What's With Wal-Mart's Sales Woes?

Is it the discount feel? The try for trendy? The bad union rep? On Nov. 30 the No. 1 retailer may explain its first key sales dip in a decade

by Pallavi Gogoi

All eyes are on Wal-Mart Stores (WMT) and what explanation the world's largest retailer will provide for its slipups on Thursday, Nov. 30, when it reports its final monthly sales numbers.

And with good reason. The whole stock market took a hit on Nov. 27 after the Bentonville (Ark.) company warned that its November same-store sales will drop 0.1%, the first such decline in 10 years. A key retail metric, same-store—or comparable—sales, are those of units open at least one year. As the largest retailer, Wal-Mart is viewed as a bellwether for consumer spending, which makes up two-thirds of all economic activity. But Wal-Mart's problems may well be the product of its own business strategies. One of these was launching a line of trendy apparel in its Metro 7 line, which backfired and scared away core customers (see BusinessWeek.com, 11/14/06, "Wal-Mart Back to the Basics").

Goldman Sachs (GS) analyst Adrienne Shapira notes that Wal-Mart had been remodeling its stores through mid-November, which might have had a negative impact. Still, Wal-Mart rolled out some of its deepest discounts in recent years on toys, electronics, and home appliances in the hopes of appealing to its core customers, who look for value. Yet shoppers spurned the discounter. As Shapira notes in her report: "A negative handle is never a good way to kick off the season."

Fending Off Critics

One question on the minds of some retail experts: Is Wal-Mart's reputation hurting sales? After all, last year consulting firm McKinsey & Co. found that 2% to 8% of the company's customers have stopped shopping there "because of negative press they have heard." And that was before the negative publicity campaigns by two of its most vociferous opponents—union-funded groups Wal-Mart Watch and WakeUpWalmart.com. This year both groups have ramped up their attacks on Wal-Mart, calling on the company to provide a "living wage and affordable health care" for employees (see BusinessWeek.com, 10/31/06, "Wal-Mart: A Reputation Crisis").

Wal-Mart didn't comment for this article. In the past, company officials have responded to critics by saying that its workers are paid more than the minimum wage and that it offers inexpensive health plans, in some cases for as little as $11 a month. The retailer also says it acts as an ally of the middle class and poor by providing a broad array of goods at affordable prices. "We continue to create jobs, advance careers, and enhance communities across this country," said Chief Executive Lee Scott in the third-quarter earnings call on Nov. 14.

Still, Wal-Mart has struggled to keep negative headlines out of the news. Last month, Senator Barack Obama (D-Ill.) and former Democratic Vice-Presidential candidate Senator John Edwards teamed up with WakeUpWalmart.com to call on the retailer to become a better employer. Those calls officially launched a six-week campaign titled "Hope for the Holidays," in which the watchdog group plans to build public pressure on Wal-Mart to change what the group calls the discounter's "anti-family business practices with its strict attendance policies and its salary caps" (see BusinessWeek.com, 11/16/06, "See Can Barack Wake Up Wal-Mart?").

It's the Ambience, Stupid

Today, some say that the negative sales for November might be the first sign of public backlash. "Wal-Mart's brand has become very fragile," says James Gregory, chief executive of CoreBrand, a global brand-management consultancy in Stamford, Conn. Gregory says that Wal-Mart hasn't managed its brand as well as other discounters and cites Target (TGT), which gives the impression of being chic. "The Target store experience is that you don't feel like it's a discount store, but Wal-Mart stores actually feel that way," says Gregory.

Indeed, this year customers seem to be going more for pleasant ambience than discounts. Tricia Ehrlich, a Setauket (N.Y.) mother of three who owns an online boutique, says that she doesn't go to Wal-Mart because it doesn't have an acceptable shopping environment. "Wal-Mart is schlocky. It's like you're in a big flea market," says Ehrlich, whose home is on Long Island. Clearly, the toy discounts at Wal-Mart didn't reel her in. Target, on the other hand, seems to be doing quite well. Like Wal-Mart and other retailers, Target will release its monthly sales figures on Nov. 30, but Goldman's Shapira expects a 7% increase in Target's same-store sales, according to a preliminary traffic report the analyst compiled.

Gogoi is a reporter for BusinessWeek Online in New York.