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Wal-Mart Wins Big During Downturn


The retailer was reeling from overexpansion and tough competition. Now it's stressing bargains and pulling in crowds

These are heady times for Wal-Mart (WMT). The Bentonville (Ark.) retailer has been enjoying double-digit profit growth and strong sales as bargain hunters crowd its aisles. Its stock is up about 20% since the start of the year. And shoppers like Sal Garcia of Downey, Calif., are joining the growing ranks of loyal customers. "Look," says Garcia, 52, putting the last of 10 shopping bags into the trunk of his Lexus, "all that for $54!"

Wal-Mart's turn in fortunes has as much to do with a shift in strategy as with the economic downturn. After years of stuffing a wider array of products into stores to broaden its appeal, the $375 billion mass merchant is simplifying its look and drilling down prices of its most popular products. "You'd swear the only reason they're having any success is the economy and customers trading down," says analyst Daniel T. Binder of Jefferies & Co. "But the company has done a lot to help the consumer make that decision."

A little over a year ago, the world's largest retailer was suffering from a midlife crisis made worse by overdevelopment and a costly push to take on Target (TGT) with "cheap chic" offerings. Core customers were confused by an ever-changing mix of products, while higher-end shoppers dismissed Wal-Mart as the epitome of uncool.

Now, the main thrust of Wal-Mart's strategy is what Chief Merchandising Officer John Fleming calls "win, play, or show." "Win" categories are those where Wal-Mart can outmaneuver rivals with low prices on hot products such as flat-screen TVs, including higher-end models. Wal-Mart has doubled its share of the industry's sales to 16% this year, according to market research firm TraQline, while increasing its average sale from $489 two years ago to $660. "Play" applies to areas like apparel where Wal-Mart can be a player but is unlikely to dominate. Here, it's reducing the range of offerings to hot sellers like $20 L.e.i. jeans and cutting back on higher-end items. "Show" are the one-stop-shopping essentials such as hardware, which are necessary to compete with the likes of Lowe's (LOW) and Home Depot (HD). "It's important we have hammers and tape measures," says Fleming, "but not 28 tape measures."

But the big focus for Wal-Mart every holiday season is toys. Rivals have long dreaded the annual slashing of prices in its toy aisle before Christmas. This year, instead of cutting prices by its usual 30%-plus across the board, Wal-Mart is trying to drive traffic by emphasizing a deeply discounted $10 price on a handful of toys—including Barbie and Hot Wheels.

At the same time, Wal-Mart has tried to upgrade the feel of its stores. Crammed blue and gray stores are giving way to more open sales floors with warmer earth tones of mustard, tan, and green. Apparel departments boast wood flooring, while skylights brighten stores more naturally and save energy. It's curbing expansion in an effort to stop new locations from cannibalizing sales at old ones. From opening 218 new U.S. stores in fiscal 2008, Wal-Mart may open just 142 next year with an emphasis on smaller, more intimate locations.

To consumers like Mary Washington of Los Angeles, though, size matters less than price. Washington, 67, heads to Wal-Mart every Monday for the food and $4 generic prescriptions. "Even if it's just pennies," she says, "it all adds up."

For more on Wal-Mart's recession strategy, watch a video report at businessweek.com/go/tv/walmart

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.

Later, Baby
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