walmart sales in 2002

SternBusiness Fall/Winter 2002   Private labels have come a long way since the low-quality, low-priced, generic canned goods of the 1970s. Today, the world’s largest retailer is taking on its biggest customers at their own game, developing an ever-increasing number of private-label goods. Who will emerge victorious from this clash of retail titans? By Tim Condon     ike all successful companies, retailing giant Wal-Mart faces the dilemma of trying to find opportunities significant enough to sustain high growth rates. After all, the company is already the largest company in the United States with $183 billion in domestic sales in 2001. In recent years, however, the Arkansas-based retail behemoth has seen same-store sales growth settle in at 5 percent to 6 percent, faced stiffer retail competition, found fewer rural locations in which to open new stores, and reported mixed success in international markets. In response, Wal-Mart has aggressively embraced a newer strategy: private labeling. Private labels are essentially brands that are owned or licensed by retailers and often manufactured by private label manufacturers. The push for private labels is a move typical of Wal-Mart founder Sam Walton, providing customers with more options at lower prices. But the gambit requires a delicate balancing act by Wal-Mart and the branded manufacturers that supply Wal-Mart, for the strategy pits these allies against one another. To aggravate matters, Wal-Mart has extended its private labels beyond conventional store brands like Sam’s Choice cola. Indeed, its newer private labels are nearly indistinguishable from nationally branded competitors: White Cloud toilet tissue and diapers, GE Small Appliances, and Ever Active batteries. These Wal-Mart private labels spend little on advertising and research but offer nearly the same quality as their branded competitors. Since they allow Wal-Mart to create and capture value that has traditionally gone to branded manufacturers, those manufacturers must now dream up new ways to create value for the consumer. Wal-Mart: Past, Present, and Future Since its founding in 1962 – the same year that Target and Kmart were founded – Sam Walton’s brainchild has grown to dominate the discount shopping sector . Just 13 years after it started offering food, Wal-Mart is now America’s largest grocery retailer with an 11 percent share. It has surpassed Toys “R” Us to grab a 19 percent share and become the largest toy retailer. So powerful is the 3,244-store chain that the most prominent consumer packaged goods firm, Procter & Gamble (P&G), now tallies 15 percent of its sales – about $6 billion annually – in Wal-Mart’s aisles. P&G, however, accounts for only 3 percent of Wal-Mart’s sales. Most other branded manufacturers similarly rely on Wal-Mart. As recently as 1989, Wal-Mart was second to Kmart in discount retail sales. However, Wal-Mart’s lower-cost rural locations and its highly efficient distribution and inventory management system allowed it to achieve enormous economies of scale and purchasing power. These competitive advantages allowed Wal-Mart to pass cost savings to the consumer. Thus, Sam Walton was able to capture value by offering a variety of nationally branded products at the lowest prices in order to satisfy United States consumers’ love affair with branded products. Over time, Wal-Mart’s managerial and technological innovations have diffused into the competitive marketplace. As a result, discount retail competitors have increasingly closed the pricing gap on similar products. In response, Wal-Mart is now leveraging its significant penetration – an estimated 60 percent of U.S. households shop at Wal-Mart – to make an aggressive push into private label products. Changing Tides in Branding War Wal-Mart’s push coincides with an increased willingness of consumers to choose among several different brands. As innovation has become less significant, particularly in low involvement purchase categories such as paper towels and baby wipes, formerly second-tier competitors have caught up to the innovators. In many instances, consumers have traded brand loyalty – buying Lysol, and only Lysol, again and again – for the concept of brand repertoire. Brand repertoire is the set of acceptable competing brands in a category for a given consumer – Lysol, Formula 409, or Clorox, for example. Often the final purchase decision is made from this set based on availability, price, or occasion. "Wal-Mart is now leveraging its significant penetration -- an estimated 60% of U.S. households shop at Wal-Mart -- to make an aggressive push into private label products." More important, consumers’ brand loyalties have started to move from product loyalty to destination loyalty. And the Wal-Mart brand commands intense loyalty among its target. It is not unusual for a Wal-Mart store to pull customers from 30 to 40 miles away. For much of America, visiting Wal-Mart has become a ritual, akin to attending church on Sundays. In 2001, consumers averaged 5.66 trips to Wal-Mart in a given four-week span, and 7.13 trips per four weeks in December, according to one store manager. This change in consumer mindset has given Wal-Mart more power over branded manufacturers. After all, any brand removed from Wal-Mart shelves faces severe consequences. Wal-Mart’s Private Label Strategy As the technology and assets needed to manufacture consumer products such as paper towels, chocolate chip cookies, and trash bags become more easily accessible, the advantages afforded by having superior inputs, superior technology, and superior operations tend to disappear. Value then shifts to those who provide either superior access or superior segmentation, or to those who can continually provide substantial innovation. Clearly, Wal-Mart’s initial strategy has been to enter commodity-like categories and leverage its enormous access to consumers in order to create and capture value. hus, Wal-Mart works with non-branded manufacturers like Paragon Brands to create parity products at lower costs. Instead of plowing money into advertising or new product innovation, Wal-Mart uses low-cost additions such as flashy packaging and creative names to offer compelling alternatives. As of the 2001 annual meeting, Wal-Mart offered 1,259 private label products – up 12 percent from the previous year. Wal-Mart’s website indicates that that number is now greater than 2,000 and that the company is actively recruiting brand marketers. A recent walk through Wal-Mart stores indicates that Wal-Mart is taking several approaches to its private label push. The majority of Wal-Mart’s private label products are either value store brands or premium store brands. Value store brands, such as Great Value food and beverages and Equate pharmacy products nearly always represent the opening price point in their respective categories and communicate this value to the consumer through basic packaging and multiple category offerings. These brands often look like and sit near their nationally branded competitors in Wal-Mart stores. Wal-Mart’s premium store brand, Sam’s Choice, also spans multiple food and beverage categories, but often competes with a higher quality product in a premium category or segment. Sam’s Choice usually represents the opening price point of a premium segment of the category. The orange juice category analysis demonstrates how Sam’s Choice and Wal-Mart’s value brands often dictate the range between value and premium segments. The presence of these private labels effectively caps the prices that branded alternatives can command in each segment. These brands target the price-conscious consumer who has low brand loyalty in specific categories. Wal-Mart has also developed high quality private labels that look, feel, and act like nationally branded products. These premium packer brands are typically placed on the shelf with little to no advertising, identifying price/quality gaps not necessarily at the opening price point. These brands typically compete in categories where branded manufacturers use minimal innovation in an attempt to keep prices high. The most prominent example is the White Cloud brand of toilet tissue and diapers, a brand that P&G abandoned in the early 1990s and Wal-Mart licensed in 1999. It now sits on the shelf competing against P&G’s Charmin and Pampers. Other examples are Wal-Mart’s line of Ever Active batteries and its purchase of the GE Small Appliances name. None of these brands displays the Wal-Mart name and each is virtually unrecognizable as a private label. A recent in-store promotion for White Cloud demonstrates the full power of Wal-Mart’s control over access to the consumer. Wal-Mart allowed consumers to touch, squeeze, and handle open rolls of Charmin,