Wal-Mart Redux: A Turnaround To Make Sam Proud

About a century after Marshall Field coined the phrase “Give the lady what she wants,” one of the legendary merchant’s spiritual descendants, Sam Walton, founded the discount retail chain that did just that—by providing customers with quality merchandise at exceptionally good prices. But starting around the beginning of this century, Wal-Mart strayed from its roots, losing focus on its customer and why she shopped its stores. Consequently, the retailer started losing customers to competitors ranging from Costco and Kohl’s, to Target and TJX.

But in the waning days of 2006, Wal-Mart began a turnaround whose full dimensions are only now becoming apparent, a turnaround that may well rank as the greatest in retail history, particularly since turning around a global 7,000-unit store fleet is no mean feat. Doing so in one year—although soft lines and Seiyu still need improvement—is remarkable enough to make Sam very proud. Today, despite challenging economic conditions, Wal-Mart is expanding share in the United States overall, and in key merchandise categories. It also is thriving internationally and innovating across multiple fronts—even as it generates more cash than any retail or consumer company in the world. At the same time, although the giant retailer still suffers from less-than-astute public relations, it is making strides even on these “softer” aspects of business.

What is responsible for these dramatic changes since 2006? In a word, management. Eduardo Castro-Wright, formerly a senior international line executive with Honeywell and Nabisco, was promoted from CEO of Wal-Mart de Mexico to CEO of the Wal-Mart Stores Division (U.S.) in late 2005. A year later, he and his boss Lee Scott began to reshape their management ranks, appointing a new chief marketing officer, a new chief merchandising officer and a host of other senior-management positions, often with executives from outside of Wal-Mart and outside of retail. The results of the moves—including vesting the executives with the authority to make changes contrary to Wal-Mart’s prevailing cultural norms—have been stunning.

Service matters: For many years, Wal-Mart had relied on “Always Low Prices” to be enough to build and retain customer traffic. But in an era when the lure of low prices was no longer unique—witness the growth of competitors, Costco, Ross, Target and TJX—discounts were no longer enough—particularly when combined with indifferent, and too often non-existent, service. An improved customer experience is a key differentiator, as Wal-Mart has shown in recent months with dramatically enhanced customer service compared to Target, which, like many other retailers, has cut back on labor hours to keep SG&A in line as sales softened. But savvy retailers know that superior service yields superior results, and that they can expand market share during economic times by investing in excellent customer experience. Wal-Mart is even beginning to follow Fields’ other motto: “The customer is always right.”

Sharp merchandise: Wal-Mart has revamped its merchandising team over the past year, moving John Fleming into the chief merchant role and bringing in a number of new merchants, including in key categories—such as foods—where it recruited Jack Sinclair, formerly with Tesco and Safeway in the United Kingdom, to head up U.S. Grocery. Wal-Mart is the world’s largest grocer, rivaled only by Tesco, and groceries now account for almost 33% of its sales.

In other moves, it has expanded its New York design center to jump-start apparel, which is showing some signs of revival, albeit from a position that still lags behind both Target and Kohl’s. And Wal-Mart has sharply upgraded its consumer-electronics offerings, becoming a strong No. 2 to Best Buy, and expanded its offerings to include Dell computers. It ranks as the world’s leading seller of entertainment media.

Marketing matters: After the 2006 turmoil in its senior marketing ranks, including the noisy departure of a senior marketing executive and the related selection and then deselection of a new advertising agency, Wal-Mart promoted Stephen Quinn, formerly CMO of Frito-Lay, as its new chief marketing officer in January 2007. Quinn, who had headed up Wal-Mart’s Consumer Insights, moved quickly to develop and implement a new marketing and advertising strategy, with the assistance of Interpublic’s Martin Agency, which has now been on board a full year.

The strategy, linked closely with the new merchandising and in-store service initiatives, made its first appearance shortly after Labor Day—about the same time that Wal-Mart began to leap-frog Target after the many years that WalMart’s growth lagged behind that of its smaller rivals. As a result of the coordinated media advertising and sharp in-store merchandising programs, Wal-Mart enjoyed a stellar holiday and fourth quarter—except for soft lines—outpacing both Target and most other mass-market retailers and continued to outgrow them as 2008 got under way.

Customer-focused strategy: WalMart’s dramatically improved momentum is not simply the result of its new tagline—good as “Save More/Live Better” may be. In fact, Wal-Mart has taken a leaf out of Best Buy’s “Customer Centricity” book—its top competitor in the highly competitive electronics category—to fully reinvent itself, around the customer, over the last year. But despite the stem-to-stern transformation, Wal-Mart, like the Queen Mary II, has a big turning radius, so the reinvention is still a work-in-progress. Wal-Mart is getting nimbler, however, as seen in its newly announced Marketside small-footprint store, slated to open this spring in Phoenix to counter Tesco’s Fresh & Easy format—which features a value proposition designed around the customer’s need for speed, convenience and fresh, high-quality food in a “green” format.

Also, in a sign that Wal-Mart is beginning to leverage its global reach, it borrowed from one of Wal-Mart de Mexico’s pre-existing smaller-format stores to create Marketside on a “rapid response” basis vs. the slow-moving old Wal-Mart.

Global growth: In another sign that Wal-Mart is fully leveraging its international skills, Wal-Mart recently reached into Brazil to help build Asia—and to fix Japan. In January it named Vicente Trius, CEO of fast-growing and very successful Wal-Mart Brazil, as the new CEO of Wal-Mart Asia, with a charter to expand Wal-Mart’s decade-long presence in China, develop India with the Bharti joint venture—and fix a troubled Seiyu in Japan. The challenging turnaround at Seiyu, in a country where low prices as the sole selling point is “lost in translation,” has been made more difficult by Wal-Mart’s insistence on managing the company with a Bentonville-bred executive rather than with a Japanese executive—a model more successful American entrants, such as McDonald’s, have relied on.

Elsewhere, from a fast-growing Asda in the United Kingdom, to operations in the Americas from Canada to Argentina, Wal-Mart International has given Wal-Mart the headroom for growth it lacks in the United States, and WMI has delivered, with out-sized growth in both revenues and operating earnings.

New initiatives: Although not as widely known as its $4 generics prescription program, Wal-Mart has developed a variety of other customer-oriented initiatives—all designed to deliver on the “Save More/Live Better” promise. Wal-Mart in short order has become the world’s largest seller of energy-efficient CFL light bulbs, each estimated to save more than $31 per bulb over its lifetime. It is believed to be the world’s largest seller of organic cotton pajamas—at low prices, of course. And despite the opposition of banks that don’t want to compete against its low fees, Wal-Mart is bringing its savings promise to the world of money transactions.

Wal-Mart Financial Services has dramatically expanded over the past year, offering low-cost money transfers, reloadable prepaid money cards (with Visa), and low-cost if not free check cashing—all intended to save money for the more than 70 million “unbanked” or underbanked Americans, particularly “new” Americans and recent immigrants.

Financial results: Wal-Mart’s growth in market share domestically, and its rapid expansion internationally, has also translated into sound financial results, particularly so in light of the sluggish U.S. economy. Although not highly appreciated in recent years on Wall Street, Wal-Mart is an exceptionally profitable retailer given its size and scope of merchandise offerings, now over 40% in slow-growth food and consumables.

In terms of Customer Growth Partners “TOP” (True Operating Productivity) metric, Wal-Mart maintained a level of almost $32 in operating earnings per square foot in 2007, an exceptional level for a mass merchant, well outpacing Target, and not too far below luxury retailer Nordstrom (see chart above). Both worldwide and in the United States, it increased gross margin by 50 to 60 basis points. And in terms of cash flow, Wal-Mart generated more than $20 billion in operating cash flow in 2007, far more than any retailer, and topping even the largest consumer companies, whether Nestle ($16 billion) or Procter & Gamble ($13 billion).

Not your mother’s Wal-Mart: Lastly, Wal-Mart has reinvented itself over the past two years in a host of other ways, both well-known and some less recognized. It has sharply improved its employee health benefits—and is by far the largest private employer in the world, with 1.9 million associates worldwide. In cities where city councils and labor unions join forces to keep Wal-Mart Superstores from opening, many thousands show up to apply for one of the 450-plus job openings whenever a new location is announced.

It has become a leader on the environmental-sustainability front and, perhaps most poignantly, Wal-Mart has become in many ways today’s Ellis Island, where new Americans learn how to become Americans—where they first learn how to write or cash a check, use a debit or credit card, get their first formal jobs (with a Social Security number), learn how to speak English, understand the complexities of our consumer culture and learn how to shop—and spot a discount, of course.

In short, Wal-Mart is in the midst of an exceptional transformation, rivaled only by Sears, Roebuck’s great expansion into suburban American post-World War II to create the premier modern department store chain concept. But in many ways, the transformation marks a back-to-basics return to the central value proposition Sam Walton created more than 40 years ago, updated for today’s global consumer and now translated into Save Money/Live Better. The big question is whether the transformation will yield sustained financial results in light of stepped-up competition—from smaller and still nimbler domestic competitors, savvy global rival Tesco or other retailers on the horizon. The answer still remains to be seen.