Wal-Mart: Remembering The Forgotten Consumer

For a decade now, you could attend virtually any food industry conference, pick up any food industry trade publication, talk to almost any retail consultant and you would get advice on the same subject: how to compete with Wal-Mart. In a sense, the advice has been a very good thing for the deli/retail foodservice industry because the advice was always the same: Become the anti-Wal-Mart. A retailer looking to compete with a newly opened Wal-Mart Supercenter ought to emphasize perishables, high levels of service, focus on specialty items, ethnic and organic foods — all things that the deli department is very well positioned to do.

And so the heroes lauded in workshop upon workshop, article after article in both the trade and consumer press have been Wegman’s, Ukrop’s, HEB’s Central Market and, of course, the most anti-Wal-Mart of them all: Whole Foods. Sometimes these concepts and others like them have been credited with being viable strategies for competing against Wal-Mart. Other times they seemed to be focused on simply because they are so interesting and fun, especially for the well-educated journalist who feels a more cultural affinity with the Whole Foods’ shopper than the Wal-Mart consumer.

Yet, in the wake of Winn-Dixie’s bankruptcy and the decision of Albertson’s to sell out, something is becoming increasingly clear: namely, that these anti-Wal-Mart proposals are not so much proposals for how to effectively compete against Wal-Mart as they are proposals for how to avoid competing with Wal-Mart.

In essence, these proposals are designed to help supermarkets focus on those consumers who value variety and service and appreciate exceptional quality more than they value low price. The dilemma here is that this strategy is almost certainly correct for any individual store, yet, applied on the scale of a national chain, it winds up forfeiting large swathes of the consumer market to Wal-Mart.

The Forgotten Consumers

An individual store can survive and even thrive by focusing on a particular segment of consumers, such as upscale shoppers or organic consumers and a national chain can succeed and neglect the interests of certain consumers, say not focusing on kosher food. But the price is simply too basic and important a retail draw for major national or regional chains to simply cede the market of consumers who care about price.

Yes, Whole Foods can build a profitable, growing business on consumers with an environmental and health-oriented psychographic. In all the attention paid to what is a legitimately interesting and important phenomenon, however, it is well worth remembering that the sales of both Whole Foods and Wild Oats combined are less than 1 percent of the total supermarket industry, not counting Wal-Mart and warehouse clubs.

In other words, it is a niche business and not a viable strategy for anyone looking to win the favor of the great number of Americans who live paycheck to paycheck. Census Bureau statistics for 2004 (the latest available) give the median household income at $44,389 before taxes are taken out. This means that half of all households have incomes below this level.

It doesn’t require extensive consumer research to know that households trying to feed a family with this income level are going to be less concerned about the newest pannini and deeply concerned about the price of ham for the kid’s lunchbox.

Yet, Safeway, for example, doesn’t seem to pay any attention. Instead, it explains that: “…Safeway has been aggressively remodeling its stores and opening new stores in what it has called its ‘Lifestyle’ format store. These stores feature an inviting decor with a warm ambiance and subdued lighting that highlights its high-quality fresh products and enhances the Safeway shopping experience. In addition, many of these stores have unique offerings including a large selection of natural and organic foods, full-service meat counters, full-service bakeries and floral design centers, as well as sushi bars and olive bars.”

It is not so much that this is a bad strategy on Safeway’s part, it is more that its upscale, fresh focus ignores half the households in America. The company might as well have issued a press release saying: “If you are focused on ‘subdued lighting’, we are your store; if you like a value, go to Wal-Mart.”

Wal-Mart’s Deli Strategy

It is not that quality doesn’t matter. The truth is Wal-Mart has built its reputation as a low-price leader on selling branded products for less. Indeed when Wal-Mart began building its supercenter concept, it focused on using brands in its perishable offerings so as to piggyback on the credibility well-established brands have with consumers. This was deemed crucial by top executives in Bentonville because Wal-Mart had no established reputation with consumers for quality perishables. In produce, the strategy was very effective. Brands such as Chiquita reassured the consumer of the quality of the offerings. But Wal-Mart was thwarted in executing its plan in deli because Boars Head refused to sell to Wal-Mart.

Wal-Mart hoped to use Boars Head, with its high consumer recognition for quality deli products, as a foundational brand of its deli efforts. Boars Head feared alienating its supermarket clientele and was concerned that its association with a discounter such as Wal-Mart might diminish its own brand equity, so the deal was never struck.

Instead, Wal-Mart developed a two-prong strategy, both carrying a wide variety of branded product with a special emphasis on seeking brands with high regional appeal and launching a private label deli line, Prima Della, which Wal-Mart executives claim is designed to equal or exceed the specifications for the best broad line vendors in the deli marketplace.

Wal-Mart is now selling in excess of 20 percent of all the supermarket sales in the country. Although weaker in perishables, it is still likely that in 2005, Wal-Mart will have sold at least 15 percent of all the deli products sold at supermarkets in the U.S. One wonders if, at some point, the executives at Boars Head won’t regret their decision.

Wal-Mart doesn’t do a lot of trendy things in deli and retail foodservice and thus doesn’t get a lot of attention for its merchandising and marketing. This is because the focus among top executives in Bentonville is not so much on what they might like to do, but rather on identifying those initiatives that Wal-Mart can execute well and scale across its enormous number of high volume units.

Wal-Mart Deli Service

In Wal-Mart internally, there have been debates for years as to whether the consumer is best served by having a service deli at all. In the meat case, Wal-Mart is completely case-ready. Outside observers claim the motivation was to avoid trouble with unionized butchers. Wal-Mart executives say it was a judgment that case-ready would provide the most consistent quality.

Many think a commitment to self-service deli products would make equal sense. So far, the service deli advocates have won out and for two prime reasons: First, in the supercenter concept where service is sparse, the service deli provides one of the few points of interaction between consumers and the store staff, and maintaining this interaction has value. Second, certain hot food programs, such as rotisserie chicken, are very successful at Wal-Mart and would require substantial staff anyway, so having this staff do double duty makes financial sense.

This assessment seems firm right now but is always being reevaluated. If Wal-Mart should one day make a change and decide to focus strictly on self-service in the deli, one should expect a dramatic change in the nature of product available. When Wal-Mart switched to case-ready meat, for example, it provided the critical mass that allowed the meat industry to develop new products and packaging. (Ironically, many of the same efforts in case-ready meat have been imitated by competitors such as Dollar General, which carries fresh produce, case-ready meat and other refrigerated and frozen items in its Dollar General Market concept stores.)

Supplier Reaction

Suppliers’ take on the Wal-Mart phenomenon varies. Whenever anyone gets so big, suppliers get nervous as they become vulnerable to losing the account. Most, however, are thankful that the relationship with Wal-Mart is free of constant pressure to pay various fees and even free of the casual pressure to take the retailer’s buyers out for expensive trips to the Super Bowl and what not. As with industry leaders such as Costco, accepting such favors is cause for dismissal.

Many suppliers are critical about in-store merchandising at Wal-Mart, claiming it is irregular and that too many stores are unacceptably disheveled. All suppliers acknowledge that Wal-Mart sells lots of deli products, with particular strength in a lot of convenience items, such as grab n’ go items. But it often appears to suppliers that Wal-Mart is successful in deli despite itself with its massive sales credited merely to the massive customer count flowing through the stores on a given day, not on the excellence of the deli in merchandising, marketing and, more generally, serving customers.

Insiders at Wal-Mart think such a critique is beside the point. To whatever extent it is true, Wal-Mart executives think it is a function of rapid growth. In 2005 Wal-Mart announced plans to open 50 new discount stores in the U.S. (which sell a limited selection of self-service deli products), 220 new Supercenters, overseas it planned another 140 new stores. And this doesn’t even count Sam’s Club, a membership warehouse concept similar to Costco, or Neighborhood Markets, a smaller footprint store selling at the same price as a Supercenter and capable of being inserted both between Supercenters and in more urban areas where large tracks of land are unavailable.

These are just numbers on a page, and if you say them fast they don’t seem like much of anything, but the total sales of just these new outlets will exceed the sales of all but perhaps three U.S. supermarket chains. It is a phenomenal achievement of logistics and engineering, an annual construction project rivaling the building of the Panama Canal but, inevitably, it causes strains. It means a continuously inexperienced staff, a supply chain always being expanded, a learning process going on to identify individual market needs at new stores.

If execution is a problem, executives at Wal-Mart are confident it will get better with time as its workforce gains seasoning and stores become more established.

More generally the critique may fail to take account of the nature of the typical Wal-Mart customer. The chain is particularly strong among immigrant groups and young families, and Wal-Mart is serving as the place where many get their first exposure to “delicatessen”. In other words, it is Wal-Mart’s low-price strategy that encourages trial of specialty cheese, for example, among people to whom the product is foreign.

No Whole Foods

Without a doubt, Wal-Mart is no Whole Foods and doesn’t have the breadth of offerings or carry the most expensive lines, but every consumer has to start his or her journey somewhere and for many of the next generations, that initial exposure is occurring in Wal-Mart.

Somewhere along the line, supermarkets just decided to give up the price card and allow Wal-Mart to seize the business of consumers who are focused on price. In a sense, Wal-Mart’s mad dash to open stores can be attributed to the fact that when they open in a town, Wal-Mart can count on supermarkets moving over and focusing on fresh, service, organics, ethnic foods, etc., and thus making room in the market for a price-oriented vendor. It virtually assures Wal-Mart that its stores will be profitable

Looking ahead, when the midnight oil is burning in Bentonville, it is almost certainly not because of supermarket initiatives such as the Safeway Lifestyles concept. These are merely efforts to get out of Wal-Mart’s way. Far more troubling in the minds of Wal-Mart executives are concepts such as Aldi, Save-A-lot and the dollar stores, concepts designed to challenge Wal-Mart’s ownership of the price card. There is concern that some of these concepts seek to subdivide the sector of the consumer that Wal-Mart has claimed as its own. The Dollar General Market concept attracts a consumer with an average family income of only $30,000 — numbers such as this really concern executives in Bentonville.

The CEO of a supermarket once told me that he wasn’t worried about beating out Wal-Mart. The analogy he used was that of a group of campers walking through the woods and being set upon by a hungry bear. He pointed out that it wasn’t necessary to be able to outrun the bear, you only had to be able to outrun the other campers.

It is an interesting analogy, but one with a fatal flaw: Bears get hungry again after a while. If you are on a camping trip, you are presumably in your car hundreds of miles away when the bear wants his next meal. But in retail competition, there is no running away.

Right now there is a vast market of forgotten consumers, those who live paycheck to paycheck and whose focus is on value, not subdued lighting and wood floors. Having been forfeited this market, Wal-Mart is on an urgent mission to seize it before someone else does. And the potential for growth here is still very substantial, perhaps an increase in market share from 20 percent to 30 percent of the supermarket business, maybe more.

No Safe Haven

But even those retailers that have gotten out of its way shouldn’t feel safe. Wal-Mart’s Neighborhood Market is being developed as a next-generation platform for growth when the supercenter concept has saturated the domestic market. And future iterations will focus on ethnic marketing and experimenting with more upscale offerings. Indeed, in Bentonville, it is firmly believed that Wal-Mart’s vaunted logistics ability, combined with its philosophy of acting as a buying agent for consumers, should allow it to offer compelling value propositions on all classes of goods, including luxury items.

How this will play out is yet to be determined, but the Japanese auto industry may provide a model. Wal-Mart’s customer base skews very young, much as the early purchasers of economy cars from Japan did. In time, though, the Japanese car makers got tired of losing their customers when they got older and became more worldly and more affluent. In the fullness of time this led to the development of upscale brands from each of the major Japanese car producers: Honda has Acura, Nissan created Infiniti, and Toyota developed Lexus. All are really designed to give the Honda, Nissan and Toyota customer a way to stay in the family as needs and desires change.

The whole supermarket industry may have been content to forget the mass legions of price-oriented consumers, to give up competing on price and cede that consumer to Wal-Mart. But they haven’t forgotten about any consumers in Bentonville; they are merely biding their time.