By Craig R. Johnson
Addressing a September analyst conference, Walmart-US CEO Bill Simon told investors that he predicted a “socks and underwear” Christmas for Walmart. Unfortunately for Walmart investors, his prophecy self-fulfilled -- just as Target completed a stellar season, and retail enjoyed its best holiday ever.
Walmart’s doldrums are not extending to Sam’s Club, or to its International division. For 2010’s nine months, Sam’s sales rose 3.1%, international a rapid 13.5%. But Walmart-US has been flat for six quarters -- rising a 0.4% for the nine months -- and grew this holiday only because Christmas tidings lift all boats. Meanwhile, Target’s nine months’ sales rose 4.1%, accelerating to 5.7% in November. Walmart’s other rivals -- Costco, the dollars and Aldi -- all enjoy rapid U.S. growth.
So why the reversal of fortune between Target and Walmart, after several years when Walmart prospered? Given the growth of other discounters during the recovery, Walmart can’t blame the economy or consumers. In short, Target is outperforming Walmart US in strategy, management, and innovation.
Unlike Target, Walmart’s pricing strategy has veered back and forth between EDLP and rollback prices -- while positioning itself under “Save Money/Live Better.” When Simon became CEO in June, it reverted from rollback to EDLP -- until this holiday, when it used a hybrid EDLP-Rollback strategy. Although Save Money/Live Better is a compelling value proposition, changing prices are confusing to both customers and employees. Target, though not always the lowest, is at least in the ballpark on all products -- and with the 5% Redcard discount is lower on almost all identical products.
Walmart seems to believe that pricing is its only weapon, relying on price to address every competitive challenge -- if you’re a hammer, every problem looks like a nail. Conversely, Target’s pricing has long been consistent, and the Redcard discount launched in October, generating great enthusiasm among customers with the flat 5% savings on everything. The 5% promise is good even on items not discounted, whether Apple’s iPad or the Xbox Kinect, holiday’s hottest products.
Walmart’s U.S. sales growth has recently lagged Target due to myriad factors, some of Walmart’s own doing, some due to Target’s outperformance. One Walmart issue lies in its biggest asset -- its U.S .store fleet. Like battleships built for the last war, Walmart’s 180,000 SF superstores, designed in the 1980’s when moms had the time and patience to navigate such huge stores on stock-up trips, are ill-suited to the fill-in or convenience trips today’s time-pressed working Moms now take. Walmart has been losing “share of trip” to the fast-growing dollars, CVS and Walgreens -- who have all increased food and consumables -- and to smaller formats, e.g. Aldi, and Tesco’s Fresh & Easy. Target’s stores are smaller than Walmart’s, and is opening small urban-friendly stores in cities hostile to Walmart -- most recently New York.
Package size has been another strategic issue, particularly for modest income customers, Walmart’s core customers. Such customers often have barely enough cash to afford the larger pack sizes (e.g. the 100 oz size of Tide) typically featured at Walmart -- but could find discounted smaller sizes at Dollar General. Target also features larger sizes in national brands, but at least in its own-brand caters to lower-income households -- its Up & Up line is very affordable, and its own-brand foods have three pricing tiers, including deep-discount -- at good quality.
Target’s ad strategy has been more consistent than Walmart’s. This fall, Walmart announced that it was trimming advertising -- precisely the wrong strategy as consumers was reviving -- while Target and others were ramping up. The ads that Walmart ran this holiday seemed off-key -- focusing less on holiday merchandise than on “corporate” commercials touting the Humana partnership. Fine advertising, but they didn’t move the sales needle. Meanwhile, Target ran appealing, customer-focused ads that drove holiday traffic.
Some Walmart’s shortcomings may reflect management issues. Although Sam’s under Brian Cornell and International under Doug McMillon both field solid teams, Walmart-US has recently seen much turmoil, culminating in U.S. CEO’s Eduardo Castro-Wright’s replacement by Simon. Then, chief merchandising officer Jerry Fleming, and his apparel head Dottie Mattison, exited. Fleming hasn’t been replaced, so Simon acts both as CEO and head merchant -- though his background has been in logistics -- with four senior merchant reports. CFO Tom Schoewe has been replaced by Charles Holley. In November Hank Mullany, president of Walmart-North, decamped for CVS -- only to be sued by Walmart.
Target has been a model of management stability, with the CEO transition from Bob Ulrich to Gregg Steinhafel causing barely a ripple. Long term CFO Doug Scovanner is one of retail’s most respected finance chiefs. Chief merchandising officer Kathy Tesija, long a senior merchant, maintains Target’s superiority over Walmart in apparel and home -- and has enhanced Target’s electronics and food. Chief marketing officer Mike Francis has helped lead marketing since 2001.
The organizational upheaval seen at Walmart can weaken even retailers with sound strategies, and the changes coincided with holiday planning, contributing to a subpar season. In addition to the off-note ads, Walmart had several merchandise misses:
- Although Walmart is the longtime toys leader, many stores ran out of the hottest toys, including iXL Learning System, Monster High dolls, SpyNet Video Watch, and Lego’s Hogwarts Castle -- all featured in January toy fairs; Walmart’s orders were simply too small, while Target, though not immune from stock-outs, generally had better inventories;
- Target beat Walmart to the punch in consumer electronics -- by getting Apple’s iPad in stores a month ahead; and
- Walmart stores again depleted white Christmas lights -- always the most popular--by late November, while Target and CVS had plenty. Meanwhile, Walmart’s shelves were clogged with cheap red candy tins. Both issues were due to Bentonville decisions, with local store managers not given a vote.
Moreover, due to topline shortfalls, Walmart has trimmed staffing to still meet EPS guidance. Two holiday results: supercenters didn’t have enough cashiers manning registers -- and sometimes no one was around to retrieve shopping carts from parking areas, leaving customers without carts -- no way to encourage shopping.
Walmart has lost market share to Target and other discounters -- a loss CGP estimates to exceed 80 basis points since 2009. Certainly the dollars, including General, Dollar Tree and Family Dollar, as well as Aldi, have captured food and consumables share from Walmart. In apparel, Kohl’s, TJX and Ross have helped stymie Walmart, while Target has expanded its apparel/accessories share.
A resurgent Target enjoyed its best Christmas season in years. Steinhafel and his team have out-innovating Walmart across the board. Its apparel and home have long outdistanced Walmart. More recently, its private label food has far outpaced Walmart’s lagging private brands -- and its expanded P-Fresh food sections in remodeled stores have boosted both food and non-food.
Innovation has also marked Target’s successful urban entries, most notably Manhattan, and new plans for smaller 40-60,000 SF stores, targeting the convenience market. Target has also upgraded toys and electronics -- on Black Friday, its 40” flat-panel TV for $298 beat out Walmart’s 32” for $198 wherever stores were adjacent. Lastly, Target hit an innovation home run with its 5% Red Card, providing a loyalty card -- long eschewed by Walmart -- with a tangible dollar benefit, good on non-discounted items, e.g. a $499 iPad for $474.
Walmart can get its mojo back -- but needs a sense of urgency evident to date only with the response, in Delaware Chancery Court, when Mullany joined CVS. CEO Mike Duke has made some changes, such as bringing his International executive heading store formats -- including small-format stores -- back home. But as it enters 2011, Walmart should take a fresh look at its U.S. business, and understand innovation initiatives at competitors such as Target, and what really drives consumers and how they shop today. For Target, the challenge will be to top a great rebound, and to maintain the innovation engine that saw P-Fresh, big city stores and the 5% Redcard all reach fruition in the same ‘red-letter’ year.
Craig R. Johnson is president/CEO of Customer Growth Partners, New Canaan, Conn., a consumer consulting and research firm serving retail and institutional investor clients, and has long forecast back-to-school and holiday retail sales.