Wal-Mart Moves Up

The country’s largest jewelry retailer is repositioning in a big way.

By Brent Felgner -- JCK-Jewelers Circular Keystone, 9/1/2006

They have rings that range in price from $68 for a few diamond chips to $5,488 for a couple of carats. Who would believe this is Wal-Mart?

Indeed, the world’s largest retailer has selectively bumped up its jewelry assortment in a mostly symbolic positioning statement. Wal-Mart’s evolving bid to move upmarket in an effort to expand its core customer base is intended to produce merchandising shock and awe—a “wow” factor that’s part of what company executives have dubbed “mass luxury.”

But it’s upmarket with an asterisk. Wal-Mart has also vowed to keep a tight grip on the loyalist customer base that delivered $312 billion in sales to its 6,500-plus worldwide stores. Just whisper the word “upscale” and the response is immediate.

“It’s not about going upscale,” says John Fleming, Wal-Mart’s chief marketing officer. “It’s about understanding the customers who are already in our stores and focusing on the selective shopper —not at the expense of the loyalist, because that is still a very important segment, and we will continue to develop our relationship with that customer—but to focus on the selective shopper and … drive a deeper level of loyalty with the selective shopper.”

Regardless of the labels, the company’s recent actions speak volumes about the strategy. In addition to a host of organizational changes, within the last 12 to 24 months, Wal-Mart has

opened an apparel buying office in New York City and during last fall’s Fashion Week staged runway shows—offering its own version of haute couture and making an unmistakable statement it intends to be a fashion player;
opened a pop-up store in Miami’s trendy South Beach to introduce its self- designed Metro 7 apparel;
dabbled in 600-thread-count luxury bedding and Egyptian cotton bath towels;
begun selling $3,200 flat-panel high-definition television sets;
run an eight-page advertising section in Vogue. A broader ad campaign is under way to convey a surprise factor. For example, one TV spot promoting home fashions says: “I came in for a lipstick and I discovered a whole new look!” Wal-Mart promises more surprises in its advertising and a broadening media mix.

And don’t forget the rings. The top- of-the-line 2.00 ct. round solitaire is set in 14k white gold. The International Gem-ological Institute grades it as I–J/I2. Wal-Mart also carries diamonds from Keepsake and Facets of Fire.

“What you need to decide first is if [the ring] looks good to you—do you like it? Can your eye pick up any flaws,” offered one obviously seasoned jewelry saleswoman. “Once you decide that, the question becomes is this the best value you can find for the price?” That statement captures the essence of the Wal-Mart marketing and merchandising strategy.

To be sure, not all jewelry sales clerks seem as well informed as this jewelry manager. At another store in another city, one clerk offered this proof that a diamond was real: “It’s a real diamond because it’s set in real [14k] gold.”

Most associates’ understanding of the merchandise seemed somewhere between the two extremes, and in most cases where their knowledge came up short, they were more than willing to seek out at least basic answers to basic questions about quality. But clearly, it’s a department that could benefit from more training.

Wal-Mart’s steps upmarket have been deliberate and selective. They reflect a new customer and market segmentation strategy that’s nudging Wal-Mart further from its everyday low pricing stand to one that places greater emphasis on the best values at every price level it enters. It would be difficult to overstate the dramatic change that represents for a retailer that specializes in having the lowest prices in sight.

The changes carry risk. Wal-Mart has carefully honed and jealously protected its low-price image. When JC Penney made upscale moves some years ago, it confused its core customer. Rather than pulling that shopper along as it attracted new consumers, its core flocked to competitors, and efforts to pull them back while attracting new higher-end shoppers failed. It took more than five years and tens of millions of dollars to correct those errors.

That helps explain Wal-Mart executives’ sensitivities. But making the moves is not in question. “Wal-Mart is sending a signal that they are about more than price,” explains Wharton School marketing professor David Bell in a paper. “They have played price. Now they want to play quality and broaden their image. It will be interesting to see whether people believe it.”

RAISING THE BOTTOM

And it’s not happening just at the top end. In a number of merchandise categories the company is adopting a “perfect essentials” position promoting values and quality at the opening price point level, according to Claire Watts, executive vice president, merchandising.

Indeed, Wal-Mart has highlighted five distinct lifestyle segments it’s appealing to: suburban affluent, multicultural urban, Hispanic, boomers, and rural. Each group presents its own needs and challenges, and the retailer believes it can meet them by tailoring its stores. (See “Breaking the Mold,” p. 120.) So the $5,400 ring goes mostly to the suburban-affluent stores—like its new merchandising “laboratory” test store in Plano, Texas—while rings falling comfortably under $1,000 remain the high end at mostly rural stores. Diamond rings in the $1,000–$2,000 range top the assortments in many of the stores in between. But, staying true to its loyalist roots, 10k gold jewelry and other low-cost items still dominate the assortment in virtually every store.

“The loyalist shops items, they shop price points, and they love the big broad assortments that Wal-Mart offers,” Fleming explains. “It becomes one-stop shopping for them. The selective shopper, on the other hand, is looking for solutions. This is a customer who is looking for value for their money. This is a customer who is very focused on convenience; in fact, time becomes their currency. … They shop for value, not just price.”

The segmenting strategy doesn’t end there. In addition to five store types and three broad groups of shoppers it has identified—loyalist, selective, and skeptic—marketing executives have given names to specific types of shoppers—Gracie, Maria, Sandra, Roy, Phil, and another half dozen or so. They represent key customer types: the Hispanic selective shopper; the career-driven, time-starved shopper; the pragmatist; the style seeker; and others with a broad range of behaviors and characteristics.

During the economic dip that accompanied the fourth-quarter holiday sales push two years ago, Wal-Mart did something it has almost never done in its 44-year history: It missed. Worse, quick action to remedy the situation—more rollbacks, slashing its EDLP even more—also fell short. At the time, chief executive officer Lee Scott vowed it wouldn’t happen again, blaming the misses more on macroeconomic factors than on shortcomings in its own merchandising.

The company realized that while the opening price point customer was its most loyal, that shopper was also the most affected by any blips on the economic radar— rising gas prices, increasing credit card debt, declining numbers of low-paying jobs, etc. Any of those factors could stanch discretionary purchases. The only place left to go was up.

During a closed meeting with several thousand vendors in January, Scott displayed a merchandise pyramid. At the base was the everyday opening price point merchandise Wal-Mart is known for. In the center was higher-price, higher-margin, more aspirational merchandise it believes represents its greatest opportunities. And, at the top was the “wow” merchandise—the goods that will help it make the statement that it’s in business segments you might not imagine.

Wal-Mart executives found that more-affluent customers were already buying its groceries but rarely “crossed the aisle” into general merchandise. The retailer’s current actions are directed at persuading those shoppers to take that step, and selected jewelry items are part of the appeal—part of the image remake Wal-Mart is seeking.

“There is not a timetable; it will take a couple of years,” vice chairman John Menzer told JCK at a recent store opening in New Jersey. “Worldwide, 180 million people come into our stores every week. Those customers are already shopping our grocery aisles; what we’re trying to do is get them to shop the entire store.”

Higher-end jewelry won’t be a volume business, but consider the math: If Wal-Mart sold just one $2,000 piece to just one ten-thousandth of its 130 million weekly customers, it would yield $26 million a week—a $1.35 billion business. Adjust those numbers any way you wish—that’s raw retail power.

Breaking the Mold

Wal-Mart’s “store of the community” concept represents a departure from the retail adage that you can’t be everything to everyone. Wal-Mart apparently believes it can be almost everything to almost everyone.

To reflect the communities in which they are located, stores of the community are boldly individualistic, not only in their designs and footprints, but also in much of their merchandise assortments.

“It’s pretty simple,” says Pat Curran, executive vice president of store operations. “In order to deliver the best customer experience, we need to tailor the store to what she needs and what she wants, based on where and how she lives. And our old structure did not allow us to reflect those preferences in our stores.”

“The issue is, how do you take it down to the local store level, because the composition of each local market is very different,” said John Fleming, executive vice president, marketing, following Wal-Mart’s recent media conference. “If we understand the segments locally, we can then tailor the programs to be very specific for that segment, and then it’s not like everything’s different. In some instances, the product changes only by 2 to 3 percent, but the [store] experience is very different—how we feature the product.”

Stores of the community also reflect the company’s increasing confidence in its ability to micromanage broadly divergent retail venues. That ability is being honed largely through improvements in retail and information technologies—including RFID (radio frequency identification)—along with a decentralizing regional management structure that places executives back in the regions they’re responsible for, Fleming explained. “With technology today it’s all very doable—and also putting your management back out in the field. You know, it’s very easy to understand 10 stores.”

Wal-Mart’s merchandise strategy no longer must translate as narrow and deep. It can broaden or shrink its assortments as individual marketplaces demand. It can customize SKUs, even as better inventory management is emptying backrooms and lowering merchandise shelves.

“[Regional] management will now be measured on how well they develop those [store] associates to take care of the customers who come into their stores every day,” Curran said. “This business unit structure allows for better decision making really much closer to the customer.”

The effort permits Wal-Mart to convert a former factory location in Chicago’s west side into a multistory store with a roof garden, a two-level art deco–inspired unit in Hollywood, or to build a store with a western flavor in Fort Collins, Colo. Likewise, its store in Evergreen Park, Ill., reflects an expanded assortment of ethnic hair and beauty products for its larger African-American base, while its unit in El Centro, Calif., is assorted more to the liking of its largely Hispanic customer base. And in Middlefield, Ohio, where the nation’s fourth-largest Amish community resides, Wal-Mart offers hitching posts for horses and buggies, block ice for refrigerators, and larger assortments of denim fabrics for making clothing.

Indeed, Wal-Mart now has what it terms a “flex Supercenter concept” that covers multiple designs and sizes, counting those for urban entries, along with various design concepts, including its Northeast design concept.

Symbolism Is Critical at Sam’s

If Wal-Mart’s moves are intended to bring it closer to “mass luxury,” the merchandising at Sam’s Club is directed at “affordable luxury” and then some.

The symbolism is critical: “Rain boots. Ink cartridges. A 7-carat Asscher diamond ring. Luxury goods at Sam’s Club. Who knew?” a jewelry counter sign reads.

During last year’s holiday selling period, Sam’s displayed a $250,000 diamond ring online. It didn’t sell any at that price, admits president and chief executive officer Doug McMillon, but that wasn’t the point. The point was to stop club members dead in their tracks and let them know Sam’s carries a broad range of high-end luxury goods.

In Springdale, Ark., recently, a freestanding display case—a Sam’s “road show”—displayed gold nugget jewelry, including one piece priced at $125,000. The regular display case offers diamond necklaces (7.47 cts. t.w., H–I/VS2 –S1) for just under $16,000.

More than 62 percent of Sam’s Club members have household incomes above $100,000 a year—more than half of those above $125,000, according to McMillon. The challenge is to attract more members with even higher household incomes.

One way to meet the challenge is to offer great products to give those customers a reason to come in. “There are brands that we would like to carry in the club that haven’t determined that they want to be in the clubs yet,” McMillon said recently, speaking of the merchandise effort generally. “Some people are still hung up over the old days of channel shopping. The truth is that members with money are shopping all kinds of channels today. Some of the brand names have figured that out and they’re dealing with us directly. … [With] others we do it indirectly, and there are others still that we are pursuing today to try to bring into the club.”

Despite some missteps along the way, Sam’s has grown to a chain of 567 clubs with just under $40 billion in sales and $1.4 billion in net profit. Sales grew 7.2 percent last year, profits 8.2 percent. Executives believe they’re back on the right track.