Guest post: Is Wal-Mart at a Cross Roads?

Earlier this year Ken Gronbach, an expert in demography and generational marketing, released an analysis of Walmart’s future business prospects based on the thesis that Walmart’s customer base is largely the baby boom generation.  One may not agree with Gronbach’s conclusions, but his perspective is thought-provoking.  Here is the essay:

Is Wal-mart at a Cross Roads?

Is Wal-Mart a Baby Boomer consumer based business? Is sliding Baby Boomer demand and declining consumption driving Wal-Marts sales in the same direction? Let’s take a look from thirty-thousand feet.

A January 28, 2010 New York Times headline reads: “Wal-Mart Makes Organizational Moves to Raise Efficiency.”  Back at its analyst meeting in October 2009, Mike Duke, Wal-Mart’s new chief executive, said the company is determined to become more efficient and cut costs, allowing it to offer lower prices to increase sales.

Efficiency is good, saves money.  So Wal-Mart divided the country up into three separate parts: Wal-Mart North, Wal-Mart South and Wal-Mart West, and has three separate presidents running things. Efficiency?  Wal-Mart will combine logistics, real estate and store operations, under COO Bill Simon. Andy Barron will oversee store merchandising execution for the three new business units. Both he and Simon will deal directly with the three new presidents.  In addition, Wal-Mart put the Wal-Mart International CFO, Wan Ling Martello, in charge of international internet sales and moved the former internet guru, Raul Vazquez, into one of the new president positions.  In January Wal-Mart also announced that it is cutting 11,200 jobs. So there, now Wal-Mart has the formula for efficiency. There is more. Hot off the wire in February Wal-Mart just reported that it will close ten under performing Sam’s Club Stores and cut 300 support division jobs at its headquarters in Arkansas. From thirty thousand feet this all looks like a frantic fire drill.

In mid 2009 Wal-Mart announced an ambitious retail strategy called Project Impact that is said to improve customer service and knock all of Wal-Mart’s more vertical competitors out of business, yes out of business. It is fair warning from Mike Duke to drug stores, toy/craft stores, supermarkets and consumer electronic giants that Wal-Mart is going for your throat.

From thirty thousand feet Project Impact appears to be nothing more than an untenable and desperate demonstration of corporate ego.  It is not a retail strategy, it is a pipe dream.

Wal-Mart switched to a quarterly same-store sales reporting format last year. Its same-store sales dropped during the second and third quarters of its fiscal 2010 (ending in July and November 2009).  Speculation is forecasting more of the same when Wal-Mart’s numbers come out this month.  Project Impact better kick in soon. From thirty thousand feet it sure looks like Wal-Mart is selling less stuff to fewer people and the competition is certainly still standing.

Wal-Mart sought to capitalize on the recession in 2008 by upping their ad spending by a whopping 15.9 percent over 2007 according to analysis by Ad Age Data Center.  Total U.S. ad spending by Wal-Mart in 2008 was reported to be $1.66 billion, and measured media spending on its flagship Wal-Mart chain soared 66.4 percent, making the giant discount retailer the fifth-most advertised brand in the U.S.

Wal-Mart is receiving marginal returns from this big increase in advertising spending, with net sales essentially flat for the first three quarters of 2009, with a modest 1.7 percent year-over-year increase for U.S. stores, offset by year-over-year declines in overseas and Sam’s Club net sales.  But shouldn’t Wal-Mart’s U.S. sales be up more than marginally?  One would think that heavy advertising and discount prices should lead to bigger sales increases during a recession. 2009 ad spending numbers are not available yet for Wal-Mart but we have no reason to believe that their aggressive spending strategy has changed. Can the bad economy be blamed for the company’s meager sales increases?

We don’t think so. In fact, we believe that demographics may be playing a significant role in Wal-Mart’s lackluster performance. Wal-Mart’s best customer, the Baby Boomer, is aging and as they age their consumption is dropping precipitously and very predictably.  No matter how much money Wal-Mart spends to chase this shrinking market, the returns are always going to be marginal. Why? Because the worst mistake you can make in marketing is to use good money to chase bad. Chasing a shrinking market is death. The most efficient ad/marketing dollars are spent on expanding markets.

Is Wal-Mart paying attention? We don’t think so. Wal-Mart’s retail concept is called “Cheap and Deep” by the retail trade.  It always has depth in a limited assortment of merchandise at a very low price.  In Wal-Mart’s case this cheap merchandise is manufactured in China by near slave labor.

This retail concept is not about selection or breadth of assortment. This concept, therefore, would struggle with the fashion tastes of a new market and therein lies the problem. The biggest generation in United States history, Generation Y was born 1985-2004. It is currently between the ages of 6-25 years old and is the new market.  And new markets generally have very fickle tastes.  If they don’t want something, it doesn’t matter if it is free–they just don’t want it.

Wal-Mart is very used to dictating what their customers should buy–large quantities of very cheap retailer’s choice items.  Remember the gallon jug of Vlasic pickles?

Wal-Mart is a Baby Boomer consumer based company.  Boomers were born 1945 to 1964, and Wal-Mart has decades of experience catering to the clearly defined tastes of this generation who are currently 46- to 65-years-old.  Wal-Mart has figured out what the mature Boomer market buys.  They have also refined this demand to the narrowest selection possible, almost telling Boomers what they will buy.  Boomers in turn are okay with this because when you are between 46- and 65-years-old you have pretty defined tastes and preferences that influence your buying of stuff.  If Wal-Mart does not have what a Boomer really wants, but does have something close at a very low price, the Boomer will buy it.

So where is the rub? It’s simple. When consumers hit about 50-years-old, according to the U.S. Bureau of Labor Statistics, their demand for stuff begins to subside.  At 60-years-old a person pretty much has all the stuff he or she needs and then some.  At 60, one’s body has stopped changing so one can wear clothes longer, a lot longer.  If you want to see what was fashionable thirty years ago go to a Miami retirement community.  The point here is that the bloom is off the rose of the Boomers’ consumption of things.  The Boomer population is a huge bell shaped curve with many Boomers turning sixty-five at its leading edge and with its very top cresting at 50-years-old in 2007.  All of this means that Wal-Mart needs to find a new market fast if it wants to continue doing business as usual.

But where does Wal-Mart turn? The two U.S. generations over 65 do not have the critical mass to serve their infrastructure, and besides, for the most part they have stopped consuming. The U.S. population now 26- to 45-years-old is a non-homogeneous combination of the small native born Generation X (nine million fewer than the Boomers) and the free standing market of Latino immigrants. (Latinos are not evenly dispersed through out the United States but live in geographical pockets in about nine states)

So who’s left? It is Generation Y, the largest and most powerful generation of consumers this nation has ever seen.  Will they be the solution to Wal-Mart’s sales problems? No, not under Wal-Mart’s current business model.

Wal-Mart has lost its Sam Walton connection with the customer and the rest of the retail world has caught up. As if to prove that it is no longer in touch Wal-Mart recently announced a major restructuring of its sourcing, a move designed to increase the amount of generic Wal-Mart brand goods on its shelves. This tactic could improve profitability with loyal existing customers but will be a sure turn off to new huge emerging brand conscious Generation Y market.

Wal-Mart has other issues that will play into their business success or failure. Wal-Mart and China are joined at the hip.  Despite popular belief, China’s economy is not healthy or stable.  China’s one child only policy has devastated its emerging labor force.  By their own official estimation China has prevented 400 million live births in the last 30 years.  A smaller labor force in China eventually means higher labor costs and higher–much higher–product costs for Wal-Mart.  Couple this with higher shipping costs, a falling U.S. dollar, a slowing U.S. economy and Wal-Mart will have to find a new trading partner that can produce goods as cheap as China once did because China’s prices are going up.  That trading partner doesn’t exist. India? We don’t think so. India has its own demographic problems and is not a ready substitute.

Oh yes, and one more thing. Generation Y is on track to become the greenest and most humanitarian generation in U.S. history.  If one wants to do business with them they had better be very green and very nice to their fellow man.  And popular perception is that Wal-Mart has a dismal record on both counts.  Perception is reality. This fact could seriously injure Wal-Mart’s business all by itself.

From thirty thousand feet our view of Wal-Mart is not very pretty.


1 Comment »

  1. Walmart jobs: a new kind of walmart jobs…

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