Walmart, p.3
Walmart, page 3
By the time Walmart opened its doors on 2 July 1962, consumerism was in full force.
03
House of (Walmart) brands
Quality, name-brand merchandise offered at everyday low prices is the merchandising/pricing format around which we have constructed the Wal-Mart store.
(WALMART)
Walmart’s initial merchandising strategy was centred almost entirely on selling national brands. Harvard Business School Professor John A Quelch and Katherine E Jocz define a brand as:
a promise, an assurance of consistent quality from one purchase to the next. Brands make decision-making easier for consumers; instead of inspecting myriad unbranded options at market stalls every time they shop for an item, consumers can conveniently buy the same trusted brand on each purchase occasion. They may pay a little more for the branded item, but the time saved and the peace of mind make the trade-off worthwhile.1
Brands therefore formed an integral part of Walmart’s merchandising strategy. The idea was to give shoppers greater access to these brands in the form of lower prices, bearing in mind that Walmart got its start by opening in rural areas of the United States targeting lower-income shoppers. Many of these smaller towns had been abandoned in the 1960s as retailers followed the millions of – in retailers’ eyes – more lucrative consumers who were moving to the suburbs in pursuit of the American dream. The suburbs soon witnessed the emergence of neon lights, big-box discounters such as Kmart, convenience stores and fast-food chains. Meanwhile, the smaller, more rural areas of America were left neglected as many retailers deemed them insignificant in comparison to the more profitable and densely populated suburbs. This is where Walmart came in.
In his book, Sam Walton describes how small-town commercial centres began to shrivel up:
A lot of our customer base had moved on, and the ones who remained behind weren’t stupid consumers. If they had something big to buy – say a riding lawnmower – they wouldn’t hesitate to drive fifty miles to get it if they thought they could save $100… It was this kind of strong customer demand in the small towns that made it possible for Wal-Mart to get started in the first place, that enabled our stores to thrive immediately, and that eventually made it possible to spread the idea pretty much all over the country.2
Selling for less, buying for less
Low prices, a wide assortment of popular brands and to a certain degree limited competition were Walmart’s initial recipe for success. In that respect, not a whole lot has changed over the past 50 years. Walmart eventually expanded beyond Northwest Arkansas to more established markets with fiercer competition. But that didn’t prove to be a problem; in fact Walmart’s winning formula of offering extreme value on popular brands resulted in a number of companies filing for bankruptcy protection or going out of business altogether, particularly when they began selling groceries, as we will discuss later in the chapter.
Its massive scale has enabled Walmart to shift the power successfully from the hands of manufacturers to the hands of consumers. It has become the advocate for the consumer in the form of offering low prices for nationally branded goods. And this is something that has been happening for quite some time:
When we opened Wal-Mart No. 3 in Springdale, Sam wanted a red-hot price on anti-freeze. So he got two or three truckloads of Prestone and priced it as $1.00 a gallon. Then he priced Crest toothpaste at 27 cents a tube. Well, we had people come from as far as Tulsa to buy toothpaste and anti-freeze. The crowd was so big that the fire department made us open the doors for five minutes, then lock them until shoppers left. (Clarence Leis, one of Walmart’s first store managers3)
Walmart’s former motto, ‘We sell for less… always’, would perhaps have been more accurate if it read: ‘We sell for less because we buy for less… always’. Walmart was then and is now able to offer such deep discounts on national brands thanks to its ruthless efficiency and cost-cutting measures. Walmart has stripped out middlemen, eliminated redundancies, reduced packaging, invested in technology, consolidated buying and pressurized suppliers, all in the name of offering nationally branded items at a low price. These brands already stood for quality, so selling them cheaper than the competition allowed Walmart to gain market share as a discount retailer without the worry of its customers questioning product quality.
In his book, The Wal-Mart Way, Don Soderquist, former Senior Vice Chairman and Chief Operating officer (COO) at Walmart, writes:
Wal-Mart has been, and most likely will remain, a retailer that supports national and international brand merchandise. In the minds of many consumers, brands are synonymous with quality. Therefore, our strategy was to offer primarily name brands at everyday low discount prices, thereby providing our customers with genuine value and with a direct comparison to our competitors.4
Brand dilution makes private label more attractive
Today, national brands remain a vital component of Walmart’s merchandising strategy. However, the distinction held by these brands has become diluted in today’s prolific retail environment. National brands can now be bought across a wide spectrum of retailers, channels and geographies and therefore they no longer drive loyalty to a particular bricks-and-mortar retailer. Well ahead of his time, Victor Lebow recognized the need for merchandising differentiation back in the 1950s, a time when national brands ruled the roost. In 1955, Lebow wrote:
Quite a few studies have shown that a large proportion of shoppers, when questioned, cannot tell which of several competing variety chain stores, or supermarkets, they have just left. But this sameness of their merchandise, in stores that look like twins, provides the opportunity for different merchandise in stores that look different, individual, with a character of their own.5
Today, such brand dilution, in food categories particularly, is even more evident as alternative retailers look to cash in on selling grocery products. For example, leading US drugstore chains Walgreens, CVS and Rite Aid are all adding fresh foods to their assortment in a bid to cash in on their extensive geographic reach, a topic we will discuss in further detail later in this book. Meanwhile, Target is looking to replicate Walmart’s success by transitioning away from being a pure mass discounter and adding perishable groceries to its mix. Its Pfresh format, which features a 50 to 200 per cent increase in food, is being rolled out across hundreds of stores nationwide. From a shopper’s perspective, pricing of national brands is becoming ever more transparent and there is of course the convenience factor as shoppers no longer need to make a special trip to Kroger to pick up their Tropicana orange juice or Yoplait yogurt. From a retailer’s perspective, such channel blurring in the food, drug and mass sector puts pressure on pricing and further commoditizes brands, reinforcing the need to differentiate through exclusive, private label items.6
This is not to say that consumers don’t want brands. In fact, according to Interbrand’s 2010 ranking of the most valuable global brands, nine out of the top ten are US-based, proof that brand affinity is still very much alive and well among US consumers.7 The quickest way to confirm this is by taking those brands off your shelves. Walmart’s attempt to rationalize its assortment, although clearly effective in terms of reducing inventory and labour costs, was by no means the smoothest of the company’s initiatives. We will discuss this topic in further detail in the next chapter, but the general idea was to cull those secondary and tertiary brands that were collecting dust on the shelves and costing Walmart money in the process. In addition to improving profitability, rationalizing stock-keeping units (SKUs) would free up employee time to do more customer-facing tasks, as opposed to restocking shelves, create more visibility for private label (more on that to come) and simplify the shopping experience. Surely it must be a win–win, provided you’re not that tertiary peanut butter brand.
However, Walmart got it wrong here. They soon found out that even though Brand Y wasn’t a top seller, it was still an important item to an important shopper. The result? Some of Walmart’s most loyal and profitable customers took their entire shopping basket to competitors where they perhaps paid a little bit more, but at least they found what they were after. In financial terms, the elimination of a slow-moving $1 item could result in the loss of a shopping basket worth $60–80. Walmart has since added back nearly 9,000 of those items that were originally delisted. Its top two priorities are now restoring Everyday Low Prices (EDLP) and offering the ‘broadest assortment possible’8 – clearly quite a contrast to its original goal of range culling:
The running joke used to be if we didn’t have it you didn’t need it. And all too often what we were finding was people came with 20 items on their list and left with 16 in recent years and that’s not who we are.’
(Bill Simon)9
Despite initial setbacks, Walmart persevered with its SKU rationalization efforts in a bid to strip out inefficiencies and improve the shopping experience. Like the barcode scanner and various other industry-changing initiatives, Walmart looked to do business in a more efficient way, so much so in fact that others would follow suit, thereby improving the overall health of the industry.
In his book The Wal-Mart Effect, Charles Fishman describes a similar situation where Walmart’s ruthless drive for efficiency resulted in improvements in the greater sector. In the early 1990s, deodorant was packaged in a cardboard box. Despite being the norm among consumers, Walmart saw this as an unnecessary cost. Fishman writes:
[The box] added nothing to the customer’s deodorant experience. The product already came in a can or a plastic container that was at least as tough as the box, if not tougher. The box took up shelf space. It wasted cardboard. Shipping the weight of the cardboard wasted fuel. The box itself cost money to design, to produce – it even cost money to put the deodorant inside the box, just so the customer could take it out.10
Needless to say, Walmart went back to its suppliers and asked that they begin selling deodorant without the box. Doing so, according to Fishman, saved about five cents for each product sold, which enabled Walmart to pass the savings on to manufacturers and, more importantly, customers. The move had a knock-on effect within the industry as suppliers and other retailers recognized the cost savings, and it soon became the normal way in which customers purchased deodorant.
Shifting away from national brands
As we have already touched on, brands today are struggling to retain their influence over shoppers. A combination of media fragmentation and retail consolidation has resulted in a shift in power away from the brand manufacturers. Gone are the glory days when a brand had a captive audience by advertising on one of the United States’ three TV networks. Gone are the glory days when a new product launch was a guaranteed success. Today, consumers are savvy and empowered. Product and pricing information is at their fingertips, and in a time of economic uncertainty many have begun to question the premium paid for a branded product. At the same time, retailers have merged, expanded and evolved, resulting in greater buying power when dealing with their suppliers. Retailers have transitioned beyond the physical box that sells the goods, and are now viewed as the gatekeeper to shoppers. They decide what products make it onto their shelves, and which ones should be delisted. They control the messaging both in the store and increasingly out of the store through loyalty schemes and social media. But what is perhaps most worrying for brands in today’s era of retailing is the fact that their retail customers are increasingly becoming the competition. Today, private label is a key strategic focus for virtually all US grocery retailers.
Walmart’s endless strive for efficiency has enabled them to undercut rivals with national brands. The idea sounds so simple now, but it’s important to remember that when Walmart began, retailing was a hugely inefficient industry and many companies included phenomenal mark-ups in their prices. Nevertheless, Walmart recognized that low prices resulted in volume. And volume made up for the margin investment. Of course, none of this would have happened if the right merchandise wasn’t on the shelves, and this is an area to which Sam Walton dedicated his entire life. ‘There hasn’t been a day in my adult life when I haven’t spent some time thinking about merchandising’, he writes in his autobiography.11
Merchant roots
Walmart certainly gets a lot of media attention for being the world’s largest retailer. For its cut-throat distribution, for embracing technology, squeezing suppliers and attempting to open stores from Brooklyn to Johannesburg. Where Walmart doesn’t get enough credit is in its merchandising, particularly in the early days when Walton himself scoured the country looking for hot bargains which we knew would fly off the shelves. As David Glass said: ‘… your stores are full of items that can explode into big volume and big profits if you are just smart enough to identify them and take the trouble to promote them’.12
Today, Walmart’s principle of retailing is still very much centred on offering those popular brands at the lowest possible price. Of course, there is one major difference today – Walmart’s own private labels are now included in the mix. Despite a growing focus on private label over the past couple of decades, Walmart has vehemently defended itself as a ‘house of brands’.
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The basis of our business is still built upon and will continue to be built on national brands. They will continue to be the base of all our operations. There’s a danger of overemphasizing private label.
(1993, then Vice Chairman Don Soderquist)13
We are a brand-oriented company first. We became the largest retailer in the world by offering quality, well-known brands at everyday low prices. But we also use private labels to fill a value or pricing void that, for whatever reason, the brands have left behind.
(2000, Bob Connolly, then Executive Vice President (EVP) of Merchandising)14
We’ve always been a house of brands – it used to say ‘brands for less’ on the side of the building – and we believe selling national-branded product is a very important driver that communicates value to our customer.
(2009, Bill Simon)15
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That may be so, but there is no denying that private label has become an essential ingredient in Walmart’s merchandising strategy. In North America, Walmart’s private label grocery items generate revenues in excess of $30 billion.16 Sales of the Great Value line alone in the United States reached $12.5 billion in 2009, making it the country’s largest food brand in terms of both sales and volume.17 As a percentage of overall sales, food private label remains quite low at 16 per cent; however, if we factor in general merchandise, approximately 35–40 per cent of Walmart’s sales come from private label products.18 A house of brands Walmart may be, but only if we are including their own brands.
Don’t spend a penny on marketing
When it came to developing private label, a senior Walmart executive confirmed that there was a fair degree of resistance from the top in the early days. ‘Obviously, national brands spent a lot of money on marketing and innovation, and you always had to show your value relationship.’ But back in the early 1980s, a significant change took place that would open Walmart’s eyes to the lucrative world of private labelling.
At the time, the pet food sector was fragmented and lacked a national brand. Walmart saw this as an opportunity to launch its first major private label line. Named after Sam Walton’s hunting dog, the Ol’ Roy dog food line was designed to fill the gap for an opening price point, while still placing an emphasis on quality. So how could Walmart create a private label that was equal to, or better than, comparable national brands in terms of quality while undercutting them on price? The answer was simple: there would be no marketing budget, no television commercials, no circulars. All the marketing needed would take place at the shelf and, considering that there are quite a lot of Walmart shelves across the country, this wouldn’t be an issue. Walmart’s scale, combined with its focus on quality and price, enabled Ol’ Roy to surpass Nestlé’s Purina to become the number-one-selling dog food brand in the United States.
It’s no surprise then to learn that the US operations of Doane Pet Care, the company which manufactured the Ol’ Roy line for Walmart, were acquired by Mars in 2006. Mars, of course, is the parent company of Pedigree, a brand that competed with Ol’ Roy since its launch in the early 1980s. At the time of acquisition, Bob Gamgort, former North American president for Mars, commented: ‘The acquisition of Doane by Mars is an important part of our strategy to strengthen and grow our pet care business in North America.’19 In other words, if you can’t beat ’em, you might as well join ‘em.
Driving loyalty with exclusive products
The success of Ol’ Roy showed Walmart that shoppers would view private label as a brand in its own right, provided the quality was there. In fact, good-quality private label actually drives shopper loyalty and differentiates retailers from competitors. In its 2000 annual report, referring to its successful Equate health and beauty care line, Walmart notes that ‘the products are so popular, in fact, that suppliers get letters from customers asking why they can’t buy Equate [private label] products at other retail chains’.
Exclusivity is becoming more and more important in today’s competitive retail market. However, that is not the only incentive for launching private label – in the majority of cases, stocking private label is far more profitable than stocking national brands. As mentioned, the lack of marketing expenditure allows for increased investment based either on price or on margin. For many grocery retailers, the investment is primarily based on profit margin. In other words, they price their products based on what the market will bear, whereas Walmart, owing to its focus on offering everyday low prices, aims to sell private label for as low as it possibly can. That is not to say that private label isn’t profitable for Walmart. In fact, a senior Walmart executive confirmed that while private label is sometimes used as a loss leader among other grocery operators, at the very worst it is used to break even at Walmart and in many cases it is a profit-generating tool. For example, the Equate line is 40 per cent more profitable than national brands, while dry grocery private label items are between 10 and 15 per cent more profitable than leading national brands. Let’s not forget that price/margin investment is always made up for in volume at Walmart. It all goes back to scale.
