Wal-Mart: Back to Basics for the Holidays

The No. 1 retailer refocuses on deep discounting after its up-market strategy led to a disappointing third quarter

by Pallavi Gogoi

This year, Wal-Mart Stores (WMT) has tried to woo upscale shoppers with high-end organic food, sexy flat-panel TVs, and fashionable apparel from its new Metro 7 line.

But the challenges of the up-market strategy became apparent on Nov. 14, as the world's largest retailer reported financial results for the third quarter. Revenues increased 12% for the period, to $83.54 billion, falling short of Wall Street's forecasts, for $84.48 billion. Meanwhile, net income rose 11.5%, to $2.65 billion, at the high end of Wall Street expectations. Sales at stores open more than a year, a common benchmark for success in the retail sector, rose just 1.5%, missing Wal-Mart's own original forecast for a 2% to 4% gain.

Better Tailoring

Some retailing experts say the results underscore the risks of the company's high-end strategy. They say upscale shoppers may not be impressed by Wal-Mart's new offerings, while the core low-income buyer may end up bewildered by things like fashion-forward apparel. "Wal-Mart frightened off its core customers," says Wendy Liebmann, president of market researcher WSL Strategic Retail. "They come in for the everyday low prices and, seeing these upscale offerings, they got very nervous."

Wal-Mart executives concede that they've made some missteps. In the company's conference call to discuss earnings on Nov. 14, John Menzer, vice-chairman, said the rollout of the Metro 7 line did contribute to the disappointing results. "We expanded Metro 7 beyond what now appears to be the right segmentation," says Menzer.

Wal-Mart isn't repudiating its move up-market—far from it. Company spokeswoman Mona Williams says that the company has learned from the Metro 7 initiative and will now fine-tune the strategy to increase its chances of success in the future. "We will play close attention to the demographics of individual neighborhoods and we will be more focused than ever at tailoring our products to the needs of individual communities," she says.

Holiday Opportunity

Nevertheless, Wal-Mart looks as if it's going back to basics for this holiday season. Even before Thanksgiving, when the official holiday shopping kicks off, Wal-Mart has announced a blitz of deep discounts on more than 100 toys, 100 electronic items, and at least 50 home appliances. And, there's more to come. CEO H. Lee Scott said on a prerecorded earnings call: "This season, no one will doubt Wal-Mart's leadership on price and value." (See BusinessWeek.com, 11/14/06, "Wal-Mart: We'll Lead on Price" and "Holiday Hysteria.")