," Castro-Wright said, "because as we become more relevant to each customer segment, the velocity of inventory turnover will increase, the merchandise will be fresher and there will be reduced markdowns, so gross margins will improve."

He said he expects "a great number" of Wal-Mart discount stores to be converted to supercenters over the next three to five years, with virtually all operating as supercenters within 10 years.