You can expect an increasingly aggressive private label program, tighter category SKU controls and more focus on “Save Money, Live Better” from Wal-Mart in the year ahead.

The company has fared better than most in these tough economic times, with higher-income shoppers trolling the stores more often as the Bentonville, Ark.-based powerhouse capitalizes on its powerful new slogan.

We spoke with a cross-section of competitors, vendors and consultants for this story, and included comments made by Wal-Mart executives themselves in conference calls with securities analysts. Wal-Mart did not respond to our request for an interview.

Big Plans for Private Brands

Hang onto your hat. Wal-Mart has significant plans for its private label program, with the unveiling of its redesigned Great Value line expected any day now.

According to Andrea Thomas, the company’s senior vp of private brands, “We’re building from a position of strength. Great Value is the largest brand at Wal-Mart. It plays across more than 100 categories, making it the largest food brand in the country. In this economically challenging environment, we have seen our customers turn to us even more this year. We have plans to make this brand even stronger with improved value and quality.”

Brand Billboard

“The packaging is being redesigned to improve our communication of the brand. The new design has a much better brand billboard and much more appetizing food photography. We aren’t just dressing up the outside, we have also worked hard on what we are putting on the inside. We have tested over 5,500 products against the national brands and we are in the process of reformulating 1,200 items,” she says.

Thomas notes that the new packaging will have much more visible product guarantees, adding that “We’ll have a professionally staffed 1-800 number, along with online product support. We’ve also recently staffed the team to focus on gaining efficiency across the supply chain. They are looking at logistics, raw ingredients, and packaging to find cost savings that will be invested into price leadership and brand building.”

According to Information Resources, Inc., the Chicago-based market research firm, private label accounts for 17.6% of dollars and 22.5% of units at Wal-Mart. One securities analyst — Deborah Weinswig of Citigroup — has been quoted as saying that private label might skyrocket to 40% of dollars at Wal-Mart within the next three years. She figures that if Wal-Mart carries the top three branded products in a given category, it could substitute one of them with its own brand.

We think the 40% number is too high. After all, Wal-Mart already follows this strategy in many categories. And, beyond that, many shoppers go to Wal-Mart precisely because it carries so many well-known national brands — at the lowest price. We expect a surge in private label by Wal-Mart, but would expect it to go no higher than 30% dollar penetration in three years. Beyond that, and it risks damaging a perceived core competency.

Back in October, Wal-Mart and more than 500 private label suppliers began using a program from Agentrics, Chicago, to support the re-branding of Great Value. The program, called “Wal-Mart ASPECT” across the retailer’s network, features a Web-based, collaborative, end-to-end work process, database and production environment to drive speed, innovation and consistency across the product lifecycle. You can read more about it in a press release at www.agentrics.com.

Fewer SKUs = More Sales!

For some time now, Wal-Mart has been going through a SKU rationalization program that has helped sales dramatically says John Fleming, exec vp and chief merchandising officer. The initiative was spurred in part by an industry study showing that shoppers believed Target had better variety, even though Wal-Mart believed its own stores should have been the clear winners. In retrospect, Fleming believes Target got the credit for more variety because it more clearly presented choices in categories.

So Wal-Mart went deep on benchmarking its competition to understand where the product range started and stopped within a given category. Then it worked to achieve a clear offering — paring down to the right number of SKUs so that categories weren’t diluted and fuzzy. With SKUs cut by 10% to 50%, Wal-Mart has been able to achieve higher sales. Fleming says he hasn’t yet seen departments that have lost sales from SKU cuts. “It’s interesting,” he says. “The more SKUs we took out, the more business went up.” We suspect there was a point of diminishing returns somewhere, but never mind.

It's 'Win, Play and Show'

Having written the book about taking costs out of the supply chain, Wal-Mart is now focusing on building growth categories and taking market share. Fleming cites McKinsey research on highly successful companies showing that 43% of them are successful because they play where the growth is, 35% are successful because they are superior at mergers and acquisitions, and only 22% are successful because they out-execute their competitors.

A Transformation

In essence, Wal-Mart sees itself in the middle of a merchandising transformation, trying to get better at anticipating where customers are going and then taking market share in growth categories. As Fleming sees it, “I think that will unleash a whole level of growth that we haven’t seen in the past.”

He notes that “If we can take market share in growth categories, it’s a double positive as opposed to taking market share in declining categories, which had been what we were focused on in some areas in the past.”

To bring all this about, Wal-Mart has developed a category framework it calls “win, play and show.” It is tied to each category’s growth potential and Wal-Mart’s advantage of scale there. Also important is the credibility Wal-Mart might or might not have as a destination for the category. A “win” category typically is growing at twice the rate of its business unit. Fleming cites, by way of example, pet products — a fast-growing category where Wal-Mart has a scale advantage. You can expect to see Wal-Mart adding SKUs to “win” categories.

A “play” category (not “place,” as in horse racing, although the analogy is apt) is one that is growing, but not as quickly as a win category. A play category may also be a stable business where Wal-Mart has a scale advantage and can offer highly competitive prices. An example here might be denim, where Wal-Mart has a huge scale advantage but doesn’t have access to the full range of product. Since it will thus not be seen by consumers as a destination for denim, it will not invest as heavily here as it will in pet products. You can expect stability in SKU counts in “play” categories. By the way, we’re using pet foods and denim as examples because those were the ones used by Wal-Mart execs in their conference calls. But you get the idea.

A “show” category is typically one that is on the decline, and one where Wal-Mart may not have a scale advantage or credibility as a destination retailer. This category’s mission is to fulfill Wal-Mart’s one-stop shopping proposition, but you can expect to see ongoing SKU rationalization here. “It’s important that we have tape measures, but we don’t need to have 28 tape measures, which before we started this process we actually carried at one time,” Fleming says. “It gives us the opportunity to really rationalize the assortment and supplier base to be able to drive more productivity, to be able to invest in the win categories.”

He goes on to say that “We should never feature products from a ‘show’ category. We used to all the time and yet those are categories that are declining. That is not what we should be using our feature space for. So it just gives us a framework to be more efficient, but I think even beyond that to be more relevant to customers.”

Vendors tell us that although this Wal-Mart strategy began in general merchandise and apparel, the company is working to spread it to all categories, including those in frozen and refrigerated foods. But this may not be a slam-dunk.

“Can Wal-Mart supercenters be a credible destination for frozen and refrigerated foods? It’s a good question. I think it will take more capital investment in freezers and so on along the perimeter,” says Donald J. Stuart, partner, Cannondale Associates, Wilton, Conn. (From what we’ve seen, Wal-Mart is already moving in this direction in its Neighborhood Stores.)

It’s one thing to be a destination in pet foods/care, where Wal-Mart has a huge share that is helped by its dominant Ol’ Roy brand, he says. But it won’t necessarily be easy to do the same for frozen and refrigerated foods.

Squeeze in Brands

Having said that, however, Stuart notes that he expects to see private label continue its strong growth at Wal-Mart. “I can’t help but think private label will increase, and that secondary and tertiary brands will be squeezed. They make more money on private label, plus they build their brand as a destination. Together, it helps build more win categories. They’re still going to leverage their national brand heritage, but more of the progressive manufacturers are going to be marketing both their own brand and the private label.”

Sustainability, Or Else!

Wal-Mart began its environmental/sustainability push in 2005, but only recently has it started talking tough about it to suppliers.

David Duke, the company’s new CEO, says Wal-Mart plans to accelerate and broaden its sustainability initiatives. Speaking at a Sustainability Milestone Meeting in late January, he told the supplier community that “I am very serious about it. This is not optional.”

Outlining standards manufacturers will have to meet in production and packaging, he said “The leaders that get ahead in Wal-Mart will be the ones that demonstrate their commitment to sustainability. You won’t be able, in the future, to really be viewed in the same way if you put this on the back burner.”

Watch for More 'Locally Grown'

Organics still have some strength to them, but the real trend is toward locally grown products, Fleming says. As a result, Wal-Mart is planning programs focusing on locally grown foods and will be communicating this to shoppers in the spring and summer of this year. We confess to being stunned when on one conference call, Leslie Dach, exec vp of corporate affairs and government relations, noted that Wal-Mart is “now the largest supplier of locally grown produce in the United States.”

Higher Frozen Food Sales

Lee Scott, former CEO of Wal-Mart, speaking on Meet the Press recently, about the tough economy, notes: “We are seeing people buy more and more food, particularly frozen food, and in our Sam’s Clubs we are seeing… the small restaurant owner who is visiting the store multiple times a week as yesterday’s cash flow allows them to purchase for tonight’s business.”

What’s interesting here is that some of the foodservice business is coming around full circle to impact retail — albeit club stores. We have to wonder how the Sysco’s of the world are handling this restaurant downturn.

Getting Fresh

According to Fleming, Wal-Mart plans to stand for technology, electronics and fresh. In discussing the company’s plans for its next generation of remodels and new stores, he noted that shoppers will have clean sightlines from the front to the back of the store, where flat-panel TVs will signal the company’s presence in technology and electronics.

“At the same time, on either side you are going to see a fresh presentation, be it produce or fashion, that changes all the time,” he says. He notes that since Wal-Mart shoppers are typically in the company’s stores 46 times a year, they are repeatedly exposed to the same merchandise. This means Wal-Mart has to work harder than many other retailers to keep its displays fresh and interesting.

Accordingly, Fleming says there will be a push to improve the supply chain and change out — as much as practical — merchandise and displays “every 30 days because we want customers to see newness and freshness.” That will vary by category, with high-velocity and growing categories getting more attention, but “there is a whole framework that we use from the overall to the department level into the category and subcategory looking at every individual business and then determining what the role is in the portfolio,” Fleming says. 

R&R (Remodeling and Repositioning)

As Wal-Mart developed its new positioning around ‘Save Money, Live Better,” and remodeled a few stores around the concept, customer feedback was good, Fleming says. They liked the new colors, the navigation, presentation and ease of shopping.

“So we felt that it was very important that from a brand perspective that we actually get the entire fleet up to that standard quickly, which required us to invest less in new stores, which you are seeing right now, and invest more in remodels. So we have a very aggressive three to four year remodel program, which is to get our existing fleet up to the standard of how we need to present the brand and how do we create this better customer experience that we know our customers are responding to.”

The Plano Proving Ground

At the test store in Plano, Tex., Wal-Mart has been trying out new ideas in adjacencies, sightlines and navigation. There were some “fine-tuning adjustments primarily around food,” Fleming notes, citing a dramatic expansion of the wine assortment.

Prior to the change, “You’d have been hard pressed to find a bottle for over $12,” Fleming says. After analyzing the competitive set and the local demographic, a full range of wines were offered and the results were great.

This was done on a category-specific basis. For example, little was done on product assortment on the general merchandise side because Wal-Mart research showed customers liked the open space there.

“They like us taking features out of action alley because it’s easier to navigate the store. They like the sightlines and they liked the navigation elements that we put in there so that they could find their way around the store. We have incorporated those learnings into our future remodels and new stores,” Fleming explains. So you can expect quite a bit more along these lines in food categories. 

6 Ways to Compete with Wal-Mart

A cross-section of retailers, manufacturers and consultants offer these ideas:

1.  Match, or come near to matching, prices on 100 or so key items. Leave it at that.


2. Focus on variety and local brands, since Wal-Mart puts emphasis on private label plus one or two brands.


3.  Really work on meal solutions — quick and easy meal selection along the refrigerated perimeter and in a dedicated frozen bunker or endcap. Then, be sure you have enough labor to stay in stock.


4. Get the word out on your meal solutions program with demos, signage and fliers.


5. Put most of your space and promotional efforts into growth categories, like Wal-Mart does. If a category is on life support, pull the plug.


6. Customer service, customer service, and customer service.

It's Still a Love Fest

Every time we do a story on Wal-Mart, we get the same response from vendors: that the company is tough but fair, and an ideal customer. Here are a few random comments from this time around…

• “They are financially oriented and benchmark everything based on a scorecard that’s consistent for suppliers.”
• “They don’t charge slotting —‘Just give us your best price.’ They keep a level playing field for all players. They work off lower margins than most other food retailers, which is why they are always price competitive.”
•  “Wal-Mart will experiment with modular sets and new products.”
• “Even when we lose, they are fair, consistent and rational in the standards they apply to their decision making process. You always know how they are measuring you and what you need to succeed.”
• “Their new SKU reduction strategy did directly impact us with a loss of distribution, but we haven’t seen a corresponding loss of sales because consumers appear to be buying alternative items. For example, if Wal-Mart discontinued our (X) product, they are buying our (Y).”

Okay, so nobody’s perfect. When we asked suppliers where Wal-Mart could improve, we heard that the company seems better able to interface with larger suppliers that may be able to apply more resources, which can make it tougher for smaller vendors. And there are fears that the new SKU reduction strategy may make it more difficult to get new products on the shelf. For example, with more higher-income, better-educated shoppers now in Wal-Mart stores, will there be room on the shelf to cut in more low-fat or “healthy items” that appeal to this demographic? (Of course if this is true, it could spell opportunity for competing retailers.)