Wal-Mart: Fashioning a New Growth Track

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Overseas Misfires

But time and again, Wal-Mart has found that its formula for success—high volumes of cheap goods—doesn't work everywhere. In 2006, it sold its stores in Germany and South Korea after failing to excite shoppers there with its deal-driven approach. And just last week, its Japanese unit, Seiyu, posted a loss of 20.9 billion yen, or $195.5 million, for the year ended Dec. 31. That's twice the 10.5 billion yen loss the company had forecast.

Japanese shoppers initially rejected Seiyu's cheap goods, equating low prices with low quality. Then they eschewed even the higher-end goods the store began offering later in the year. So Seiyu ended up discounting too much, which ate into profit margins. The store said one of its weakest areas was clothing.

Apparel has been a sore spot for Wal-Mart domestically, too. The share of sales from that category, plus home goods, has dropped from 20% in 1990 to less than 15%, or $56 billion, today. The company's most recent foray into fashion ended as a huge embarrassment: Two years ago it bought multipage ad spreads in fashion bible Vogue and sponsored a fashion show at New York's Times Square during Fashion Week. The chain tried to redefine its stores as a mecca for fashion, with narrow-leg jeans and trendy outfits sold under the Metro 7 label. Bewildered Wal-Mart shoppers completely rejected the items, and thousands of stores were left holding unsold apparel. As inventory piled up, Wal-Mart let go of Executive Vice-President Claire Watts, who had led the effort.

Apparel Strategies Hampered by Marketing Flaws

Despite all these problems, Wal-Mart is hell-bent on figuring out an apparel strategy. Just last month it revamped its clothing unit, laying off several people at its Bentonville (Ark.) headquarters and moving several of its employees to New York under Dottie Mattison, who last year replaced Watts as chief of apparel, shoes, and jewelry. In New York, the apparel group will be more aggressive about quickly getting trendy items into stores to better compete with other low-priced rivals like Target (TGT) and H&M. A much smaller group in Bentonville will be in charge of number-crunching tasks like making sure the right assortment of goods is sent out to locations nationwide and replenished on time.

Wal-Mart is attracted to apparel because, if done right, clothing can deliver gross profit margins of 45% to 50% or more, compared with the lower 20% margins that Wal-Mart ekes out from most of the household staples it sells, including consumer electronics, says David Abella, portfolio manager at Rochdale Investments, a fund with $2.5 billion in assets, including Wal-Mart shares. "Even a basic $5 T-shirt has as much as a 35% margin," says Abella. But he says fashion apparel is a harder sell than, say, a big-screen TV because it comes with the baggage of snob appeal. "For the simple reason that even people on the low-income end don't want to be out in public with something they got at Wal-Mart," he says.

Other discount retailers have succeeded where Wal-Mart hasn't. Target, for instance, is a destination for cheap chic clothing from top designers. Apparel makes up 22%, and home furnishings, 19% of Target's overall sales. At Wal-Mart, apparel makes up only an estimated 10% of sales, say some retail experts. They believe the giant could double that with a smarter approach. Flickinger believes that besides spending more on marketing, the company should look for celebrities who better connect with today's consumers. "With the right choices of assortment, Wal-Mart can add as much as $75 billion in sales," he says.