Food for Thought

November 13, 2007 - 13:30

Wal-Mart Losing Ground in Evolving Retail World

Wal-Mart’s era of overwhelming business and social influence in America may be drawing to a close, according to a recent Wall Street Journal article. For the past 35 years, Wal-Mart has used a combination of “low prices and relentless expansion” to reshape the world’s largest economy. They taught American’s to demand ever-lower prices and instructed businesses on running a lean organization, which helped boost productivity, increased the buying power of consumers and lowered the inflation rate. It also sped up the move to manufacturing in Asia and the decline of the “Main Street” feel of small-town America, reports the WSJ.

These days, Wal-Mart’s influence in the world of retail appears to be dwindling. While it still can disrupt prices, intense competition from swifter rivals no longer guarantees success of every initiative, according to WSJ. Competitors are luring some shoppers away from the retailing titan by offering greater convenience, higher quality, more selection within categories and better service. As a result, a sizeable portion of American shoppers are increasingly looking for qualities that Wal-Mart has a difficult time providing. After 35 years of “low prices, always,” quality, convenience and service are now a strong competitor. Even some of the big national brands that were fuel for the Wal-Mart firestorm have begun to look elsewhere. Exclusive distribution deals that don’t include Wal-Mart are popping up. PepsiCo Inc., which has always favored the mass merchandiser’s distribution model, recently chose Whole Foods to launch a new energy drink.

Wal-Mart has recently struggled in its efforts to crack international markets. It has exited Germany and South Korea, where it failed to adapt to local taste. The big box retailer has yet to turn a profit in Japan, where low prices are equated with low quality. But even in the face of these challenges, Wal-Mart remains a powerhouse in retailing. The company’s unquenchable thirst for economy of scale has been the secret to its market-changing power. Its one-stop shopping super centers are the jewels in its retailing crown. But as the tastes and demands of consumers change to focus on freshness, choice and service, the big box retailer’s focus on scale may be evolving into a weakness. The success of the super center has revolved around superior efficiency, uniformity and scale, which now makes it difficult for Wal-Mart to meet the new demands of consumers. Wal-Mart’s great insight was perfecting the “value loop” in retailing, according to the WSJ. In its purest form, the loop works like this: Lower prices generate increased sales and profits. Some of the profits go into additional price reductions, generating more sales. This value loop may be unraveling. Sales gains at stores open a year has declined to just 1.3 percent, and the price gap between rivals has narrowed.

The newspaper describes Wal-Mart’s loss of clout as a “reflection of a more fragmented world,” and goes on to state “retailing is a mirror of how we live and work.” Big box stores have thrived by selling national brands. Two things drove this success: the growth of mass media and a freeway system that encouraged large stores in remote areas. Stores and national brands allowed the retailer to achieve scale efficiencies that allowed them to overwhelm local retailers and regional brands. The Internet is transforming the retail definition of scale, WSJ says, pointing out that 150,000 items in a super center pales in comparison to millions of items available on the Web.

Wal-Mart’s influence with suppliers also may be eroding, with some manufacturers saying they can move merchandise faster at other chains. Four of the top-10 consumer product manufacturers suggest that their products move faster at Walgreen and CVS. Wal-Mart’s loss of influence can also be seen in other areas. In 1984, Wal-Mart embraced bar-code scanners in its distribution centers and stores to replace less-efficient technology used at other retailers. In 2003, they embraced another new logistics technology, radio-frequency identification (RFID). Major vendors were mandated to use RFID tags on products shipped to its warehouses and stores. Wal-Mart installed readers at these locations hoping to further automate and lower inventory costs. RFID was “quietly dropped” earlier this year after complaints by vendors of high costs and lack of return on investment, reports the WSJ. Wal-Mart wasn’t able to demand that large suppliers continue using this new technology as they did with barcodes.

History is littered with the names of large companies that grew to enormous size and were able to rearrange the world to fit their strengths for a time. IBM, Microsoft, General Motors, US Steel, Sears, WT Grant and Woolworth are a few that come to mind in both the manufacturing and retailing fields. Some were able to reinvent themselves as the likes and needs of consumers changed, some were not. It remains to be seen which path the Bentonville behemoth will follow.

 

Scent Emerging as Powerful Marketing Tool

Recently, pedestrians hurrying down crowded sidewalks near Bloomingdale’s in New York may have noticed a certain fragrance in the air. It was not their imagination: To promote a new fragrance, DKNY sprayed its new “Delicious Night” fragrance into the air. This is an example of a new broader marketing trend. After bombarding consumers for years with ads aimed at their eyes and ears, advertisers are now starting to focus on the nose, with ads that rely on smell to get attention. While this may not seem that new, an increasing number of companies, including food and beverage makers and even TV networks, are using scent to gain the consumer’s attention. Showtime cable network promoted its drama “Weeds,” about a drug-dealing mother, by adding the scent of marijuana to magazine ads. Last year, supermarket shoppers could get a whiff of a new frozen garlic-bread pizza by scratching a scent-laden card in the stores. Avon, the cosmetic company whose products are sold door-to-door by associates, is now using scent strips and scented pages in its bimonthly catalogs.

Scent is supposed to create a distinctive brand or product association in the consumer beyond what an image or written word can convey. Scent ads are four to eight times more expensive than plain print ads, but most of the companies using the technique in their ads say the additional cost is worth it because they create strong sales and attract new customers. Competition for shoppers’ attention has become increasingly intense, and using scent allows the consumer to “sample” the product, a crucial tool in luring buyers. Horticultural marketers have always thought that plants that release pleasing scents sell better than those that don’t. Plant breeders have always sought to transfer or insert pleasing scents, when possible, into their new introductions. Using scent, whether natural or created, has the potential to be a powerful tool in marketing plant products in a crowded world of “me-toos.”

 

Understanding Consumer Behavior Through Simulated Shopping

“Surrounded by three flat-panel screens and with a retina-tracking device scanning her eye movements, a consumer makes a simulated walk down a store aisle,” began a recent Wall Street Journal article. Asked by a researcher to find a certain product, the consumer presses forward on the handle of a simulated shopping cart. The video screens simulate her progress down the aisle. Spotting the requested product, she turns the handle to the right to gain a better front-on view of the product offering. Pushing a button to simulate a kneeling view of the shelves, she reaches forward and taps the screen to put the product in her shopping cart. Manufacturers and retailers hope these “virtual shopping aisles will help them better understand consumer behavior” and make the testing of new products quicker, simpler and more precise, the WSJ reports.

These virtual aisles are also used to recreate in vivid detail interiors of the retailers that sell the company’s products in a bid to gain more shelf space and oust inferior competitors. Some manufacturers have also built replicas of store interiors that match flooring, lighting and shelving of retailers like Wal-Mart and Target to use in hands-on sales presentations of new products and marketing programs. “As a fragmented market raises doubts about the effectiveness of traditional advertising and the competition for shelf space increases, manufacturers are intensifying their focus on ways to get the consumers attention while they are in the store,” according to the WSJ.

Using the video or simulated store rather than an actual store is quicker and more cost-effective and avoids tipping off the competition to new products that are still in the developmental stage. The battle for shelf space has accelerated as more new branded products are introduced as well as private label offerings. To sell retailers on new offerings, it is necessary to come armed with data on how the products will perform and what they will provide for the retailer. This is where the simulated shopping experience becomes invaluable. It is extremely important to demonstrate that you are the retailer’s partner, doing more for them than the competition. Being a vendor of quality, competitively priced products are almost a given. Being an indispensable marketing partner and creating superior value and profits for your customers should be your ultimate goal.

 

How Are We Doing?

More and more companies are finding out that it pays to ask customers that question. Last February, Burpee.com, an online gardening retailer, began asking customers to post reviews of the products they purchased. Anticipating taking several months to collect enough reviews and data to potentially boost business, they were surprised that after one gushing review in early May about the effectiveness of a seaweed-based growth activator, sales of the fertilizer doubled in the next month.

In the world of online commerce, savvy shoppers frequently check out review-heavy sites such as Amazon.com and comparison-shopping sites before selecting what to buy, the Wall Street Journal reported recently. But now a growing number of businesses are adding customer reviews to their websites. Soliciting and posting reviews is a good idea, especially for companies or products that have little brand recognition. Reviews are another form of marketing that encourages repeat visits, creates customer loyalty and encourages word-of-mouth advertising.

Research surveys suggest that product reviews can be a powerful marketing tool. One such survey found that 71 percent of adults use online product ratings with 42 percent of those saying they trust their peer’s opinion more than they trust print advertising.

Soliciting reviews is not limited to just positive opinions. Successful businesses embrace rather than fear unflattering reviews. Negative reviews can give a business a way to spot potential problems early and develop solutions.

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