SUSHI BARS AND ORGANICS AT WAL-MART? OH MY!

ELLIOT ZWIEBACH

PLANO, Texas - Wal-Mart is going upscale, at least at a single supercenter here - an experiment with some merit, industry observers told SN last week, but one that could alienate some of the company's core customers.

In what the company is calling an effort to appeal to a broader consumer base, Wal-Mart Stores has added considerably more high-end amenities to the store it opened here last week, including premium wines, gourmet cheeses, natural and organic perishables, a fresh sushi bar, a dining area with made-to-order sandwiches, an espresso bar, plus high-end electronics and more fine jewelry.

In addition, the 223,000-square-foot store features lower shelving to reduce clutter, wood floors and wider aisles and, for the first time at any Wal-Mart, baggers at several of the store's front-end checkstands.

It also has a unique layout, with consumables, pet food, pharmacy and cosmetic sections adjacent to grocery; a quieter shopping environment, with fewer announcements over the public address system, no in-store radio and quieter cash registers; a re-designed apparel area that has more space around displays, a fitting area with more privacy and its own cash registers; and more signage and graphics to make it easier for customers to find what they're looking for - features the company said resulted from discussions with focus groups.

Some aspects of the store may find their ways to other supercenters, company officials indicated, although they stressed the high-end merchandising will not be a template for other locations.

"Are we moving upscale? No, we are not," Eduardo Castro-Wright, president and chief executive officer of Wal-Mart's U.S. Stores division, said in a speech to investors last week. "Are we being more relevant to a broader customer base? Absolutely, yes.

"Please don't think this is the direction we are taking. This is one of many tests we are running to understand how we can better deliver value to customers."

Industry sources contacted by SN offered varied reactions to the store, with one - David Rogers, principal at DSR Marketing Systems, Deerfield, Ill. - saying he sees the upscale store is another indicator of a company that is losing its direction.

"When I saw Wal-Mart run an ad in Vogue last year, I felt it was losing focus or else it doesn't like its core customer, and this [Plano] store is just another indication of a company that is losing its way," he noted. "Wal-Mart has a very strong proposition that a lot of Americans want, but the biggest danger it faces is losing the strength of that proposition.

"On the positive side, this store indicates the company is alive and thinking and experimenting, but on the negative side, it's playing on SuperTarget's turf, and it's in great danger of confusing customers."

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond., Va., advocated caution.

"Wal-Mart has got to be careful because it represents value to the largest segment of its customers, which is still primarily the rural working class, and it can't afford to shift its appeal in a way that alienates that core customer," he said. "Wal-Mart already attracts some affluent customers interested in its basic food offerings, but it's not perceived in all categories for quality offerings, and this seems like an effort to switch some of those customers to a stronger price-quality perception.

"It's clear Wal-Mart is trying to get familiar with merchandising products with higher price points to see what works and what doesn't so it can expand its ability to sell to a broader spectrum of income levels."

Jonathan Ziegler, Santa Barbara, Calif.-based analyst for Dutton Associates, El Dorado Hills, Calif., said the experiment at the Plano store is an effort by Wal-Mart "to expand the runway for future growth by approaching a new market segment, and in that regard, it makes sense. The question now is, does it dilute Wal-Mart's image and can it still deliver the great pricing it's known for with these upscale goods?"

He said he sees the experiment as part of a natural evolution for Wal-Mart. "All operations lose what they started with. Costco, for example, is different today than when it started. But I think Wal-Mart has to deliver the upscale products at value prices to maintain its aura, such as selling a bottle of wine that's priced at $600 elsewhere for $500."

Wal-Mart is likely to succeed with its upscale experiment, Ziegler said, "because I don't think the hurdle is very high. While it's learning which merchandising aspects can be rolled out to other locations, the new store is more an educational laboratory than a store that needs to make bundles of money."

The store is located across from a SuperTarget and within sight of a Costco Warehouse in the Dallas suburb of Plano, which is not a typical Wal-Mart market, Castro-Wright pointed out. The average household income is $140,000 - about three times the average for other supercenter locations, he noted - "so what we're looking at is how to win some of those customers in a store environment that would be much more friendly for that customer."

Speaking last week at a retailing leaders conference sponsored by Merrill Lynch in New York, Castro-Wright said the assortment of high-end products "allows us to start understanding what cross-shopping opportunities there are in an environment where selective, high-end customers will shop."