Wal-Mart: Hungry for New Shoppers

The retailer's tough November was offset by progress in food sales. But is that enough to lure buyers and satisfy investors?

Wal-Mart Stores (WMT) had a rough November. On Nov. 30, the world's largest retailer reported that same-store sales declined 0.5% for the month, its first monthly sales decline in a decade. The rest of the holiday shopping season looks difficult, too—it expects December sales to rise 0% to 1%, falling short of Wall Street's expectations for a 2% increase. The news sent the company's stock down about 2%, to $46.10, on Nov. 30.

But there were bright spots in Wal-Mart's report. The company racked up double-digit comparable-store sales growth in its pharmacies, as it expanded its $4 generic prescription drugs program. Perhaps even more important, it saw its effort to sell more food pay off with a 5% jump in sales, as the retailing giant offered more organic products and slashed prices.

Enticing Foodies

Food is important because it's integral to Wal-Mart's efforts to pull in higher-income shoppers. The strong numbers suggest that Wal-Mart is getting new shoppers into stores with its grocery offerings. Earlier this year, it vowed to double its offering of organic foods and to sell them at the lowest prices. For November, Wal-Mart offered deep discounts on Thanksgiving food items like Stove Top Stuffing and Ocean Spray Cranberry sauce, both for just 88 cents, down from $1.74 and $1.36, respectively.

"Two things that make people change their behavior when it comes to food—make it easier or make it cheaper," says Harry Balzer, renowned food expert and vice-president at research firm NPD Group.

Today, 24% of Americans' grocery budget is spent in Wal-Mart stores, according to research firm Retail Forward. The firm conducted another price comparison study in Columbus, Ohio, where a number of Wal-Mart's competitors like supermarket Kroger (KR) and pharmacy CVS (CVS) were slashing prices on some food and soft drinks below Wal-Mart's. Retail Forward Vice-President Sandy Skrovan found that a basket of 20 items at Wal-Mart always cost the lowest, regardless of price cuts at other places. "Consumers know that you get name-brand foods at Wal-Mart and you can trust its low prices," says Skrovan.

Return On Its Space?

The key question is whether Wal-Mart can build upon its success in food for November and keep pulling in new customers. One issue: The company's food sales numbers benefited from the fact that the amount of space dedicated to food within stores was substantially expanded. Several Wal-Mart discount stores were converted to supercenters, with the square footage dedicated to grocery and food items increasing dramatically from 15,000 square feet to over 65,000 square feet, says Burt P. Flickinger III, managing director of Strategic Resource Group, a retail consulting group. "Wal-Mart is spending more on expanding its square footage for food than the returns it is getting from this area," says Flickinger.

In the coming months, Wal-Mart will have to strike the right balance between luring shoppers with low food prices and trying to sell them more than groceries. Food has razor-thin profits, with margins of 15% to 20% before overhead expenses. Margins in fashion-related goods—like home furnishings and apparel—run higher than 35%, but Wal-Mart hasn't been able to make much progress in those categories. "The home and apparel business is challenging and this will continue throughout the fourth quarter," says Eduardo Castro-Wright, president and CEO of Wal-Mart's U.S. stores.

Wal-Mart has indicated that it will pursue a much more targeted format for its merchandise and marketing in the coming months, based on ethnicity and income demographic. But that approach could pose its own problems. "It isn't easy to micromanage merchandise at each of its 3,000 stores," says Retail Forward's Skrovan. "Even Wal-Mart doesn't have the right answer about what it needs to do now."

"He's Not Cool"

Wal-Mart might take a page or two from rival Target (TGT). The smaller retailer reported stellar results on Nov. 30, with same-store sales rising 5.9% and topping forecasts of a 5.7% gain. Target's higher-margin apparel and home furnishings make up 42% of overall sales annually compared with Wal-Mart's 15%, notes Skrovan. But Target is all about image. And its image exudes cool and chic. "Wal-Mart's now saying: 'I'm cool, too.' But you still have that old guy greeting you at the store—it's very nice, but I'm sorry, he's not cool," says Senior Analyst Marcia Mogelonsky at research firm Mintel International.

Wal-Mart had better figure out a strategy soon—after all, the dollar stores are already moving aggressively into food and other staples, giving Wal-Mart a run for its money. Family Dollar Stores' (FDO) November sales rose 2.5% and Dollar General's (DG) reported a 2.2% increase in sales. It might prove hard to bring new customers to the table even with the lure of low-priced food.