Timing not Strategy Revitalized Wal-Mart

Implications: Castro-Wright says his strategy, not the economic down turn saved the company's bottom line.  But, the facts don't bear that position out .  Investors should be weary of retail executives that believe their own press clippings.

Analysis: Twelve months ago analysts had written off most of Lee Scott and Castro-Wright’s turn around strategy.  But, they did everything just right, at least according to a recent interview with Castro-Wright in the Wall Street Journal.  Now, you wouldn’t expect the President of Wal-Mart’s US stores to admit his reorganization strategy was a failure anymore than you would expect Lee Scott to agree that Wal-Mart failed to go up-market.  But to suggest the company has benefited little from the current economic down turn and more from the two executives retail leadership requires the suspension of disbelief.  

Business in general and a turn around in particular all benefit from market timing.  Nowhere is that more true than in Wal-Mart’s case.  The US economy turned down just as the company was picking up the pieces of its failed up-market strategy which included new fashion apparel, ethnic market segmentation, and centralization of store operations; most of which were either poorly executed or just plain wrong.  The only thing that saved the company’s bottom line from deteriorating further was the onset of the credit crisis in July 2007 and subsequent rise in oil prices as the dollar tumbled.  

Higher energy costs forced all retailers to increase product prices as a direct consequence of rising product costs and increased operating expenses.  Simultaneously, consumers suffering acute sticker shock sought out the lowest common denominator to shop in order to balance family budgets.  Wal-Mart was the obvious choice.   

The unplanned outcome of Castro-Wright’s reorganization was a leaner stores organization that was able to effectively compete in retail environment dominated by price.  But to claim that the new structure provided a better customer experience is a complete exaggeration.  In fact today’s Wal-Mart eschews service even more than the original one that Sam built.  For instance, check out lines at peak business periods where it takes longer to pay for products than it did to find them.  Likewise, longer waits to checkout during off hours because almost all the registers are closed except the automated lanes.  

Similarly, Castro-Wright’s view that customers should get the product they “deserve” is operationalized at the store level by significant reductions in both product variety and depth.  Stock outs are common, even in Sam’s Choice products and product consistency seems to take a back set to opportunistic buying; leaving consumers with a take it or leave it choice.  

According to Castro-Wright, Wal-Mart “made big bets in growth categories such as consumer electronics, providing brands that gave us authority.”  If commoditizing luxury brands like Panasonic is establishing leadership, then he’s correct.  In the face of dwindling sales, Wal-Mart slashed prices on high visibility, name brand flat screen TV’s in 2006 and 2007 to reinforce the company’s low price perception in the market.  The fact is the company had few of the products to sell, but the ploy started a price war among consumer electronics retailers who took the bait.  The biggest gain for Wal-Mart wasn’t the sale of few thousand name brand TV’s as much as it was the disintegration of its retail electronics competition.  Unfortunately, as more retailers go out of business, the better Wal-Mart looks, if for no other reason than it’s the only one left.  

Relatively speaking, Wal-Mart will do well for the next several quarters, but probably not as well as its press clippings suggest.  For all the consumer’s focus on low price, the company hasn’t recaptured that much market share.  Moreover, Wal-Mart, like all retailers, still depends in part on discretionary spending to grow sales.  Nowhere will that be more apparent than in September and October when retailers will slug it out for the consumers extra dollars with out the benefit of the stimulus rebate.  It remains to be seen, but don’t be surprised if Wal-Mart’s sales fall off faster than its competition.    

As economy emerges from the slowdown, there’s no evidence to suggest the company can compete any better against its competition than it did earlier.  At best, about all you can say about Wal-Mart is that it’s more of what it originally was.  That’s not necessarily a bad thing, but the company’s relevance to the future of US retailing has been diminished and will in all probability remain so; at least under it current leadership.