DECEMBER 2005 :: COVER STORY : BIG BUSINESS

An Upscale Wal-Mart?
The World's Biggest Retailer Sets Its Sights on Target's Clientele

By Ann Zimmerman and Kris Hudson
Staff Reporters of The Wall Street Journal

Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

A prototype store in Arkansas, where Wal-Mart is based, features wider aisles, lower shelves and more elegant displays of pricey products. The retailer that sold the first DVD player under $100 now offers 42-inch flat-panel plasma TVs for $1,648 to $1,998.

An Upscale Wal-Mart? Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

How Wal-Mart Weathered the Storm: Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

Against the Wal: When Wal-Mart Stores became the world's biggest public company, it also became one of the world's biggest targets.

The Wal-Mart Effect: Wal-Mart, itself one of the largest grocery chains in America, is changing the way food is sold at other supermarkets as well. Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart and other discounters.

The Lucky 2% Getting into Wal-Mart is an entrepreneur's equivalent of making it to Broadway. Even a short run on the shelves there can help transform an invention from niche product to household name.

It's a significant gamble for Wal-Mart, because lower-income rural shoppers have always been the core customers of this nearly $300 billion-a-year company-bigger than any other nonoil company in the world, as measured by sales. But Wal-Mart needs to shake things up. Its sales at stores open at least a year, a key measure of retailing performance, have been lagging. Over the past year, such sales at more fashionable Target have been rising twice as fast. Wal-Mart's share price has slumped over the past year, while Target's has risen.

'The Wrong Direction'

The sense of crisis sank in last holiday season. Last December, Wal-Mart stores were instructed to display items under $2 in the prominent places at the end of aisles, in an appeal to financially squeezed shoppers. But sales were disappointing. "We went the wrong direction," Wal-Mart CEO Lee Scott said earlier this year, reflecting on the failure. "You can't just spend all your time chasing a customer who is going through that economic cycle."

Across its 3,100-store empire, Wal-Mart is deploying a 340-person squad to enforce new "rack rules." In a Wal-Mart supercenter in Cullman, Ala., Joel Ewing recently snatched a group of peach-colored, beaded tunics from a circular rack and put them on a rack with four outspread arms. The four-way racks hold fewer items but allow shoppers to glimpse a garment's style and detail. "Putting out less merchandise can translate into more sales, because customers can really see what you have," explains Mr. Ewing, touring the store with a manager. "But here, that is not an easy lesson to teach."

Wal-Mart's predicament reflects broader changes in the U.S. The country's uneven economic recovery over the past couple of years has benefited high-income Americans more than the typical Wal-Mart customer, who values price over image. Even before hurricanes pushed gasoline over $3 a gallon, rising pump prices were having a disproportionate effect on working-class Americans, because fuel represents a much bigger slice of their budgets.

Executives now say Wal-Mart needs to appeal to the shopper who loves a great deal on socks but also can splurge on merchandise with fatter profit margins, such as high-quality linens or a stereo.

After surveying its customers and concluding they were "starved for fashion," Wal-Mart has started to bring in more stylish merchandise. The company still does all its apparel buying out of its Bentonville, Ark., headquarters. But two years ago, it opened a New York office to spot hot styles. Last year, the office persuaded headquarters to take a chance on long, patterned skirts embellished with sequins. They sold out in all stores within weeks.

"Fashion and creativity are not centered in Bentonville," says Celia Clancy, a former employee of Filene's Department Store, who runs strategic planning for the New York office. "To excel and be credible in apparel and home furnishings, this had to happen."

Still, the company must be careful not to alienate its traditional base. Other retailers have flopped in pursuing growth outside their areas of expertise. A decade ago, J.C. Penney failed to attract new customers and alienated old ones when it tried to go upscale. Wal-Mart may also face a challenge squeezing suppliers for the last dollar of savings as it sells a plusher image.

Many shoppers simply don't associate Wal-Mart with fashionable clothes. Caroline Geppert, a 36-year-old stay-at-home mom from the Dallas suburb of McKinney, regularly shops at Wal-Mart for clothing for her daughters, but not for herself or her husband. "I've been surprised going to Target and seeing some things that I would buy and wear, whereas in Wal-Mart I usually wouldn't buy anything other than socks or underwear or a basic T-shirt," says Ms. Geppert, who formerly worked as a lawyer.

Calmer Ads

Advertising is another front in Wal-Mart's quest. For years, Wal-Mart advertised relatively little, believing that low prices spoke louder than any commercial. What advertising it did emphasized "everyday low prices" and "rollbacks," or permanent price cuts. Television ads featured a yellow smiley-face character bouncing around the store and slashing prices. That approach seemed to work as Wal-Mart devastated retailers such as Sears and Kmart that had higher costs and less-efficient distribution.

But the constant emphasis on bargains turned off many affluent shoppers. And the frenzied advertising seemed to echo the long lines and busy aisles that can make shopping at Wal-Mart an ordeal.

Wal-Mart's marketing team has now crafted calmer ads. One spot shows small girls walking down a hallway at home wrapped in oversize towels. Another features Trish, a customer in her home, describing how she found low-priced yet contemporary decorating materials at Wal-Mart.

With the ads now running nationally, the challenge is to make the stores match the image. If higher-income shoppers are lured to the stores only to find the familiar drabness, they're not likely to give Wal-Mart a second chance.

Filet Mignon Sales Up

In early June, Wal-Mart opened its prototype supercenter in Rogers, Ark., which targets the new demographic. Among the changes: wider aisles, mock hardwood floors and skylights. Stereo systems are on display rather than being left in boxes.

Then there are the shelves. In older stores, all are 7 feet high, sometimes with merchandise stacked above that. The new prototype in Rogers strategically places 4-foot-6-inch shelves among higher displays. One shelf of small kitchen appliances is kept low so shoppers can see over it to the aisle of pans and kitchen utensils. "The aisles are wider and it's not as crowded," says Amy Cooper, a Rogers homemaker, loading her kids into a minivan. "It seems cleaner."

The new sales strategy is showing early results, Wal-Mart says. In McKinney, Wal-Mart manager Brent Allen says his recently opened supercenter has seen a "high-double-digit percentage increase" in its sales of big-screen and flat-screen TVs, compared with a smaller store that used to be across the street. The sets are easy to see on a wall with less merchandise packed around them. Mr. Allen has noticed healthy sales of artichoke hearts and filet mignon. He doubled the floor space in his wine department after customers kept emptying the shelves. "I think we have a more well-rounded income level that is visiting the store now," Mr. Allen says.

Wal-Mart's immense size, however, means it will be a long time before the prototype store is the norm. Wal-Mart plans to open roughly 100 supercenters modeled on the prototype this year, but that represents just 3% of the total.