There is no Joy in Bentonville: Has the Mighty Walmart Struck Out?


Guidepoint Advisor Charles Moore

by Charles Moore, President, Premier Products

On October 14, 2015 Walmart shocked Wall Street with its worst one-day plunge in 27 years.
The shares of the corporate giant dropped 10 percent for a loss of $21.5 billion in market capitalization. Since February, Walmart’s stock performance has plummeted 29 percent. Walmart’s senior management team has declared the next two years will be well below expectations. You can say the outlook isn’t brilliant in Bentonville these days — but has the mighty Walmart struck out? That might be the case in the short term, but Walmart will be back swinging faster than you think. In the meantime, here is my scouting report for the clean-up food and beverage player in the lineup.


Kroger is the leader in shelf technology, pioneering the new digital shelf edge (DSE) that brings video and digital media content to the shelf edge at the point of purchase. DSE tags are larger and easier to read than paper price tags, with identifiable symbols on the digital tag — such as organic, gluten free, etc. — that jump out at the consumer. In the future, DSE will use Bluetooth technology to alert a shopper to the location of items on their shopping list and might even remember past purchases, notifying a consumer by text message when he or she passes by one. It’s a worthy investment: 85 percent of shopping decisions in traditional grocery are made at the shelf.


Kroger has also been the pioneer, and continues to be on cutting edge, of convenience trends such as online, pickup-at-store shopping, and home delivery. Kroger is expected to continue its innovation: In spring 2014, the chain signed an exclusive relationship with the leading shopper analytic data company, Dunnhumby, and currently has majority ownership of the data company.


The corporation has prioritized customer service and loyalty. The chain was ranked number five among all retailers, and number one among supermarkets, by 24/7 Wall Street in its 2015 listing of the Customer Service Hall of Fame.


And even Kroger’s management team has taken home accolades. CEO Rodney McMullen was named the top rookie CEO of 2014 by Fortune, and since his appointment in January 2014, total shareholder return has been 52.6 percent, sales have increased 10.3 percent, and profit is up 13.8 percent. Kroger also has been moving to centralized decision-making for all banners, which might trigger significant savings in labor costs by eliminating positions that were responsible for decision-making at each individual banner.


Amazon has an opportunity to expand all consumer product and goods offerings, especially food and beverage offerings. AmazonFresh first debuted outside of its Seattle home area in 2013, and given Amazon’s incredible logistics capabilities and experience, I foresee the company offering perishables, such as meat, dairy, and produce, nationwide. That’s a critical capability because perishables often drive brick-and-mortar grocery purchases.


And, of course, Amazon is renowned for its internet leadership and exceptional shopping experience. An Amazon consumer can refine their shopping experience by almost every imaginable variable, including certification (organic, gluten-free, non-GMO, etc.), price, category, and even calorie count and fat calories per serving. In commercial web traffic, Amazon is number seven globally and number three domestically, by far the highest ranking of all food and beverage retailers. The e-tailer was also ranked number one among all retailers in customer service in 24/7 Wall Street’s 2015 Customer Service Hall of Fame.


A membership model has many advantages, including loyalty, a bottom line profit that can be re-invested in lowering prices, and consistency. Costco’s membership renewal rate has maintained around 90 percent. The retailer’s same-store sales are consistently the highest in industry, and the company’s market basket and food and beverage dollar purchases are highest in industry.


Costco is also focused on employee loyalty. It pays one of the highest employee wages of all retailers (averaging $21 per hour) plus a solid benefit package, contributing to extremely low turnover. The cost to find and train replacement employees averages approximately 40 to 150 percent of an employee’s annual salary.


Costco also has a profitable SKU strategy: they offer few brands. The retailer typically only carries the top two market-leading brands in addition to its Kirkland Signature private label brand, which gives Costco price leverage. Manufacturers can pass along economy of scale since their products are one of few on the shelf and in limited competition. (As a related aside, Kirkland has been called a success, named by Advertising Age as one of the most recognized and trusted private label brands in the industry.)


A major opportunity for Costco lies in its international growth. Its business model has seen the most success in markets outside United States with, on average, five times more members within its first year internationally versus U.S. stores. Same-store sales have been 30 to 50 percent higher in international markets.


In the famous words of John Lydgate: “You can please some of the people all of the time, you can please all of people some of the time, but you can’t please all of the people all of the time.” Walmart has struggled with this.


Years ago, it was easy to define the core Walmart customer and its core business, but today the lines are blurred. It opened a dollar store section to compete with the dollar class of trade and had very limited success. As mentioned in my earlier article, it hasn’t seen success in organic endeavors. (In contrast, Kroger’s Simple Truth organic brand now generates over $1 billion in sales, achieved in just two years, and is expected to surpass Whole Foods sales by 2017. Costco surpassed Whole Foods earlier this year and is number one in organic sales — a market expected to grow to $100 billion by 2025.)


Who does Walmart see as its core customer, and what is the strategy to bring in new/retain current customers? Is Walmart the “everyday low price” retailer or the champion of price reductions (“rollbacks”)? Does Walmart serve the value chain customer that earns under $30,000? Or, is Walmart the organic food retailer that serves the $80,000-salaried customer?


Walmart has an identity crisis, and to bounce back it must return to the fundamentals. It must pinpoint and focus on its core customer base. It must market and keep up its product assortment to serve that customer base, and it must refresh its stores to cater to that base.


Recently, Walmart announced new supplier charges that will allow the company to reinvest in these needed initiatives and also announced employee pay raises. So yes, in my opinion, Walmart will be back at bat and back in the game.


But for now — competitors, play ball!


Please note: This article contains the sole views and opinions of Charles Moore and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security.


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