Walmart Resonates Part I: Productivity and Plentitude

As the executive vice president and chief merchandising officer for Walmart U.S., Duncan Mac Naughton is responsible for all aspects of merchandising across Walmart’s more than 3,700 U.S. stores. His presentation  this week as part of the Bentonville Bella Vista Chamber’s WalStreet speaker series openly covered a breadth of topics, despite kicking off with the disclaimer that his “handcuffs are tight” as the clock counts down to Walmart’s November 15th 3rd quarter earnings release. The points that he made spoke to how sands are shifting across all of retail and they were important enough to inspire this three-part series on Walmart’s approaches for negotiating the changes.

Read Part II

Read Part III

Michael Moore’s presentation to the WalStreet group back in May dispelled any rumors that Walmart was going “back to the future” with its aggressive reversal of Project Impact. In last week’s presentation, Mac Naughton charted the considerable progress made as the results of its post-Project-Impact add-backs gain traction. He wasn’t sheepish about admitting that Walmart has stumbled not only with shoppers, but also in its relationships with suppliers. Now that positive results have begun to roll in, however, the Walmart story has progressed from one of alienating to one of resonating, on multiple fronts.

Productivity Payoffs

 The “productivity loop” concept has long been a staple of Walmart executive presentations and investor calls. The idea sounds simple. If you lower costs, you can lower prices, sell more, and increase profits. Perhaps this was true a few years ago, when there was still plenty of fat left in the supply chain and transparency was far from the norm. These days, the retailers left standing have very lean systems. They have to trim pretty precisely to increase productivity, and all eyes are on them while they do it. Mr. McNaughton did a great job of detailing which stones Walmart is turning over it its next push toward productivity, and the considerable payoff that awaits.

Through what Mac Naughton calls a “self-funding” business model, he claims that Walmart can deliver an additional $2 billion in retail price point reductions, leveraging its productivity loop to ensure that it stays true to its “every day low price” (EDLP) promise even as shoppers aggressively exercise their online and offline comparison shopping and extreme couponing options. As if that weren’t enough, Walmart is simultaneously pursuing a multi-format, multi-channel, hyper-local model that makes maintaining price consistency alone challenging. In spite of this, Walmart is committed to delivering price leadership “community by community, store by store, category by category,” doing so in partnership with its suppliers through joint business planning rather than take-it-or-leave-it cram-downs. In return, suppliers enjoy consistent demand for their products, Walmart and supplier company shareholders see consistency in earnings, and customers shop Walmart loyally and with confidence.

Walmart has already identified 80 percent of the savings that it needs to create over the next five years in order to hit its goal, and is starting with high-traffic, high-purchase-cycle items in order to grab the early awareness of shoppers. Its ultimate goal is to parlay the program into a “broad application of price investments” across a store, which will resonate with shoppers regardless of their shopping behavior.

Unfortunately, Walmart is starting in negative territory. Last summer’s “atomic rollbacks” may be cycling out, but they have a “long tail” according to Mac Naughton. Not only did the rollbacks kill the credibility and trust of Walmart’s loyal shoppers, who expected low prices without theatrics, but suppliers felt the pain as their already-thin margins went molecular.

From Paltry to Plenty

Anyone whose livelihood is linked to Walmart knows that Action Alley is back in action at Walmart. Its widened aisles no longer look like landing strips as pallets of sharply-priced products once again beckon shoppers to go ahead and stray from the shopping list already. The displays not only showcase the items that Walmart has reintroduced to its stores, they “disrupt shopping behavior” and communicate value in a seasonally-appropriate way, and with great national brands (more on that in Part III).

To date, Walmart has placed more than 10,000 previously-removed items back in its stores through a three-phase process that started in dry grocery and consumables, then worked its way through dairy, deli, frozen, health and wellness, and into hard lines. The early-phase results are encouraging. In the dog food category, for example, sales are up 290 basis points in comp stores, while hair care is up 480 basis points.

According to Mac Naughton, Walmart is about 70 percent of the way into phase three, which will focus on entertainment and softlines (home and apparel). Of course, Action Alley can’t hold all of that bounty. Walmart has literally risen to the occasion by elevating the gondolas in over 1,000 stores in order to build capacity back into its modulars. Sales have risen by 140 basis points in those stores, making any sight line compromises well worth it. Mac Naughton called the massive replenishment “the gift that keeps on giving,” as shoppers, including those with incomes over $50,000 per year, test Walmart’s waters once again and find what they are looking for.

Moving Metrics

If products are out of stock, having the lowest prices doesn’t matter much, but perhaps being in stock isn’t all it’s cracked up to be either. According to Mac Naughton, in the past Walmart “kidded themselves” that assigning a 98.5 percent in-stock metric would get the job done. The problem was that the criteria for “in-stock” was far too loose, and the number of non-shelf possibilities far outnumbered the desired locations, ranging from the back room to hidden behind a pallet. The result? Lost sales. Clearly, playing with percentages wasn’t the answer, so last spring, Walmart changed its in-stock criterion to on-shelf availability (OSA), and erased all the gray areas.

In an uncharacteristic (but realistic) move, Walmart now acknowledges that 100 percent on-shelf availability isn’t just pie-in-the-sky it’s cost-prohibitive, from both labor and infrastructure perspectives. Rather than tacking on its usual high-nineties metrics across the store, Walmart has started assigning on-shelf metrics by category and in some cases, by product. To back up its on-shelf commitment, it has begun to conduct physical audits every week, in every store, on top-selling items. This on-shelf surveillance has helped Walmart achieve 90 percent on-shelf availability across the store over the last 12 weeks, with the number scooting up to 93 percent over the last four.

In Part II, I’ll cover how Walmart is leveraging its souped-up scale and the implications of its multi-format forays. If you want us to ping you when Part II posts and be notified of our retail trajectory updates, simply enter your email address in the subscription box in the right column and you'll be on your way!

Want to know what these and other retail trajectories mean to your total retail strategy? Planning your 2012 sales or marketing meetings and want to kick things off with a beyond-trend presentation on what really matters in retail? Contact Carol Spieckerman directly.