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Odds are that Wal-Mart's attempt to reinvent itself will succeed, though it may cost the world's largest retailer dearly in the short term. Same-store sales figures are likely to take a hit as the company renovates about half of its stores as part of its metamorphosis from the best-price provider to the purveyor offering the best value.
For suppliers, there's opportunity in the retailer's shift to a more upscale image: Over the next two years, Wal-Mart will be on the prowl for companies that manufacture or source hipper apparel; better-quality bed, bath, gardening, home furnishings and fix-up products; organic foods; and consumer electronics. The chain is looking both to sell well-known national brands and to build its stable of house brands, such as George and Metro7. Wal-Mart won't shy away from buying companies as well, as long as they convey cachet to consumers. It would have bought the iconic Tommy Hilfiger brand last year, for example, but was foiled by a too-steep asking price.
How upscale is Wal-Mart aiming? Think $500 bottles of wine, espresso bars and plasma TVs. Wal-Mart won't turn its back on its traditional customer base of lower-income households, but it wants to draw in bigger spenders—much in the way that rival Target does—to boost sales and profits. The plan is to keep the core shoppers coming with low-priced products and to entice others with new products and low, but not rock-bottom, prices. "The idea is to increase sales of higher-margin products by going after consumers who also routinely shop at Target, department and some specialty stores and sell them on equivalent, but lower-priced, products," says Robin Lewis, president of Robin Lewis Inc., a retail and management consultancy.
If the strategy succeeds, a rejuvenated Wal-Mart juggernaut will mean big trouble for competitors far beyond Target. Although it won't change the retailing landscape as dramatically as it did during its rise in the 1980s and 1990s, it will accelerate current trends by further squeezing department stores such as JCPenney, Macy's and Kohl's. And Wal-Mart will seek to take a larger bite out of the big-box shopping center category-killers Bed Bath & Beyond and Best Buy, among others.
There is some urgency in Wal-Mart's self-described "reinvention program" following a string of so-so financial reports that led Wall Street to downgrade the company's stock. Analysts are skeptical about the retailer's ability to sustain its revenue growth and boost profits. "Monthly comp-store sales have been slowing because Wal-Mart has saturated most markets with stores and can't count on new ones to generate a big sales lift. Plus its continuing push to drive prices lower means that dollar sales per store and profits will keep sliding," says Lewis. Wal-Mart can't rely on better deals to fatten profits, since many suppliers have already cut their prices to the bone.
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