Walmart: Reversal ... to Fortune

When the world's largest retailer ($405 billion in U.S. sales for fiscal 2010) changes strategy, there's potential for aftershocks. So goes the story of "Project Impact."Introduced in October 2008 as a strategic framework to expand Walmart's customer base by reshaping its store design, merchandising mix, pricing strategy and promotional activity over a three-year period, Project Impact did alter Walmart's course dramatically.The problem for Walmart was, the impact it had was not positive in all aspects. And in fewer than two years, Walmart reversed course. In not much more time than it took to comprehend Walmart's "Win-Play-Show" standards for category importance, Project Impact was, for the most part, dead (although some of its elements remain)."It was well-meaning," says Chris Hoyt of Scottsdale, Ariz.-based Hoyt & Co. "I can certainly understand the business rationale for it because at the time they began this, Walmart had 85% household penetration. But they weren't getting the upper middle class consistently. Those people were shopping at Target or Costco."Accompanied by key corporate personnel changes in Walmart U.S., the reversal began taking shape in the summer of 2010. And judging by the chain's 2010 holiday activity, Walmart is well on its way to reaffirming and building upon its leadership role in the industry."[With Project Impact] there were initiatives undertaken with the right intentions during a very difficult economic period," says Landon Nobles, chief operating officer at Kendal King, Kansas City, Mo. "What we do see going forward is encouraging."What Went WrongUnder the mantra of "Win-Play-Show," Walmart reprioritized product categories and departments based on a combination of their importance at the time and their future potential as determined by Walmart. That, combined with a drastic reduction in SKU count and the removal of temporary displays from Action Alley, resulted in fewer marketing and merchandising opportunities for the products that remained. As a result, manufacturers were alienated."Walmart culture has always been one of 'community' between the knowledge of the brand-holders and their value to the shoppers, and the buyers and merchants who align the merchandising strategy to the core values of Walmart," says Kerry Bailey, director of the Walmart/Sam's Club global support team at Bentonville, Ark.-based Menasha Packaging. "The gap grew between the brand-holders because of the strongest move ever by the retailer to drive its [own] brand initiatives at the expense of its merchandising partners.""As opposed to being fair," says Hoyt, "and factual-based, and supplier-friendly -- which is the reputation Walmart had always had -- they pirouetted, and you couldn't figure them out.""Ultimately, the store did not win," said Leon Nicholas, director of retail insights at Kantar Retail, during a November 2010 UBS presentation about Walmart. "They cut assortment too much. They had less aggressive, confusing pricing."While executing systematic store remodels that provided for cleaner, more attractive stores, there was a disconnect with the shopper."Walmart became uninteresting," says Hoyt."Project Impact offered some positive changes to the Walmart floor set, the most dramatic being a cleaner sight line for customers," says Bailey, "but the other end of the spectrum was the increasing demise of purchase opportunity or choice that became the straddle between SKU rationalization and lack of inventory."In an effort to attract the upper middle class shopper, the retailer was losing its core customer, households that make less than $70,000 a year and rely on low prices. "It wasn't something the culture of Walmart could tolerate," Nicholas said.The ReversalAlthough the remodeling of stores under Project Impact guidelines continued at a steady pace in 2010 (51% were expected to be complete by the end of fiscal 2011 in January, and 100% by fiscal 2014), word surfaced in June of a "3/30" mandate from Walmart brass that within 30 days merchandising should return to the way it was three years earlier in terms of how Action Alley and "Rollback" pricing were handled. Likewise, there was evidence of the reintroduction of national-brand SKUs to stores and speculation of a rebranding of Project Impact.Soon after, Walmart announced wholesale changes atop its U.S. organization, with chief merchandising officer John Fleming making a "personal decision" to leave the company and Walmart U.S. CEO Eduardo Castro-Wright being shifted over to the company's Global.com and Global Sourcing divisions. Taking over as CEO of Walmart U.S. was Bill Simon, formerly chief operating officer.Although Walmart did not in any way relate the moves to Project Impact, inferences could be made. In a media release announcing the changes, Simon said, "My goal is to partner closely with our suppliers.""The first thing Walmart did ... Simon made a conscious effort to heal wounds with suppliers," says Hoyt. "Suppliers never knew where they stood. Your product might be de-listed. It wasn't de-listed because of any fact-based deal; it was de-listed because of 'Win-Play-Show.' ... Fleming meant well. He said, 'Well, we're surveying our consumers and they really like this.' The problem is, they surveyed the consumers that were left, not the consumers that had migrated to other stores."At the company's annual investors meeting in October, Simon detailed how, since he took the reins, Walmart had been re-establishing product assortment levels, addressing "macro space issues" created by the store redesigns, and returning "promotional intensity" to Action Alley."Action Alley is an important piece of who we are, because it tells the customer what we believe is important, and it adds that element of excitement that says, 'This is a Walmart store,'" said Simon, who revealed a formal program that launched in October and calls for 80% of Action Alley promotions to be dictated by headquarters and 20% to be determined by store and field teams.What's Happening NowWhile some stores never completely emptied Action Alley and displays began returning before Walmart officially adjusted its strategy, Simon said in October that the company had seen a 65% increase in sales among the products showcased in Action Alley since the reimplementation began. Among the activity in the fall were account-specific displays from such brands as Dr Pepper, Pepsi/Frito-Lay and Nabisco supporting the chain's football-themed "Game Time" campaign. In November and December, Coca-Cola, Keebler, Nabisco, Little Debbie and Stove Top were among the many brands receiving prime Action Alley space as part of Walmart's holiday merchandising."There seems to be lots of engagement with buyers and suppliers," says Kendal King's Nobles. "We are seeing multi-level collaboration across and within Walmart from marketing to operations to buyers working with manufacturers on a variety of in-store programs.""A lot of Tier 2 or 3 players that had been knocked out are finding themselves back in the store," Nicholas said during his presentation.Menasha's Bailey describes a "nothing is impossible" attitude that was prevalent in pre-holiday activity. "Merchants and suppliers worked extremely hard to bring 'unplanned' opportunities to the floor for holiday to strengthen the merchandising mix at a key period that would have been lacking without those efforts," he says.Hoyt likes what he's seen as well. "What they did for Black Friday/Thanksgiving that whole week, it was simply phenomenal in terms of price leadership," he says.In just a few months' time, Walmart was able to change the negative perception in terms of collaboration. In fact, 38.9% of consumer product manufacturers surveyed in the In-Store Marketing Institute's 2011 Trends survey said Walmart's reversal regarding SKU rationalization and secondary display placement will have a major positive impact on their company's business at the chain."Without a significant promotional strategy that could allow for new items, feature offerings and special opportunities, there wasn't a platform for creative selling and brand building," Bailey says. "Suppliers are now more eager to bring influential programs to Walmart as part of a trade in power and relationship with the shopper as a result of the reconnection efforts by Walmart."Going ForwardWalmart seemed to have righted the ship in 2010, and only time will tell if it stays on course in 2011. "They are very much aware of what they've done," Hoyt says. "You pick yourself up and forget about it. You just move on. And that's what Walmart's doing. It isn't all healed because there's always distrust when somebody changes course suddenly."In Nicholas' UBS presentation, he pondered whether Walmart's reversal would lead the retailer back to where it was in 2007, to a place of perceived comfort and to the conditions that created Project Impact in the first place. He predicted an overcorrection, from which Walmart would have to adjust by mid-2011.Answering a similar question at the investors conference in October, Simon said, "I don't like to say, 'Back to where we were.' I like to say, 'Forward to where we're going, which is in line with how we grew.'"Nicholas also wondered to what degree Walmart would commit to a more "blended-channel" approach that incorporates more formats, such as digital and mobile. "Is Walmart focusing so much on Action Alley that it is missing out on where the action is?" he asked.One area in which Walmart clearly is moving forward is new-store growth. In addition to the ongoing remodels, the company plans to open 185 to 205 stores in fiscal 2012 (after opening a projected 153 in fiscal 2011) under a three-format portfolio: large supercenters limited to 180,000 square feet (smaller than the typical 195,000), medium-sized stores in the 30,000-60,000 range (mostly in the Neighborhood Market format), and smaller stores approximately 20,000 (centering on convenience). "There are hundreds and hundreds, if not thousands, of opportunities in the U.S. for small formats," Simon said."As Walmart announces additional formats for urban stores and the growth of its market penetration, it offers everyone great opportunity and challenge at providing the best products and services that can execute their strategies," says Bailey.

Walmart: Reversal ... to Fortune

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