Wal-Mart's Crossover Strategy Still Works

Sales are up, as budget-minded consumers lured by cheap groceries make the retailer's stores their one-stop shopping choice
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Twenty years ago Wal-Mart Stores (WMT) launched the first step in what would turn out to be an aggressive move into the grocery food business. It was a calculated bet that the chain could extend its low-price formula beyond general merchandise. The thinking at headquarters in Bentonville, Ark., was that customers would flock in to buy food at everyday low prices and then stay to buy everything else for the household, from Tide detergent to Hanes boxer shorts.

It turned out to be a brilliant strategy. In recent years, as Wal-Mart grew into the world's largest and most powerful retailer, executives there have sometimes seemed to be grasping for new ways to grow, such as moving into high-fashion apparel, a strategy that failed spectacularly, sending sales into negative territory. But as the U.S. economy flounders and Americans are looking for bargains that will stretch every dollar, Wal-Mart's food aisles are thronged yet again.

That was apparent in Wal-Mart's February results, released on Mar. 6. Sales at stores open at least one year rose 2.6%, mostly from growth in groceries. That may not sound like a lot, but 2.6% growth is quite a feat today, given that many retailers are struggling to post any sales gains at all as consumers cut back. Rival Target's (TGT) sales for the same period, for instance, grew a mere 0.5%. "There are a few daily and weekly purchases like food that consumers have to make, regardless of how the economy is performing," says Frank Badillo, senior economist at researcher TNS Retail Forward.

The Economy Favors Discounters

A combination of factors have lined up in Wal-Mart's favor. Gas prices are rising steadily—to an average of $3.16 nationwide for unleaded, up 66¢ from a year ago—so consumers are looking to cut down on driving and hence are consolidating their shopping trips as much as possible to one store. That's especially appealing in rural areas where shoppers may have to drive great distances, and where Wal-Mart has about half of its stores.

Once shoppers arrive at a Wal-Mart store, of course, the prices on everything from socks to salmon are often lower than those at department stores and supermarkets. Shoppers are even lining up to buy gas at about 430 Wal-Mart and Sam's Wholesale Clubs where it's available, generally for 3¢ or so less than at area gas stations. With household wealth being steadily eroded by higher mortgage payments, tighter credit, and falling stock and home prices, discounters have an edge. "Not only is it a one-stop shop, it's also a place to save money on all household needs," says David Abella, portfolio manager at New York's Rochdale Investment Management, which manages $2.5 billion in assets, including Wal-Mart shares.

Crossover Sales

Ten years ago, grocery made up just 14% of Wal-Mart's total annual sales. Today, it accounts for about 32%, or $120 billion. Wal-Mart's strategy has always been to lure shoppers with low food prices: Despite the razor-thin margins and small ticket items like potatoes at 72¢ a pound or a dozen eggs for 98¢, the hope is that shoppers will cross over from the food aisle to shop for higher-ticket items such as flat-screen TVs.

And that appears to be exactly what's happening, which has also meant that the average checkout bill for a Wal-Mart customer has gone up, the company says. In its Mar. 6 report, Wal-Mart noted that sales were particularly strong in "perishables, dry grocery, and paper goods." In a recorded call, the company said, "Sales of flat-panel TVs were extremely strong, as were TV stands in furniture." Sales in the Southeast and the Midwest were softer than in the rest of the country.

"Only One Boss"

Lately Wal-Mart has been beefing up services for its core customers, selling generic prescription drugs for $4 and opening health clinics and MoneyCenters that offer "unbanked" customers various financial services, such as check cashing, bill paying, and international money transfers. All of this is strengthening Wal-Mart's relationship with pinched consumers.

"Wal-Mart's return to basics will make old Sam proud, and it's really helping the company achieve a turnaround during a challenging time," says Craig Johnson, president of Customer Growth Partners, a consumer consulting and research firm in New Canaan, Conn. Johnson is referring, of course, to Sam Walton, the founder of Wal-Mart whose mantra was: "There is only one boss: the customer."

Of course, appealing to a struggling consumer goes only so far. Retail experts warn that the economy has to turn positive for Wal-Mart's sales momentum to continue. If consumer spending sours even further, it will be difficult to continue to sell more flat-panel TVs, or even DVDs. Abella of Rochdale Investments warns: "A lowering tide will sink all ships, and even Wal-Mart will feel its effects."

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