The World’s A-Changing… With Or Without You!

July 20, 2006 - 08:30

The only constant any more is change; the status quo simply doesn’t cut it in a highly competitive marketplace, especially one where disposable spending dollars are being cannibalized by increasing energy costs, rising interest rates and soaring insurance premiums. There’s only so much consumers can absorb before they start cutting back on the “affordable luxuries” — the category we’re pigeon-holed into by most consumers (as is, “like” but don’t “need” to live or survive).

When sales get tough to find and sales plans are missed on a regular basis, when stock prices fall or get in the doldrums and Wall Street looks disfavorably on a company’s performance, even the big executives get nervous and start re-thinking their business models, looking for new ways to “jumpstart” their programs and images.

 

Meeting Expectations?

A classic example of this is the retail behemoth Wal-Mart. While the company is still the largest retailer in the world and its monthly sales increases are more than most retail chains’ total annual sales, those in charge have become concerned that the company’s financial performance is not meeting expectations…the expectations of its shareholders (notice I said shareholders and not stakeholders).

Stakeholders are a company’s human assets — employees, suppliers or business partners — I point this out because, in many cases, shareholder and stakeholder concerns are not always complimentary (at best) and are sometimes at cross-purposes. (Note that while I’m using Wal-Mart as the example in this article, all retailers, large and small, are — or should be going through — a lot of these same review and self-assessment processes in these challenging economic times.)

Simultaneous with financial/sales challenges come some image issues. As Wal-Mart moves into major metropolitan areas (“union” strongholds) with its supercenters, the company’s openly anti-union stance is being tested by social activists and pro-labor groups, which cite job advancement opportunities, health care benefits, worker rights in developing countries and wage issues as highly visible targets. To its credit, Wal-Mart has made some positive moves by changing some policies and fighting a public relations war.

Wal-Mart’s core customer base has always been population segments that are living from paycheck to paycheck, the ones most susceptible to higher living costs. And Wal-Mart has done an exemplary job of developing a brand that reinforces its low-cost business platform. The challenge right now is that the population that made the stores successful doesn’t have the disposable income to continue fueling the company’s rate of growth. As a result, Wal-Mart sees the need to both fine-tune its business model and focus more attention to gaining new customer segments.

A good illustration of one of its review processes is cited by John Hennessey of Concept Shopping. Using groceries as an example, Wal-Mart has looked at the shopping habits of its customers, with the results in Figure 1, right. Retailer Of Choice?

By definition, Wal-Mart is not the retailer of choice for skeptics; they only shop there out of urgency. Wal-Mart’s goal is to convert skeptics into selectives, selectives into loyalists and build its loyalist customers. Wal-Mart EVP/CMO John Fleming announced a 5-point plan:

  • Offer products shoppers are purchasing elsewhere and use the company’s logistics strength to lower the price of these goods.
  • Respond to changes in shopper demographics and life stages.
  • Develop more attention to major ethnic groups, such as Hispanics.
  • Develop a store layout designed to be faster, easier, more convenient and focused on affluent, more educated females.
  • Appeal to young people in assortments and also in policies, such as employing renewable energy and efforts to create zero waste.

To accomplish this, Wal-Mart is planning to diversify and tailor its merchandise assortments and store design to each of five key shopper categories:

  • Suburban Affluent
  • Rural
  • Boomers
  • Urban/Multicultural
  • Hispanic

On the surface, these processes look formidable, but when we dig a little deeper into how they will be implemented, the task is almost daunting. For instance, it’s highly possible that a store in a given market might have a strong customer representation in both the Boomer and Suburban Affluent segments, while another store may need to cater to Urban/Multicultural and Hispanic segments; the combinations and permutations are scary.

Each individual store will have micro-marketed product assortments and unique layouts to achieve these goals. Granted, there’s probably 60 percent of the store that has common appeal, but the expansion and contraction of specialized product categories and the addition of new assortments to appeal to a given population group, such as spicy foods that appeal to Hispanics or the addition of garden tractors that meet the needs of a rural shopper, make the management of this process very challenging.

Wal-Mart’s not going into this process completely blind. In a Suburban Affluent test store in Plano, Texas, the assortment includes an extensive wine collection and high-end electronics. This store experienced a gross profit per square foot that’s 24 percent higher than other stores in that market. And in Evergreen Park, Ill., close to Chicago, merchandised to appeal to a Multicultural market, sales were 25 percent higher than other stores in the area.

 

Challenges To Overcome

Additional challenges that will need to be overcome as this program rolls out on a chainwide basis are positioning and advertising. First, for a company that has built its entire image on price value and low operating costs, can Wal-Mart realistically cater to new consumer segments, such as the Suburban Affluent, without alienating or compromising its core low- to middle-class, price-conscious customer base, or will there be backlash?

How will the company effectively advertise in circulars or broadcast media when the assortments will vary considerably by store, even in the same advertising market? Will it only be able to advertise the common core of products that all stores will carry, not promoting the micro-marketed categories it hopes will appeal to and attract new customer segments or develop higher loyalty from existing ones? The risks of implementing all of these changes, especially at the same time, are very real…but the risks of not changing are very real, too!

 

Explanation Please

So what does all this retail babble mean to you as suppliers? Very simply, as retailers look to change, sometimes radically, it puts their suppliers at risk but also offers tremendous opportunities. On the down side, if you’re not prepared or don’t anticipate impending change, you could be surprised.

Think of how pay by scan affected those suppliers who hadn’t thought through the process in advance and developed the necessary store support. Or how about Wal-Mart’s recent focus on reducing its carrying inventory, forcing suppliers to create new, just-in-time replenishment and distribution methods? Or what about unexpectedly losing categories of merchandise because your products don’t fit into a given store’s new demographic customer profile or layout?

There are the opportunities to fine tune your assortments so they will appeal to the customer base you’ve always known was there. With proper planning, you could have more control over your destiny, possibly offering some of the benefits of pay by scan without the inherent risk.

So how do you minimize your risk and maximize your potential? First and foremost, stay in tune with retailer’s thinking and plans. Second, be proactive in offering your expertise in their decision-making processes. Third, and possibly most important, don’t fight the changes but look for the opportunity to use them to your advantage.

Bottom line, the world of retail is changing, and the changes will accelerate rather than slow down. Will you bear the brunt of the changes or be the one who sees the potential that change brings...

 

About The Author

Stan Pohmer is president of Pohmer Consulting Group, Minnetonka, Minn. He can be reached at spohmer@pohmer-consulting.com or (952) 545-7943.

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