Wal-Mart Comes Back Swinging

Disappointing November sales have brought a rapid response, starting with steeper discounts on top-selling items and an online ad blitz

By Wendy Zellner

After being outmaneuvered by aggressive competitors at the start of the holiday shopping season, Wal-Mart Stores (WMT ) is returning fire. Starting Dec. 3, the world's biggest retailer is launching an ad campaign that will hawk lower prices on 24 "key items," mostly toys and electronics. In another unusual move, Wal-Mart is canceling its December newspaper circular in favor of an online version that will allow more flexibility to change prices as late as possible. "That way we can be as aggressive as we need to be," says spokeswoman Mona Williams. While the outfit has experimented with electronic circulars, it has never before dropped the nationwide paper version.

As some analysts expected, this latest campaign appears designed to increase store traffic without decimating Wal-Mart's profit margins. While prices on the 24 products will be cut by up to a third, those reductions represent a relatively tiny amount in comparison with the thousands of items that Wal-Mart sells. "I doubt the aggregate gross margin on those 24 items is going to dictate Wal-Mart's earnings next quarter," says Tom Rubel, CEO of consultancy Retail Forward.

Still, if the products are right and the discounts steep enough, he expects Wal-Mart will succeed in luring back shoppers. "Promotions are clearly driving traffic," says Rubel. "Even for Wal-Mart, they need to be in that promotional game."


  Wal-Mart started the Christmas season with fewer "door-busters" and smaller discounts than in years past. Instead, the focus was on meeting earnings goal in the face of weakening sales growth and rising costs. But some rivals stepped up their own promotional efforts after Thanksgiving and caught the megaretailer off guard.

On Dec. 2 it announced that U.S. same-store sales for November were up only 0.7%, vs. the 2% to 4% it originally predicted. Now Wal-Mart expects December sales to be up 1% to 3%, but it has made no change in its fourth-quarter earnings guidance. Analysts still expect Wal-Mart to earn 73 cents to 75 cents a share for the period, vs. the year-ago figure of 63 cents.

The ad campaign in newspapers, TV, and on radio will run in 15 major markets, including Dallas, Los Angeles, and Chicago. The promoted items -- with permanently lower prices -- will include Fisher-Price's dancing Sesame Street Elmo, the Little Tikes Hummer, and CD and DVD players. "That's what people are buying," says Williams. "We're generally very happy that our pricing is aggressive enough," she insists. No doubt customers who want those particular items will be feeling pretty good, too.

Christmas is still more than three weeks away, but Wal-Mart is taking competitive challenges seriously enough that it's moving rapidly to reinforce its position as "price leader," Williams adds. Now bargain-hungry shoppers will decide if Wal-Mart has sharpened those prices enough.

Zellner is BusinessWeek's Dallas bureau chief

Edited by Beth Belton

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