Robin Reports







A “Six-Alarm” Growth Headache

Window Of Opportunity For Foes?


Target, Kohl’s and JC Penney: listen up!!  You may have a competitive window of opportunity as Wal-Mart deals with its “six-alarm” growth headache. 




However, a word to the wise would be to seize whatever opportunity you may have, as quickly as you can, before Wal-Mart’s Exedrin for migraines kicks in and they slam that window shut, while coming back at you, bigger and stronger than ever.


Alarm #1: Up-Marketization

A “Cheap Chic” Wannabe For A Different Reason


When Wal-Mart launched its own version of a “Cheap Chic” designer-like apparel strategy, it did so more out of necessity than to copy Target.  They were, and still are, faced with an enormous margin dilemma, to say nothing of their slowing growth.


Wal-Mart’s core business model and value proposition requires perpetual cost reductions for lower prices, higher volume and increased velocity to achieve profitable growth.


Problem #1: for Wal-Mart: over time, they cannot keep cost squeezing their vendors’ margins to death; and, problem #2: the percentage of their total business in groceries keeps increasing faster than their other categories, and groceries yield razor thin operating margins of 1-2% vs. their current overall margin of about 5%, (which compared to Target’s 2005 operating margin of 15% in the third quarter, seems paltry).




So, Wal-Mart, faced with the schizophrenia of maintaining their enormous low income customer base with the lowest-priced products and simultaneously getting those customers to buy more in existing stores, while also gaining higher-income consumers, launched into more upscale, pricier apparel brands, such as Metro 7, George, Boundaries, Exst, and others.  They even centralized their designer and product development headquarters in New York.


In a word, their apparel strategy suffered from over-aggressive execution, particularly with the more fashion forward segments of the lines.  Therefore, it is still a work-in-progress.


Therefore, problem #3 and worse for Wal-Mart: top line growth continues to slow, with comp store sales sliding over the past five years from 9% in 1999 to around 3% in 2005 and continuing through 2006.  Of course, rising gas prices and interest rates have not helped, having more of a negative effect on their lower-income customers than for other sectors.


And, if “alarm #1” is a headache, it becomes a migraine with five additional dimensions of pain.


Alarm #2: Saturation And Cannibalization


With a high level of market saturation: 62.2% of the U.S. population lives within five miles of a Wal-Mart store and 93.6% within fifteen miles, Wal-Mart has been forced to scale back new store openings due to the cannibalization of sales from existing stores.


Alarm #3: Globalization


Wal-Mart’s globalization efforts have slowed due to missteps in Germany, Asia, the UK, and elsewhere.


Alarm #4: Urbanization


Wal-Mart’s urbanization efforts have been delayed and in some cases blocked, at every turn, by local market politics and various community forces.


Alarm #5: Localization


While not necessarily a headache, Wal-Mart’s localization initiatives, intent on delivering different products to different markets and doors, according to local consumer preferences is still a work-in-progress, thereby simply adding to the complexity and disruption of its other “alarms.”


Alarm #6: Renovation


Also, while not a headache, Wal-Mart is in the process of renovating about 1800 of their 3900 stores, disrupting traffic flow, ease of shopping and generally having a negative impact on sales.  One expert from JP Morgan estimated that the stores under renovation could see sales drop by 3-7 percentage points.


Beware The Behemoth’s Next Surge


Could all of these negative forces combined mark Wal-Mart’s transition into maturity and ultimate, (albeit slow) decline?  Remember, Sears Roebuck & Co. reached the apex of all of retailing in the late 1970’s, and has been slowly dying for the last quarter century.


Well, having reached the top of the heap in retailing was, and still is, the only thing that Sears will ever have in common with Wal-Mart.


While Wal-Mart has “six alarm” tactical headaches, in my opinion, they are strategically right on the money.  Once they get their execution fixed, look out.


Beyond The Migraine

“Sustainability:” Not Just Spin


Furthermore, they are just on the leading edge of their organic food initiative, which is just one piece of their long term “sustainability” strategy, which isn’t just a word spewing out of the mouths of their “spin doctors.”


CMO, John Fleming stated at the recent WWD CEO Summit, that the strategy included three elements: 1) internally, they would identify renewable energy sources in major areas, such as reducing the fuel requirements of their trucking fleet, which happens to be the largest in the world, while also reducing emissions harmful to the environment; 2) they will strive to create zero waste, such as demanding the “right-sizing” of packaging from their vendors; and 3) they will convert their product offerings wherever possible, such as organic foods and cotton and light bulbs that have a longer life.  Somewhat ironically, all three of these initiatives will lower costs.


Fleming sees millennial teenagers ultimately driving and therefore, rewarding this strategy.


“Future Retail Model?”


Lastly, Fleming talked about what he called the “future retail model,” which he defined as the true integration, or what I might call the harmonious convergence, of merchandising and marketing.  He said that the current model has:


Merchants “Thinking”                            Marketers “Thinking”


·          Products                                             Customers

·          Tactical/Fast                                      Strategic/Slow

·          Make The Sale                                   Build The Brand


The best future model, according to Fleming, will integrate both so that both merchants and marketers will “think like marketers, act like merchants.”


Competitors: Seize The “Window” While You Can


As I said, for those competitors like Target, Kohl’s, and JC Penney, they would be well advised to seize the 2-3 year “window of share-winning opportunity” that Wal-Mart’s “fixit” period and new initiative development provides.


Because when Wal-Mart gets it all together, which they will, the cry: “the behemoth is baaaaaack!!!” will be an understatement.







Article provided by:
Robin Lewis Inc., Robin Reports
P.O. Box 523, Fleetwood, PA, 19522
T: (610) 944-5688 F: (610) 944-5149 E: 



Robin Lewis is a strategic analyst and consultant, specializing in identifying strategic growth opportunities for major corporations in the retail and related consumer products industries. In addition to ROBIN REPORTS, he frequently delivers keynote presentations to a wide range of companies, associations and academia: Bloomingdale’s; JC Penney; Estee Lauder; Liz Claiborne; The National Retail Federation and the Fashion Institute of Technology are just a few.  He’s often quoted in various trade and consumer publications such as Women’s Wear Daily, the Chicago Sun Times, the New York Times, and Brand Week. Most recently VP and Executive Editor of Women's Wear Daily and originator of Fairchild's Strategic Information Services, he also held executive positions in strategic planning, business development, and brand and marketing management at DuPont, Collins and Aikman, Grey Advertising, and the VF Corporation.