Wal-Mart drops one-size-fits-all approach

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EVERGREEN PARK, Ill. -- When Wal-Mart Stores Inc. recently opened a new store here with a heavily African-American clientele, it stocked the men's apparel section with an exclusive line of clothes featuring baggy jeans and trendy sports jackets, made the department 30 percent larger than at typical stores and moved it to the front corner.

To appeal to affluent shoppers in Plano, Texas, Wal-Mart staffed the new store there with consumer-electronics specialists called "know-it-alls." And it geared the sporting-goods section toward children, on the theory that well-heeled adults tend to buy their tennis and golf gear at country clubs, not discount stores.

These two stores are part of a much broader effort by Wal-Mart to jump-start sluggish sales gains by abandoning its one-size-fits-all approach to retailing. In place of cookie-cutter stores stocked with largely the same products, the retailer is custom-fitting its merchandise assortment to reflect one of six demographic groups. Besides African-Americans and the affluent, it is targeting empty-nesters, Hispanics, suburbanites and rural residents.

Wal-Mart's attempt to break its approximately 3,400 U.S. stores into six different models is a huge shift for a company that grew to be the largest retailer in the world on the strength of standardization. By buying products in giant volumes, Wal-Mart was able to relentlessly lower prices, forcing other retailers to adapt or go out of business. But with comparable-store-revenue growth slowing and the stock price falling, the company now thinks aiming at specific types of customers will boost sales.

With about 85 percent of the U.S. population shopping at its stores at least once a year, Wal-Mart "is all things to all people," says Eduardo Castro-Wright, chief executive of the company's U.S. stores and architect of the new approach. By offering customers all the same things, he adds, "you end up under-serving everyone because you don't have an offering that is specific to that customer segment." (Mr. Castro-Wright is a director of Dow Jones & Co., publisher of The Wall Street Journal.)

As part of this strategy change, the retailer is shaking up its management structure. It moved executives previously based at company headquarters in Bentonville, Ark., to markets around the country so that they're more in touch with their customers. And it beefed up local marketing teams and gave them more power to pick products.

The new campaign runs the risk of diluting what remains the most powerful brand in retailing. Earlier this year, Wal-Mart de-emphasized its low-price message in ads to alert shoppers to trendier products, believing it "owned the low-price" niche, its chief marketing officer said in March. By summer, as sales started to flag, Wal-Mart went back to emphasizing low prices, papering stores with "We sell for less" signs.

While Wal-Mart continues to open new stores at a voracious rate, sales gains at existing stores have been sliding since the late 1990s. Last year, it notched same-store sales gains of 3 percent, down from a lofty 9 percent in 1999. Target Corp., which has slashed prices almost as low as Wal-Mart's while honing an appeal to upscale shoppers, posted gains of 6 percent last year.

Wal-Mart reported earnings of $11 billion on revenue of $312 billion for the year ended Jan. 31, a 10 percent rise in profit from the previous year. But the company's stock is down 35 percent from its peak in December 1999.

Wal-Mart is scrambling to bolster the growth prospects of its massive U.S. division, which accounts for 78 percent of sales. Slowing sales growth at its U.S. stores and increasingly saturated markets point to a future when it can't rely solely on building hundreds of new stores each year to perpetuate growth. Rather, Wal-Mart must find ways to generate more sales at existing U.S. stores.

Other big retailers are starting to adopt strategies like Wal-Mart's. For years, giant chains spread across the country with virtually identical store models, betting that their lower prices and larger selection would flatten less-efficient operators. It worked. Now that national retailers are increasingly competing against each other, they are scrambling to win new customers and get existing customers to spend more.

Federated Department Stores Inc. recently said its newly acquired May department stores that are being converted to Macy's wouldn't all carry the same merchandise, and buying would be done by seven regional offices. Fearful of increasing competition from Wal-Mart, Best Buy Co. two years ago proposed revising its 800 stores to better reach prized customers, targeting some at women, some at technology-obsessed youth and others at affluent men.

But no retailer has tried a localization campaign on anything like the scale being proposed by Wal-Mart, which plans to convert a significant number of its 3,400 stores in the next 12 months.

Localization can add new layers of expense and undermine the economies of scale that lower cost and prices, according to a recent study by consulting firm Bain & Co. After Best Buy converted some stores to target specific groups, costs at those outlets rose, says Brian Dunn, the company's president and chief operating officer. He says Best Buy remains committed to its "customer centricity" approach but is tweaking the implementation. Instead of aiming an entire store toward suburban moms, for instance, Best Buy decided to add personal shoppers at a number of stores to lure this customer group.

Wal-Mart got its start in rural Arkansas in 1962, and grew to prominence by building stores in small towns where executives knew what sold. As the company expanded into suburban and urban areas, Wal-Mart's culture remained very focused on Bentonville. Most decisions, including on store layouts and even on how product should be arranged on shelves, were made at company headquarters.

Wal-Mart always tailored some products to customer groups, usually along regional lines. A few years ago, managers were trying to figure out why ant and roach killer sold so well in Southern stores, but not in Northern states, even during warm weather. Women shoppers, when questioned, said the word "roach" was synonymous with a dirty house. Wal-Mart convinced the supplier to change the name to "ant killer" for stores in certain regions and sales jumped, says John Westling, a Wal-Mart general merchandise manager.

Store managers could purchase some popular local products and make sure regional preferences for items such as barbecue sauce or chili were conveyed to buyers in Bentonville. But such variations accounted for just a few hundred items out of a total of more than 100,000 for an average Wal-Mart supercenter.

Enter Mr. Castro-Wright. The 51-year-old native of Ecuador had conducted a test run of his localization theories during his stint running Wal-Mart's Mexican division from 2000 to 2005, first as chief operating officer, then as chief executive. Wal-Mart's Mexican stores had six different formats before he arrived. Mr. Castro-Wright refined their merchandise mix to better target different income levels.

For example, the Bodega stores catered to low-income customers with basic breads while the Superama stores lured the affluent with rich desserts and fancier display cases. Sales per square foot in the Mexican stores rose by 10 percent after these and other changes were made.

When Mr. Castro-Wright moved to Wal-Mart's U.S. operations about 18 months ago, he said he saw an opportunity to bring the concept to a new level. "I think we can address specific customer segments with a precision that better meets their needs and wants," he says.

While the Mexican localization was based purely on shoppers' incomes, Mr. Castro-Wright concluded the U.S. was a more complex market and segmentation would involve ethnicity and lifestyle as well.

First the company beefed up its marketing department, adding Ph.D.s in areas such as ethnology, food science, and research and evaluation. The department began researching its shoppers last year, using census data and customer feedback, among other things, to break them into demographic groups.

Next, Mr. Castro-Wright began overhauling Wal-Mart's management to match its new localized approach. The company's 27 regional general managers had always lived in Bentonville and spent a few days a week visiting stores in their territory. Starting last fall, Mr. Castro-Wright began moving them to the regions they supervised.

Todd Libbra, who is responsible for 132 stores in Illinois, moved to a Chicago suburb in July. "By reading the newspapers, watching the TV stations and being part of the community, I have a better flavor for what's going on," he says.

Wal-Mart also bulked up the field staff, giving local managers more say in what products to carry, aided by new staffers responsible for following trends in fashion, food and consumer electronics.

Today, about half of Wal-Mart stores are in rural areas. Their product mix will change the least.

The bigger changes are coming in approximately 1,500 Wal-Marts in suburban and urban areas. Mr. Castro-Wright cautions that this is a work in progress. The only details the company has revealed about planned stores geared to empty nesters, for instance, is that they will carry less apparel for children and have an expanded pharmacy area.

The stores for Hispanic markets will have obvious differences like more varieties of tortillas. They're also getting flexible layouts to accommodate weekend "farmers' market" events offering fresh food, said John Menzer, Wal-Mart's vice chairman, at a recent analyst meeting. The retailer plans to expand store displays devoted to quinceaneras, Hispanic girls' 15th-birthday celebrations, featuring products ranging from dresses to special cakes.

The Plano store has about 3,000 different items -- or about 3 percent of the total -- targeting the well-heeled. It has twice the number of organic products and a wine section with 1,000 bottles, at prices ranging from $4 to $500. Wal-Mart removed the gun department and expanded the home-fitness equipment area.

"I normally do not shop at Wal-Mart, but I really like this store, because it is much nicer than the typical Wal-Mart," said Charlotte Ackley, an employee-benefits specialist, on a recent visit to the Plano store. "It is clean, has a good selection of wines, and the service is fast."

The store looks different. Before opening it, Wal-Mart researchers interviewed 50 women in North Dallas. The women complained how cluttered Wal-Mart stores seem. To address that, Wal-Mart made changes large and small. Over the front doors, it says "Welcome" instead of "Entrance" in block letters. The aisles are at least a foot wider than at the typical Wal-Mart. And special displays of products that normally mark Wal-Mart's main aisles have been removed.

But the store still needed a way to showcase special products. After about eight feet, shoppers' eyes glaze over and they stop noticing what is on a shelf, Wal-Mart's research revealed. In this store, every so often, shelves jut out with a rounded edge. These are where the special items are displayed, says John Fleming, Wal-Mart's chief marketing officer.

Wal-Mart also chose special loudspeakers, audible only when shoppers are close to or directly under them. "There are some additional costs to building this store," Mr. Fleming says, but "overall, the increases are marginal."

Some important changes in the Evergreen Park store occurred before it opened. Evergreen Park is a largely white suburb of Chicago. However, Wal-Mart's new market-focused team determined that the store's shoppers would be predominantly African-American, many from nearby Chicago.

Chad Donath, marketing manager for Evergreen Park and seven other stores, began studying the area last year. During a visit to a hospital, he learned it had a high number of premature births. At his suggestion, the store stocked up on clothes and baby-bottle nipples geared for preemies, far more than Bentonville buyers would have originally ordered. Both have been strong sellers.

"Before, the strategy for each region and store was set by Bentonville and we were good executors," says Mr. Libbra, the regional general manager, a 24-year-veteran who started as an hourly worker. "Now we set the strategy and are expected to get results. Talk about accountability."

Mr. Donath says the new system has freed him to make some merchandising gambles. In the Evergreen Park store, he increased the gospel, rhythm and blues, and hip-hop music section to 92 feet, almost four times the size at an average Wal-Mart. In the past, he says, the most he could have convinced Bentonville store planners to add was a few feet.

"It's unbelievable; sales are off the charts -- no pun intended," he said. Now several other urban Wal-Mart stores are following suit.

Tiffany Owens, a 19-year-old African-American shopper who was holding a friend's baby, said, "This Wal-Mart has stuff for all your needs -- the right music, makeup, baby things."

Maureen Reilly, a longtime Wal-Mart shopper, stopped Mr. Donath on a recent visit, to complain. Ms. Reilly, who sells rehabbed houses and says she once worked for Wal-Mart for four months, was visiting this store for the first time and complained that everything had moved from where it would be in a normal Wal-Mart. She found it off-putting that men's apparel was now where the pharmacy and cosmetics used to be. In an interview later, she said she also couldn't find the hair-color product she uses -- a L'Oreal item for redheads.

Wal-Mart spokeswoman Sarah Clark says the company "will continue to work hard to make our stores easy to navigate as we transform our business."

Mr. Donath is still tweaking the product mix in the store. When the store opened, it carried trailer hitches; though popular in Wal-Mart's rural stores, they turned out to be poor sellers in this urban neighborhood. And it failed to stock neon lights that urban teenagers like to put on their car's undercarriage to reflect off the street. The store now carries them.



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