Carol Spieckerman's Brain On...Promotions vs. EDLP

In Carol Spieckerman's latest contribution as a Retail Wire Brain Trust panelist, she comments on a recent study from the Stanford Graduate School of Business that makes a compelling argument against everyday low pricing (EDLP) for retailers attempting to compete with big boxes.

Here's what she had to say..."Interesting findings considering that this year, Walmart, J.C. Penney and Lowe's all made various vows to end promotional shenanigans and either return to (Walmart) or initiate (the others) EDLP-ish models. With the big guys zigging to price consistency, smaller-scale competitors would seem to have a mighty zag in moving toward promotional pricing."

Read the full discussion

Additional thoughts from Carol...

I agree with the study conclusions that pricing strategies aren't to be taken lightly since variances will tarnish consumer trust and the process of re-educating consumers about new strategies can be long and costly. Although the study focused on grocery, I see this applying to all categories and retail tiers.

Walmart learned that when last year's "atomic rollbacks" backfired. Far from being grateful, Walmart's loyalist customers questioned whether they had been getting the best deal all along and in the meantime, dollar stores' massive scale and convenience factor tugged away at Walmart's base. It's journey back to price leadership has been fraught with foibles but a recent quote from Walmart's Chief Merchandising Officer, Duncan Mac Naughton, hints at the real reasons why more retailers are abandoning promotional high-low games in favor of uniformity.

In his fourth quarter presentation in Bentonville, Mac Naughton stated that Walmart is committed to delivering price leadership "community by community, store by store, category by category." Why so specific?  Because as difficult as it has always been to manage promotional strategies across a few thousand stores carrying the same brands and products, it is nearly impossible to do so as retailers localize the brand and product profiles of individual stores, explode online offerings, and ramp up site-to-store capabilities, all under the watchful eye of smartphone-wielding consumers who can exercise their right to tap out a price comparison and/or make an online purchase on a whim...and do so while visiting an alternative retailer's physical or virtual space.

Among the most promotionally-driven retailers in the country J.C. Penney announced in November that it will move toward an everyday low price strategy beginning in spring 2012. Not coincidentally, Penney simultanously announced its plans for a significant relaunch of its e-commerce site which will include adding to its online-unique assortments and enhanced mobile interactivity.

One of my 2011 Earth-shattering Events that Escaped (Almost) Everyone is retailers' mania for online marketplaces which promises to further complicate the pricing and promotion picture. Lowe's is portraying its announcement today that it will acquire online retailer, ATG Stores as an example of its committment to provide an "endless aisle" of products. I'll say. ATG's virtual portfolio contains over 500 websites featuring 18 category divisions. Over 3.5 million products from more than 3,300 manufacturers are featured on ATG websites.

Let the limber and land-based have a go at promo. 

For the scale-busting behemonths? EDLP, please!

Walmart Resonates Part III: Brands in Command

Special notices: We will be in the greater New York area this week conducting retail trajectory presentations and client strategy sessions. Contact Carol Spieckerman directly to request a meeting.

Don't miss Carol Spieckerman's webinar, Cover Your Assets! The Retail Touch Point Transformation, tomorrow, Wednesday, 11/16/11.  Register online at LIMA's website now.

Last week, I shared my first and second takes on Duncan Mac Naughton’s presentation as part of the Bentonville Bella Vista Chamber’s WalStreet speaker series. Today, I wrap it up with Part III.

Read Part I: Productivity and Plentitude

Read Part II: All Hail Scale!

Separation Anxiety

Back in May, Michael Moore talked about Walmart’s reintroduction of entire categories, rather than just products. Mac Naughton called these “heritage” categories (we call them “the three Fs,” meaning firearms, fishing, and fabric) and he added a somewhat surprising twist to the story. As important as EDLP and OPP (opening price points) are to Walmart, widening the price separation between good, better, and best punctuates their value on the price continuum.

Context is everything, so as Walmart completes its last-phase replenishment of many good-tier OPP items that were cut during Project Impact, it is simultaneously layering on a higher ceiling of best offerings, particularly in its heritage categories. The chorus of Walmart naysayers might call this a risky scheme, but a quick reality check proves otherwise. Strapped consumers don’t always favor a steady stream of cheap, throw-away items and in fact they often prefer to make select investments in high-quality, durable goods that will withstand some wear and tear.

Walmart is currently driving double digit comps in the hunting category by offering items such as $900 shotguns and, in fishing, by raising the fishing rod price threshold from $45 to $100. The company is really just participating in the high-low dynamic that is currently driving all of retail: with dollar stores gaining wider acceptance among higher-income shoppers, retail’s bottom has been lowered, making the entry-level market more saturated and competitive. At the same time, the luxury market continues to buck economic trends as the “haves” keep having. It’s for this reason that retailers such as J.C. Penney who are fighting their deeper descent into the murky middle are bringing in higher-priced items (such as $80 Liz Claiborne handbags). One person’s handbag is another’s hunting rifle; “luxury” is in the eye of the shopper.

Private What?

Walmart’s 2009 revamp of its mega-private brand, Great Value, ranks right up there with Project Impact in terms of industry buzz, and many have taken it as a sign that Walmart was going to embark on a private brand-a-palooza across multiple categories. While those dire predictions never really came to bear, the one-two punch of Great Value’s power proliferation in consumables and Project Impact’s curtailment of national brands created a palpable perception imbalance, if nothing else.

Mac Naughton didn’t hedge one bit on the branding front – national brands are what drives the authority that girds each category and, in apparel, Walmart now sees national brands such as Levi’s Signature as critical to quality perception as well. Walmart’s recent announcement that it will return to the basics that it arguably never abandoned and shutter its New York apparel office had many speculating about the brand implications (establishment of the office in 2009 was another move that had many predicting a private brand takeover). My head obviously wasn’t the only one that snapped around when Mac Naughton went all “national brand” on the audience, as a clarifying question regarding the role of private brands in Walmart’s overall strategy was raised during the Q&A. He didn’t hesitate to put a finer point on the situation, calling Walmart a “house of brands for less,” and stated that private brands would be deployed only when a price that customers need is not available. Suppliers, start your branded, OPP engines!

Mac Naughton also provided additional color by saying that, when Walmart stopped building stores, 9,000 dollar stores “showed up.” The horse they rode in on was “a bunch of entry level price point products” that Walmart couldn’t meet with their brand portfolio at the time. Walmart’s first choice is now a national brand, but if a suitable one can’t be had, they’ll push a private brand forward. In Mac Naughton’s words, “it’s all about price.”

Although Walmart’s appetite for licensed products is well-known in the licensing community, one doesn’t often hear Walmart execs call out licensing as a focus area. Mac Naughton did when he referred to a successful OPP backpack program that featured a licensed Hello Kitty version. I took that to mean that licensed brand providers will find new opportunities in the future, if they can bring on the value.

Scattergories

Mac Naughton blazed through Walmart’s point of view on additional categories. In home, the focus will be on sheets, towels, candles, floor care, and outdoor living. What’s left, you ask? The tchotchkes and pieces that once took up room but didn’t have a point of view. They’re outta there.

The focus in Walmart’s back-of-store entertainment area will be on “value and immediacy,” since the innovation hasn’t really been there lately. 3D didn’t deliver as expected, so Walmart is determined to win in OPP here just as they are in other categories. Walmart rakes in $300 million a year, with its $5 movie bin and its $5 CD business up 13 percent. Mac Naughton threw in a bit of imagery to make the point, saying that Walmart’s core customers are doing “head dives” into those bins (ouch!). Walmart’s overall share of new movie releases is an impressive 40 percent and they had a 45 percent share of the Transformers 3 release. The trick is to drive a bit of aisle crossing when that peak-time traffic hits the store.

If the shelf hogs aren’t flying off the shelves, doubling up on the high-turn, high-profit items that attach to them makes a lot of sense, particularly on the heels of Toys 'R' Us' announcement of its expanded and re-designed CE departments which will feature tablets, headphones, media players and Apple accessories. Walmart is focusing on all manner of iPad, iPod, television, and printer add-ons and increasingly relying on Walmart.com and its in-store delivery mechanisms to execute bulkier pieces, particularly in smaller stores that can’t dedicate the space.

It’s Beginning to Look a Lot Like…

Walmart began working on holiday 2011 at noon on December 25^th, 2010, according to Mac Naughton. A cross-functional team has been chiseling away since then on defining Walmart’s holiday point of view and plotting its product flow, daily sales, and service plans. Layaway kicked off in mid-October (earlier for associates) and Walmart’s Christmas price guarantee will ensure that they aren’t beat on price, even after the sale. Walmart’s previous announcement of its ad match program doesn’t run counter to the EDLP philosophy according to Mac Naughton. It just takes care of the anomalies.

Walmart has also taken a stand on which items will drive its holiday must-haves. Mac Naughton shared the top five, which are Elmo Rocks, Leap Pad, Fidget, Call of Duty, and the IPad II.

Mac Naughton closed his presentation by saying that he is as “serious as a heart attack” about growing the business. With Walmart  just reporting positive comps for third quarter and its first revenue gain in two years after nine quarters of negative same-store sales, hopefully he will be able to breathe easy come 2012.

Walmart Resonates Part II: All Hail Scale!

Special notice to our East Coast clients and readers! We will be in the greater New York area next week conducting retail trajectory presentations and client strategy sessions. Contact Carol Spieckerman directly to request a meeting.

Yesterday, I shared my take on Duncan Mac Naughton’s presentation as part of the Bentonville Bella Vista Chamber’s WalStreet speaker series. Today, I continue with Part II.

Read Part I

Hands off!

Dollar stores and small box masters like Aldi and Tesco’s U.S. Fresh & Easy have set a new standard in skeleton-crew efficiency and low-touch merchandising solutions. Walmart is laser-focused on in-store productivity and achieving its on-shelf goals without requiring employees to handle merch multiple times. In his speech, Mac Naughton mentioned a “one touch” goal that will lower systems costs and keep employees where they are most effective: on the selling floor or at the register. Walmart also continues to evaluate its DC locations to ensure that fewer miles are driven to get goods to its stores. Achieving these efficiencies will become even more critical as Walmart opens more of its small format Express and Neighborhood Market stores in the coming years. Both concepts promise to bring the organization into new urban and rural territory that can’t be efficiently serviced through its traditional delivery routes.

Souped-Up Scale

As I noted in a recent blog article, retailers are rethinking scale and attempting to make the most of the assets that they already have, whether virtual or land-based. True scale is no longer achieved through thousands of stores, but it isn’t achieved through millions of online impressions or mobile transactions either. It’s all of these combined. Walmart has obviously been thinking a lot about how to leverage the scale it already has, as well as how to build more in the future. Mac Naughton directly addressed this when he called Walmart’s 4,000 stores “existing assets” and when he spoke of leveraging its strengths in a multi-channel world, rather than trying to win at someone else’s game (hello, Amazon!).

Although Walmart’s Express stores have been portrayed by the media and other observers primarily as a small-format move, building site-to-store scale is a huge part of the Express story, and one that is largely overlooked. All of those small stores will not only service new customers in neighborhoods that used to only have dollar stores, but will serve as pick-up locations for the over 40,000 unique items that Walmart offers online. Walmart is augmenting its self-cannibalizing supercenter model with a new fleet of small formats that will forage new ground while facilitating online purchases.

Just since Mac Naughton’s presentation, two 1,000 square-foot, low-inventory Walmart’s have popped up in the downtown areas of Los Angeles and San Diego. The sign outside says Walmart.com for a reason; the displays inside promote holiday gifts including toys, big-screen TV’s, computer tablets and home theater products that draw from online stock. Orders placed at the stores ship free through a rebate program and instant gratification can be satisfied through store-stocked accessories like 3-D glasses, remote controls and headsets (look for more on Walmart’s CE strategy in part III).

Walmart's site-to-store capabilities have the potential to give it a killer advantage over dollar stores, which have built massive scale through store proliferation while largely ignoring online opportunities. Dollar General recently changed that with its September e-commerce launch, but the site went live with direct shipment, rather than site-to-store capabilities.

Sorting out the dizzying array of accessibility options that retailers are offering has become increasingly difficult. Site-to-store is now another of the many arrows in retailers’ product delivery quivers, and even that is no longer a one-size-fits-all proposition. Mac Naughton breaks Walmart’s offerings into three categories based on customer need states: fast, faster, and fastest.

Fast: Site-to-store or site-to-FedEx. Mac Naughton cited site-to-FedEx as a way to give underpenetrated markets access to Walmart’s EDLP prices. To me, that means that folks in big cities can shop Walmart without having a location anywhere near. Some of retailers’ biggest markets are now store-less, which answers the question “Why are they running ads here when there aren’t any stores?” (Don’t shoot the media buyer just yet).

Faster: Free home shipping, now available for 100,000 items with purchases over $45, within a three-to five-day time frame.

Fastest: Pick up today service. Shoppers can choose from 25,000 items online and have them shipped to a local store the same day. According to Mac Naughton, Walmart is working hard to increase the number of items in the pick up today family.

Walmart is also working very closely with its newly-created @walmartlabs division to optimize its multi-channel mojo, and I predict that the ideas incubating in the lab right now will be game-changers for the entire industry. Walmart has announced its digital acquisitions, but it’s the fruit that they bear that will transform the retail trajectory. Update: Check out today's announcement from @walmartlabs

Density Intensity

Back on terra firma, although Walmart has recently shuttered its Marketside concept, it is clearly invested in pursuing not just multi-channel but also multi-format retailing (and, as mentioned before, the two are now inextricably linked). Walmart is shifting capital away from remodels and toward accelerating the growth of its store base. Mac Naughton outlined a format “hierarchy” that still places supercenters at the top of the heap, with Division 1 stores continuing to be converted into highly-profitable supercenters.

Neighborhood Market stores have produced five consecutive quarters of positive comp store growth, and Mac Naughton says that the returns on these stores are now approaching those of its supercenters.

Walmart Express is slated to be the new kid on a growing number of blocks and Mac Naughton acknowledges that the company is still tinkering with the concept, including deciding which locations will include pharmacy and/or fueling stations (two more capability advantages that Walmart enjoys over dollar stores). Walmart’s Express stores have the potential to be the real scale-builders for Walmart, and are the best weapon in its battle against dollar stores and those pesky mid-size formats in the drug tier that keep pushing into non-core categories like food and alcohol.

New store development is once again de rigueur at Walmart, but as a point in the productivity loop. Walmart is wringing cost efficiencies out of its store builds by scrutinizing every element, from fixtures, signage, and other hard pieces to store layouts. Where will savings realized from these efforts go? Where else? Into building more stores, which will drive top-line growth.

Part III will reveal some surprising twists in Walmart's pricing and branding strategies.

If you want us to ping you when Part II posts and be notified of our retail trajectory updates, simply enter your email address in the subscription box in the right column and you'll be on your way!

Want to know what these and other retail trajectories mean to your total retail strategy? Planning your 2012 sales or marketing meetings and want to kick things off with a beyond-trend presentation on what really matters in retail? Contact Carol Spieckerman directly. 

Walmart Resonates Part I: Productivity and Plentitude

As the executive vice president and chief merchandising officer for Walmart U.S., Duncan Mac Naughton is responsible for all aspects of merchandising across Walmart’s more than 3,700 U.S. stores. His presentation  this week as part of the Bentonville Bella Vista Chamber’s WalStreet speaker series openly covered a breadth of topics, despite kicking off with the disclaimer that his “handcuffs are tight” as the clock counts down to Walmart’s November 15^th 3^rd quarter earnings release. The points that he made spoke to how sands are shifting across all of retail and they were important enough to inspire this three-part series on Walmart’s approaches for negotiating the changes.

Read Part II

Read Part III

Michael Moore’s presentation to the WalStreet group back in May dispelled any rumors that Walmart was going “back to the future” with its aggressive reversal of Project Impact. In last week’s presentation, Mac Naughton charted the considerable progress made as the results of its post-Project-Impact add-backs gain traction. He wasn’t sheepish about admitting that Walmart has stumbled not only with shoppers, but also in its relationships with suppliers. Now that positive results have begun to roll in, however, the Walmart story has progressed from one of alienating to one of resonating, on multiple fronts.

Productivity Payoffs

 The “productivity loop” concept has long been a staple of Walmart executive presentations and investor calls. The idea sounds simple. If you lower costs, you can lower prices, sell more, and increase profits. Perhaps this was true a few years ago, when there was still plenty of fat left in the supply chain and transparency was far from the norm. These days, the retailers left standing have very lean systems. They have to trim pretty precisely to increase productivity, and all eyes are on them while they do it. Mr. McNaughton did a great job of detailing which stones Walmart is turning over it its next push toward productivity, and the considerable payoff that awaits.

Through what Mac Naughton calls a “self-funding” business model, he claims that Walmart can deliver an additional $2 billion in retail price point reductions, leveraging its productivity loop to ensure that it stays true to its “every day low price” (EDLP) promise even as shoppers aggressively exercise their online and offline comparison shopping and extreme couponing options. As if that weren’t enough, Walmart is simultaneously pursuing a multi-format, multi-channel, hyper-local model that makes maintaining price consistency alone challenging. In spite of this, Walmart is committed to delivering price leadership “community by community, store by store, category by category,” doing so in partnership with its suppliers through joint business planning rather than take-it-or-leave-it cram-downs. In return, suppliers enjoy consistent demand for their products, Walmart and supplier company shareholders see consistency in earnings, and customers shop Walmart loyally and with confidence.

Walmart has already identified 80 percent of the savings that it needs to create over the next five years in order to hit its goal, and is starting with high-traffic, high-purchase-cycle items in order to grab the early awareness of shoppers. Its ultimate goal is to parlay the program into a “broad application of price investments” across a store, which will resonate with shoppers regardless of their shopping behavior.

Unfortunately, Walmart is starting in negative territory. Last summer’s “atomic rollbacks” may be cycling out, but they have a “long tail” according to Mac Naughton. Not only did the rollbacks kill the credibility and trust of Walmart’s loyal shoppers, who expected low prices without theatrics, but suppliers felt the pain as their already-thin margins went molecular.

From Paltry to Plenty

Anyone whose livelihood is linked to Walmart knows that Action Alley is back in action at Walmart. Its widened aisles no longer look like landing strips as pallets of sharply-priced products once again beckon shoppers to go ahead and stray from the shopping list already. The displays not only showcase the items that Walmart has reintroduced to its stores, they “disrupt shopping behavior” and communicate value in a seasonally-appropriate way, and with great national brands (more on that in Part III).

To date, Walmart has placed more than 10,000 previously-removed items back in its stores through a three-phase process that started in dry grocery and consumables, then worked its way through dairy, deli, frozen, health and wellness, and into hard lines. The early-phase results are encouraging. In the dog food category, for example, sales are up 290 basis points in comp stores, while hair care is up 480 basis points.

According to Mac Naughton, Walmart is about 70 percent of the way into phase three, which will focus on entertainment and softlines (home and apparel). Of course, Action Alley can’t hold all of that bounty. Walmart has literally risen to the occasion by elevating the gondolas in over 1,000 stores in order to build capacity back into its modulars. Sales have risen by 140 basis points in those stores, making any sight line compromises well worth it. Mac Naughton called the massive replenishment “the gift that keeps on giving,” as shoppers, including those with incomes over $50,000 per year, test Walmart’s waters once again and find what they are looking for.

Moving Metrics

If products are out of stock, having the lowest prices doesn’t matter much, but perhaps being in stock isn’t all it’s cracked up to be either. According to Mac Naughton, in the past Walmart “kidded themselves” that assigning a 98.5 percent in-stock metric would get the job done. The problem was that the criteria for “in-stock” was far too loose, and the number of non-shelf possibilities far outnumbered the desired locations, ranging from the back room to hidden behind a pallet. The result? Lost sales. Clearly, playing with percentages wasn’t the answer, so last spring, Walmart changed its in-stock criterion to on-shelf availability (OSA), and erased all the gray areas.

In an uncharacteristic (but realistic) move, Walmart now acknowledges that 100 percent on-shelf availability isn’t just pie-in-the-sky it’s cost-prohibitive, from both labor and infrastructure perspectives. Rather than tacking on its usual high-nineties metrics across the store, Walmart has started assigning on-shelf metrics by category and in some cases, by product. To back up its on-shelf commitment, it has begun to conduct physical audits every week, in every store, on top-selling items. This on-shelf surveillance has helped Walmart achieve 90 percent on-shelf availability across the store over the last 12 weeks, with the number scooting up to 93 percent over the last four.

In Part II, I’ll cover how Walmart is leveraging its souped-up scale and the implications of its multi-format forays. If you want us to ping you when Part II posts and be notified of our retail trajectory updates, simply enter your email address in the subscription box in the right column and you'll be on your way!

Want to know what these and other retail trajectories mean to your total retail strategy? Planning your 2012 sales or marketing meetings and want to kick things off with a beyond-trend presentation on what really matters in retail? Contact Carol Spieckerman directly.