This time last year, our pages were filled with stories about how Wal-Mart was thriving as the US economy turned increasingly sour.
Throughout the downturn, the company consistently booked expectation-beating sales and profits at its namesake US stores. Customer footfall soared as the discount retailer expended its appeal to a more affluent breed of consumer.
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The question was always going to be whether Wal-Mart could hold onto these new shoppers when the economy rebounded.
Wal-Mart management certainly seemed confident that this was an achievable goal and the company announced plans to embark on an expansive store opening and remodelling programme as it looked to add style to value and improve the in-store shopping experience it delivered.
The world’s largest retailer said that its capex would total US$6.6-$6.8bn in the US over its fiscal 2010 period. Capex in the US for fiscal 2009 stood at at $5.8bn.
“In the US, we’re building new stores and accelerating the pace of our remodels because they have been so successful at winning and retaining customers,” CFO Tom Schoewe said as he announced the changes last October.
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By GlobalDataBut last week came fresh evidence that the tide has indeed turned once more for Wal-Mart in its domestic market.
Despite increased investment, total US sales gained just 1.1% while ID sales at Wal-Mart fell 1.2% during the first quarter, the company revealed.
So, what went wrong?
The recession in the US was not as deep or protracted as many had feared.
According to a National Association for Business Economics (NABE) study released Monday (23 May), the US economy should see solid expansion over the next 24 months, driven by rising consumer spending from shoppers confident that the recession is behind them.
“Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished,” NABE president Lynn Reaser cheerfully predicted.
While economic recovery and higher discretionary spending is no bad thing in itself for Wal-Mart, it has made it harder for the US retail juggernaut to hang on to those higher earners that it was able to attract during the downturn due to its position at the value end of the market.
Spooked by the downturn, more affluent shoppers had deserted the likes of rival warehouse retailer Target Corp. in their droves and turned to Wal-Mart as they looked to drive down their shopping bills.
As confidence returns, this fickle new Wal-Mart shopper has proven just as quick to return to old buying habits – as can be witnessed by the strong first-quarter numbers Target was able to unveil last week.
One issue that seems crucial in the exodus of middle-class consumers from Wal-Mart was its move last year to radically reduce its branded SKUs in a bid to increase own-label sales.
Own-label gained increasing traction during the downturn in the US as consumers widely came to view it as a ‘better value’ option. Nevertheless, US shoppers remain highly brand-conscious shoppers and when Wal-Mart removed more than 300 grocery products from its shelves, many began buying their groceries elsewhere.
So, at one end of the spectrum Wal-Mart’s sales have been hit by its inability to retain middle-class consumers. At the other, Wal-Mart said that its “core shopper” – typically families in lower income brackets – continue to feel the strain of rising gas prices and unemployment.
“Rising gas prices and high unemployment levels continue to be the most pressing issues for our core customer. Gas prices are up 41% over this time last year,” Wal-Mart US CEO Eduardo Castro-Wright observed.
In a bid to save money on gas, Wal-Mart’s core shoppers are making fewer trips to the store and spending less when they do go, the company revealed.
And, in more bad news for Wal-Mart, there are few signs that gas prices will ease off while the recovery in employment figures looks set to trail the overall economic rebound in the US.
In a bid to revitalise its US sales and reverse falling traffic trends, the company said that it would up its “rollback” price campaign, increase advertising and re-examining its move to drastically cut SKUs.
In particular, Wal-Mart revealed that it is re-introducing the 300 grocery brands that it had cut in a bid to ensure customers do not shop elsewhere for “essential” names.
The question has now become whether this action will be enough for Wal-Mart to distance itself from the swings of the wider economy and counter the ‘boom and bust’ sales cycle that it appears to have been caught up in.
The market will have to wait until Wal-Mart unveils its second-quarter numbers in order to gage the success of the company’s bid to stem the tide of exiting shoppers – and indeed win some back with its increased focus on value.
