BusinessWeek Logo
Management & Leadership June 3, 2009, 3:51PM EST

Wal-Mart Moves Upmarket

The recession is bringing Wal-Mart affluent shoppers looking for bargains. Can new CEO Duke keep them in a recovery?

http://images.businessweek.com/mz/09/24/600/0924_51duke.jpg

Illustration by Owen Smith; photographic reference by Manan Vatsyayana /AFP/Getty Images

By Matthew Boyle

null

null

Duke wants Wal-Mart to go upscale but maintain its low-price image Beth Hall/Bloomberg News

When he stepped into the chief executive job at Wal-Mart Stores (WMT) in February, Michael T. Duke looked like the luckiest retailer in America. Duke, 59, inherited a rigorously efficient company that rang up $401 billion in sales and $13.4 billion in profits last year. Rivals are struggling to stanch losses while Wal-Mart's U.S. same-store sales grew 5% in April.

Duke, who will make his public debut at the company's annual shareholder meeting on June 5, now must figure out how to keep the momentum going. More than a quarter of Wal-Mart's sales increase has come from new shoppers, more than half of whom have household incomes of at least $50,000. Wal-Mart execs say that higher-income group spends an average of 40% more per visit than the typical shopper. "Wal-Mart is becoming increasingly relevant to a growing proportion of households," says William Blair analyst Mark Miller. As Wal-Mart's U.S. marketing chief Stephen F. Quinn puts it: "We are being reassessed."

Sprucing Up

The question is whether Duke can hold on to that more affluent demographic once the economy improves. Wal-Mart's reputation for humdrum goods and aggressive labor tactics has made it tough for the chain to gain a following among wealthier customers. To help keep them, Duke is expanding the presence of brands such as Dell (DELL) and Apple, putting pressure on manufacturers to advertise more in stores, and aggressively ramping up an initiative called Project Impact.

The effort's goal: to remodel most of the chain's 3,600 U.S. stores (it has 7,900 worldwide) and make them more inviting. Duke is spending $1.6 billion to upgrade 600 stores this year, on top of 300 that were recently redone. He is also continuing a push to reduce the number of items in stores, which means less clutter but less variety for customers. And despite Wal-Mart's growth, he has laid off 800 staff at the Bentonville (Ark.) headquarters and slashed other costs to keep the chain lean.

Such moves suggest Duke is taking a bolder role than expected by industry experts, who paint him as a caretaker CEO. They see his main mission as keeping Wal-Mart steady until execs such as 43-year-old international head C. Douglas McMillon get seasoned. Morgan Stanley (MS) analyst Gregory Melich calls Duke "the keep-it-going" leader.

But insiders say he's taking a big hand in moving Wal-Mart upscale while continuing to emphasize its low-price mantra. Aisles are being widened, lighting improved, and shelves lowered to give the stores a more sophisticated feel. Even the well-trafficked corridor known as "Action Alley" is no longer packed with pallets of random merchandise.

The spruced-up aisles provide a more inviting home for brands that previously had little exposure in Wal-Mart but are now desperate to find customers. Newer offerings range from Danskin apparel to gadgets from Dell, Palm (PALM), and Sony (SNE). Dell Vice-President Michael Tatelman says the two-year-old partnership is expanding fast: "Some were skeptical of whether it would benefit us, but it has." The home department now features brands such as KitchenAid and Dyson, and a new line of products endorsed by celebrity chef Paula Deen.

Executives have learned some lessons from the last time Wal-Mart tried to shift its identity upmarket. In 2006 the chain went after Target's (TGT) "cheap chic" customer by launching Metro7, a line of fancier apparel. Despite a splashy ad campaign, the clothes failed miserably. They simply weren't hip enough to attract a new style of buyer or cheap enough to appeal to the old one.

Reader Discussion

 

BW Mall - Sponsored Links