Wal-Mart's New Growth Opportunities

The retail giant is dropping its high-end strategy to focus on securing the loyalty of its base with services such as health care, banking, and broadband access

Rural America, Wal-Mart wants you back. Gone is the focus on trendy fashions, 400-thread-count sheet sets, and snooty ads in glossy fashion mags designed to appeal to a higher-income demographic that rarely shopped at the store anyway.

These days, Wal-Mart Stores (WMT) is making a big push to woo back its core audience with a strategy based not just on price cuts, but on a more holistic approach with deeper and broader services aimed at its core customers. The latest offer is high-speed Internet access, a costly proposition in many remote corners of the country. On Oct. 9, Hughes Network Systems (HUGH) announced it will sell satellite broadband at Wal-Mart stores. The satellite broadband offering at 2,800 stores is just the latest in a litany of services the retail giant has rolled out this year.

Seeking a New Paradigm?

The Web initiative follows others—check-cashing for the "unbanked," inexpensive medical care at in-store clinics—in which Wal-Mart has boosted its services in a bid to regain customer allegiance. "Wal-Mart is really pulling out all the stops and going back to its core customers and trying to invigorate its base," says David Abella, portfolio manager at New York's Rochdale Investment Management, which handles $2.5 billion in assets.

Clearly, Wal-Mart has struggled to revive sales. Through Aug. 31, sales at U.S. stores open at least 12 months have grown a mere 0.8%, putting the company on track for its worst sales year in history. That pace would be even slower than the 1.9% same-store sales increase in 2006, which was already Wal-Mart's record worst performance. Overall sales growth is also slowing: Last year total revenues jumped 11.7%, and analysts estimate an 8.4% increase for this year.

So will these new efforts help bring profits or increase same-store sales? Experts say it's tough to predict. "Wal-Mart is so big now that everything that it does will just be incremental," says Stephen Hoch, professor of marketing at the University of Pennsylvania's Wharton School. Others say the service effort is only the latest Wal-Mart attempt to test multiple strategies and wait to see which one gains traction. "It is a big gorilla in search of a new paradigm as a business model," says Peter Sealy, adjunct professor of marketing at the Drucker School in Claremont, Calif.

Benefits to Brand and Image

What the service effort will do, everyone agrees, is help Wal-Mart secure customers who are more loyal. Providing its core base with greater services—especially in areas where they are underserved—could cement Wal-Mart's strength with its audience. "It plays to their sweet spot in terms of being able to provide cheaper products and services to a particular customer base and reinforce its brand as a destination for the underserved," says Robert Passikoff, president of consulting firm Brand Keys.

Using a retail outlet to sell telecommunication services is nothing new. But given that half of Wal-Mart's 3,500 stores are in rural areas, the Hughes deal represents a clever strategy to access Wal-Mart's base. Better broadband service will clearly benefit rural communities, as the Pew Internet & American Life Project reported that only 31% of them have access to high-speed Internet services. "It will also offer a true one-stop-shopping experience," says Abella.

These services will also help burnish Wal-Mart's image, which has been tarnished in the last couple of years by heavy criticism of its wage and health benefit policies and problems with customer service (BusinessWeek, 10/2/07).

Earlier this year, Chief Executive H. Lee Scott announced that over the next two to three years Wal-Mart will add 400 in-store health clinics to its already existing base of 78 clinics. Each visit costs an average of $45 to $50, compared with $150 for a visit to the doctor's and $400 for a trip to the emergency room. Wal-Mart found that 40% of visitors at these clinics were uninsured. At the same time, the $4 generic prescriptions Wal-Mart introduced in September, 2006, now account for more than 35% of all prescriptions filled at the chain. Nearly a third of the $4 prescriptions are filled without insurance.

New Areas for Price Competition

"The response has been nothing short of spectacular," says Scott (BusinessWeek, 5/24/07). "Within days of announcing our $4 program, countless other discounters, drug stores, and supermarkets dropped their prices on generic prescriptions."

The Bentonville (Ark.) company earlier this year also announced the Wal-Mart MoneyCenters (BusinessWeek, 6/20/07), which would offer its customers a host of financial services including check-cashing, bill payments, and international money transfers. According to ACNielson , 42% of Wal-Mart shoppers have yearly household incomes under $40,000. Banking service would help many customers who are described as "unbanked" because they don't use banking services. Wal-Mart says its entry into financial services (BusinessWeek, 7/6/07) has already cut some fees, such as check-cashing, by 25% to 50% in certain markets.

Sure, Wal-Mart is entering unfamiliar territory with Net access. How well Hughes serves Wal-Mart customers in a service-intensive business could make it vulnerable to complaints. "Wal-Mart will essentially be a reseller…and the service quotient will be beyond their control," says Abella. But he also believes that, as in most product categories Wal-Mart enters, prices for satellite service in rural areas will drop. And for Wal-Mart's core customers, low prices always matter.

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