Wal-Marts EDLP strategy is under scrutiny

Wal-Mart's EDLP strategy is under scrutiny

Wal-Mart's EDLP strategy has successfully driven sales growth in the second quarter, as shoppers across the globe increasingly seek out low prices. Significantly, the company was able to report that comparative sales were up in every market in which it operates. However, Katy Askew asks, is a focus on price alone enough to maintain this momentum in the longer-term? 

US retail giant Wal-Mart Stores today (16 August) reported second-quarter net sales gains of 4.5%, with total sales rising to US$113.5bn in the three months to 31 July. Sales growth was driven by higher comparable sales in every market that the group operates in, from the Americas to Asia and Europe.  

In the US, sales increased a total of 3.8% over the quarter to reach $67.3bn. US comparable-store sales rose 2.2%, its fourth consecutive quarter of positive ID sales. Meanwhile, Wal-Mart's international division recorded 6.4% growth to reach $32bn.

Commenting on the results during an investor conference call, Wal-Mart CEO Mike Duke attributes the firm's success to its EDLP strategy.

Put simply, EDLP means offering consumers highly-competitive opening price points, as opposed to relying on promotions to draw in shoppers. This price investment is primarily funded through a tight focus on costs control. 

"Our intense focus on delivering productivity and reducing cost allows us to invest in lower prices for our customers and to deliver strong profitability for our shareholders," Duke claims. "Given the continuing economic pressures, we believe that our price leadership and value are growing in importance to customers across income levels."

The company's EDLP strategy is a 'back to basics' approach from Wal-Mart that has proven highly successful while the economy is down. 

The focus on EDLP in the US has won back the firm's core consumer, typically lower income shoppers who migrated to alternative retailers when Wal-Mart's short-lived attempt to appeal to the middle-classes saw the group alter its assortment and pricing strategy.

The company was able to book improved comparative sales across all geographies and in all formats in the US as a result of this focus. 

"Price leadership is at the center of our strategy. Our marketing team is focused on ensuring the price message resonates with our customers and sets us apart from the competition," Wal-Mart US chief Bill Simon confirms. 

Internationally, EDLP is also helping the retailer grow its sales momentum, Wal-Mart international president Doug McMillon adds.

"Regardless of the market, customers want great merchandise at great prices," McMillon commented. "Every market delivered positive comps, and I'm pleased that our largest markets - the UK, Mexico and Canada - collectively delivered stable growth, solid margins and expense leverage, despite challenging environments."

In the UK, for instance, comparative sales grew 0.5% as Asda's focus on EDLP enabled the supermarket group to book improves sales in grocery and children's clothing. 

"It is Asda's strong value credentials which continue to underpin its current outperformance," analysts at advisory firm Conlumino write in a note to investors.

"This is reflected in its particular success in core grocery and children's apparel, as hard pressed shoppers look to slash their weekly bills for food and clothing. While rivals have focused on heavy promotional activity and couponing, Asda continues to stick rigidly to EDLP, with a particular focus on staples such as bread, milk and meat. Strong communication of its Asda Price Guarantee is serving to reinforce this strong value positioning."

In some other international markets, EDLP is taking longer to gain traction. However, the company reported positive signs that it is beginning to win consumers over to its EDLP approach in these regions. 

For example, the highly promotional Brazilian market has presented a challenge as Wal-Mart has had to work to convince both consumers and suppliers of the benefits of switching to this pricing model.

While the company has not seen the results that it would like in Brazil - as signaled by Wal-Mart's decision to slow store openings while it attempts to tweak its offering in the market - the fact that it was able to grow comparative sales would suggest that the EDLP model is gaining a foothold in the region. 

However, for all its success, Natalie Berg, global research director at Planet Retail, emphasises that the EDLP strategy does have its limitations. 

"We remain doubtful over the longevity of Walmart's back-to-basics approach. Low prices are no longer a USP but an expectation from shoppers," she says. 

Wal-Mart must therefore look beyond EDLP if it is to continue to build on its sales momentum in the longer-term, particularly when the economy picks up and consumer definitions of 'value' come to focus more on quality and service as well as price. 

Berg claims that Wal-Mart must focus on developing its multi-format strategy, particularly in the face of the increasing global trend for non-food sales to migrate online. This trend, Berg tells just-food, could result in Wal-Mart phasing out various non-food categories in-store and increasingly focusing on its food offering. 

If Wal-Mart's bricks-and-motar stores come to rely more heavily on grocery, then Wal-Mart has some way to go in developing its fresh food offering and improving food quality in various markets if it is to compete with more traditional supermarket operators. 

One way that this could be achieved is the sharing of best practice between Wal-Mart's various divisions - something that management hints is becoming of increasing importance. 

"In a business with the reach of Walmart, we can certainly leverage ideas and processes. We have teams with particular expertise on topics  from managing inventory as it flows through a store to format development, and from systems to training that can be perfected and exported to others," Wal-Mart's McMillon says during an investor conference call. 

Wal-Mart also revealed that it is taking steps to increase its online presence and leverage social media and other communications to foster customer loyalty and develop innovative in-store technologies that will improve consumer's shopping experience, such as mobile payments. 

"We've been focused on stepping up the intensity of our global ecommerce opportunity," Duke reveals. "Our goal is to have a deeper relationship with our customers to drive greater loyalty and e-commerce is key to that strategy.  We're also constantly driving innovation. We're building a new global platform to take our assortment and services to every one of our markets simultaneously."

These moves are essential because shopping habits are migrating, regardless of demographic. 

However, here Wal-Mart faces somewhat of a dilemma: How can it invest improving its proposition without hitting its margins - which would in turn damage its ability to deliver EDLPs? 

As it increases its investment in quality, technology and new formats, the group will invariably erode its margins. And low margins are an essential plank of Wal-Mart's EDLP strategy, because it is the firm's low cost base that allows it to deliver everyday low prices to consumers. However, if Wal-Mart steps back from its focus on pricing the retailer once again risks alienating its core consumer.