Wal-Mart tries to stave off sales decline

In 2006, it sold its stores in Germany and South Korea after failing to excite shoppers with its deal-driven approach. And just last week, its Japanese unit, Seiyu, posted a loss of $195 million for the year ended Dec. 31. That's twice the loss the company had forecast.

Japanese shoppers initially rejected Seiyu's cheap goods, equating low prices with low quality. Then they eschewed even the higher-end goods the store began offering later in the year. So Seiyu ended up discounting too much, which ate into profit margins. The store said one of its weakest areas was clothing.

Apparel has been a sore spot for Wal-Mart domestically, too. The share of sales from that category, plus home goods, has dropped from 20% in 1990 to less than 15%, or $56 billion, today.

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The company's most recent foray into fashion ended as a huge embarrassment: Two years ago it bought ad spreads in Vogue and sponsored a fashion show in New York during Fashion Week. The chain tried to redefine its stores as a mecca for fashion, with narrow-leg jeans and trendy outfits sold under the Metro 7 label.

Bewildered Wal-Mart shoppers completely rejected the items, and thousands of stores were left holding unsold apparel. As inventory piled up, Wal-Mart let go of Executive Vice-President Claire Watts, who led the effort.

Despite these problems, Wal-Mart is hell-bent on figuring out an apparel strategy.

Just last month it revamped its clothing unit, laying off several people at its Bentonville, Ark., headquarters and moving several employees to New York under Dottie Mattison, who last year replaced Watts as chief of apparel, shoes and jewelry.

In New York, the apparel group will be more aggressive about quickly getting trendy items into stores to better compete with other low-priced rivals like Target and H&M. A smaller group in Bentonville will handle number-crunching tasks like making sure the right assortment of goods is sent out to locations nationwide and replenished on time.

Wal-Mart is attracted to apparel because, if done right, clothing can deliver gross profit margins of 45% to 50% or more, compared with the lower 20% margins that Wal-Mart ekes out from most of the household staples it sells, including consumer electronics, says David Abella, portfolio manager at Rochdale Investments, who owns Wal-Mart shares. "Even a basic $5 T-shirt has as much as a 35% margin," says Abella.

But he says fashion apparel is a harder sell than, say, a big-screen TV because it comes with the baggage of snob appeal. "For the simple reason that even people on the low-income end don't want to be out in public with something they got at Wal-Mart," he says.

Other discount retailers have succeeded where Wal-Mart hasn't. Target, for instance, is a destination for cheap chic clothing from top designers. Apparel makes up 22% of Target's sales, and home furnishings account for 19%. At Wal-Mart, apparel makes up an estimated 10% of sales, though some retail experts think the company could double that with a smarter approach.

Flickinger believes that besides spending more on marketing, Wal-Mart should look for celebrities who better connect with today's consumers. But Wal-Mart hasn't been willing to invest heavily in such a marketing effort, especially since apparel is harder to position in the market than staples like Tide or Bounty.

Patricia Edwards, managing director and portfolio manager at Seattle money manager Wentworth Hauser & Volich, says: "Wal-Mart executives are very good at the science of retailing but fall short when it comes to the art of retail."

At Target, for instance, there is a laser focus on marketing an image, to the point where even the chain's top executives get involved in what goes into Target advertising. By contrast, Wal-Mart CEO H. Lee Scott told BusinessWeek editors last year, "I'm not a big fan of marketing."

In fact, retail experts agree that Target's snazzy advertising is what makes the discount retailer look like an über-cool destination. Customers have learned they can find the latest trends in everything, such as home goods (a teapot designed by Michael Graves) or clothing from some of the edgiest designers like Proenza Schouler of New York and Luella Bartley of London.

And while Target's ads have been relentless for almost two decades now, Wal-Mart's apparel-focused ad campaign was a flash in the pan whose few pages in Vogue and a handful of other women's magazines barely lasted a few months before being pulled.

"Wal-Mart is full of penurious people who want a quick fix, and an apparel strategy cannot be achieved overnight," says Flickinger.

The behemoth's ability to deliver in this key area is central to its domestic growth strategy, but everyone agrees this is the retailer's toughest challenge.

"It's similar to a strategy where Hyundai starts producing a luxury car -- would people believe in that brand? I don't think so," says Robert Passikoff, president of brand consulting firm Brand Keys.

Wal-Mart has changed its advertising tagline from "Always low prices" to "Save Money. Live Better." The problem is, people are still going in there to save money on basics but going elsewhere for the live better part of the equation.

This article was reported and written by Pallavi Gogoi for BusinessWeek.

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