Wal-Mart Moves Upmarket

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

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Last year, Wal-Mart moved its apparel-buying unit from Bentonville to New York City to stay closer to fashion trends. Designer Norma Kamali, who launched an exclusive line of women's clothing with the retailer in September, says she's impressed with the "professionalism" of her Wal-Mart partners. "They know how to service clients and yet are big enough to have the power to sell low prices," says Kamali.

Some suppliers find themselves on the losing end of the chain's attempts to increase its appeal. Analysts estimate Wal-Mart's push to simplify merchandise will reduce the total number of distinct products by up to 15% in remodeled stores. That move has been devastating to vendors such as CCA Industries (CAW), which makes health and beauty products in East Rutherford, N.J., and generated 44% of its fiscal 2008 sales from Wal-Mart. CCA learned earlier this year that Wal-Mart was dropping its Plus+White toothpaste, eliminating a chunk of its Wal-Mart business. (CCA won't say exactly how much.) "There's not much you can say," says CCA analyst Maggie Cornell, who works on the Wal-Mart account.

Vendors who remain may well be asked to do more. A recent JPMorgan Chase (JPM) report says Wal-Mart wants manufacturers to spend more on promotions and ads that appear on the retailer's in-store TV network. "Failure to participate could have meaningful consequences," the report concluded. Paul Boitman, head of the global Wal-Mart team at Atlanta consumer-products maker Newell Rubbermaid, denies being asked to spend more, but another vendor concedes that it's happening. CMO Quinn insists that "any increase [in spending] is because there is value on both sides."

Easier to Complain

With fewer items to restock, employees can, in theory, devote more time to helping customers. To drive home what Wal-Mart calls its "fast, friendly, clean" message, store managers' bonuses are now based partly on scores of customer surveys. Until this year, only profits mattered. The manager's office is being moved to the front of the store from the back, making it easier for customers to register a gripe.

While Wal-Mart reports higher sales, faster inventory turnover, and happier shoppers in remodeled stores, retail experts are divided on whether it will retain higher-end shoppers. "If the recession ended tomorrow, they would lose a lot of them," says Ryan Mathews of Black Monk Consulting, which works with retail clients. "But the longer the recession goes, the smarter Wal-Mart will be about holding on to those customers."

Newcomers such as Sarah E. Bowman appear to be converts. The 39-year-old legal recruiter, who makes about $130,000 a year and lives in Hagerstown, Md., says she used to have "negative feelings" about the world's biggest retailer. In January, to save money, she began grocery shopping at a local outlet. She discovered a dress for her daughter, bathroom items, and even a tungsten wedding band, for $48, to replace the one lost by her husband. "He gets compliments on it," she says, adding she's "only told a few people" where it's from. Asked where she'll shop when the economy rebounds, Bowman replies: "I think I'm going to stick with Wal-Mart."

Boyle is deputy Corporations editor for BusinessWeek.

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