While selling higher end electronics has turned out well for Wal-Mart, selling fashion and home décor products has not. Over the past two years, the company’s efforts in this area have been marred by product gaffes, various hiccups and an actual decrease in clothing sales overall. In late May of this year, the current initiative to sell higher end clothing and home décor goods was deemed a failure. At the time, unsold inventories in clothing and household goods were higher than normal and Wal-Mart’s CFO noted that “working off excess inventory was going to depress margins for most of the summer.” In Wal-Mart’s recent June sales report it was also noted that clothing and household goods continued to be weak, despite some rather deep discounts indicating that the problem would not correct itself any time soon. Just recently, Wal-Mart’s head of fashion resigned after receiving what most considered a demotion earlier in the year when she lost her command over Wal-Mart’s home décor division.
In media coverage during this time period, the quality and nature of the products Wal-Mart was selling was cited as the reasons for its failure. There is definitely some validity to this as product issues, contracting relatively unknown designers, removing clothing staples that customers preferred, and other issues certainly didn’t help matters. What’s completely missing from the dialogue surrounding the fashion failure is the fact that Wal-Mart’s brand and business model simply do not support selling higher end fashion. The true solution to Wal-Mart’s fashion woes is not a better product mix, it’s to build a stronger brand.
I’m sure many readers will find the assertion that Wal-Mart lacks a strong brand as preposterous as it’s one of the best known brands in America --the world even. However, I contend that a strong brand is one that commands a price premium from the customer due to a combination of product/service characteristics such as style, cachet, value, quality, performance, and exclusivity . A strong brand can trump a lower price from another brand, as the product will be seen as inferior and thus not capable of meeting the customer’s needs. A strong brand is an absolute necessity to reach up-market consumers because their concern is in acquiring the strongest combination of product characteristics first, price second.
Wal-Mart’s Branding problem comes down to the fact that they compete on price as opposed to having the best or most stylish products. Their position in the marketplace is of being “the lowest cost provider”, which for clothing and home décor, translates into the provider people go to when they have no other choice. As a result, Wal-Mart is an unappealing place to purchase clothing for most customers. I’m sure that even if Wal-Mart carried similar clothing as a more upscale retailer, the children of affluent shoppers would revolt if their parents tried to buy them clothing at Wal-Mart, due to their feelings towards the Wal-Mart brand.
As an example of a successful method of reaching the customers that Wal-Mart covets, all one has to do is watch a Target TV Commercial. In most Target commercials, whether they’re to advertise cheese crackers or clothing, they are designed to sell you on the idea that Target is a hip, stylish, fun place to shop. Target’s commercials that market fashion never mention price. Instead, they show good looking people wearing stylish clothing and having a good time, whilst famous designers dialogue with customers about the accessible style they’ve created just for them which gives the designs a more personal touch. Target’s marketing activities are designed to build the Target brand, and with it, the ability to sell premium products to affluent customers.
Wal-Mart’s mistakes around fashion, on the other hand, are indicative of a company that is out of touch with the way consumers perceive its brand. The following recent statement illustrates this point of view: “I don’t think any customer has a problem buying a white blouse from Wal-Mart” – Lee Scott, CEO of Wal-Mart. Meanwhile, the customers the company covets are ignoring its low price touting advertisements, and are instead spending their money with a retailer that sells a brand based on accessible style and cachet. In short, the customer is effectively telling Wal-Mart how you need to market to them in order to win their business. Wal-Mart’s brand, business model, and marketing strategies are all impeding their ability to build a fashion business that attracts affluent customers.
However, rebranding Wal-Mart is probably unrealistic as it could result in the loss of some of its core customers, many of whom are low-income people in need of the lowest cost provider, particularly when the current Wal-Mart marketing message, as compared to Target’s are so different. It’s also difficult to rebrand a company the size of Wal-Mart whose current identity is so engrained in the minds of consumers. Considering the importance of its fashion (and home décor) initiatives to drive future earnings, here are some things for investors to keep an eye on as signs that Wal-Mart is going to turn this one around:
1) Acknowledgement of the Branding Issue: Wal-Mart’s fashion and home décor businesses won’t grow until Wal-Mart accepts that its brand is a liability to the growth of those businesses and takes appropriate steps to fix the issue.
2) Learning from competitors: Wal-Mart needs to learn how to emulate the strategies that other retailers use to attract the customer’s they currently covet, as opposed to simply using its current playbook.
3) Building or acquiring an up-market brand. A winning combination would be for Wal-Mart to buy an up-market brand, not alter it to reflect ownership by Wal-Mart (or even reveal it), and simply use its supply chain efficiencies on the back-end to make the brand more profitable. E.g. American Eagle prices with Wal-Mart efficiency.
4) Reconnect with the Customer: If Wal-Mart was better connected to its current customer base in addition to those they’re pursuing, they wouldn’t be having these issues around selling fashion. Wal-Mart management needs to put itself in the customer’s shoes, in order to understand how to build their brands and learn from the competition.
If Wal-Mart begins to develop an understanding of how its brand is a liability to its fashion business and takes appropriate steps to resolve the issue, I think the company can engineer a huge turnaround in this area and be highly successful. However, the focus on product will never be successful as long as Wal-Mart’s brand remains the same.
Disclosure: The author doesn’t own any positions in any of the companies mentioned in this article.
