By  on July 13, 2010

It’s hard to nudge an 800-pound gorilla in a different direction, but Wal-Mart U.S. appears to be doing just that.

With same-store sales declining for the last four consecutive quarters and traffic decreasing, Wal-Mart needs to develop — and execute — new retail concepts if it is to grow beyond the rural and exurban markets that it has almost saturated in the U.S.

To be sure, chasing trendy fashion isn’t in the cards for a chain whose apparel business is a chronic underachiever. When vice chairman Eduardo Castro-Wright relinquished his job as chief executive officer of Wal-Mart U.S. on June 29, he set in motion a management shake-up that will bring fundamental and cultural changes to the $400 billion retailer. Bill Simon, who succeeds Castro-Wright, seems to share the belief of Wal-Mart Stores Inc. ceo Mike Duke that the world’s largest retailer should return its focus to core competencies — moving enormous quantities of goods around the world as cheaply and efficiently as possible, rather than the more creative and style-driven marketing and merchandising.

“The new ceo [Duke] is directing the company more toward logistics and operations and not marketing,” said Bill Dreher, a retail analyst at Deutsche Bank.

Castro-Wright, who retains the vice chairman title, became president and ceo of global.com and global sourcing, allowing him to relocate to California, where his wife is recuperating from a heart transplant. He has been described as an innovative thinker and was the architect of the store remodeling initiative Project Impact and its transformational merchandising and marketing programs.

Simon, the U.S. division’s former chief operating officer, is a strategist with experience in global business development and facilities management. He was responsible for running the 3,700 domestic stores and overseeing 1.3 million associates, and helped develop and launch the $4 prescription program.

“Wal-Mart is heading into a consumables focus,” said Deborah Weinswig, broadlines analyst at Citi. “They need to get their store visits up. They’re getting the grocery visit, but they’re not getting the apparel visit. They need a better balance between [food and grocery] and apparel and home because that’s where you’re going to get your margins. There’s amazing competition from supermarket and dollar stores. The competition is insane and Wal-Mart can’t compete on food prices.”

Weinswig believes Wal-Mart has significant opportunity in apparel — indeed, it has nowhere to go but up. However, Wal-Mart’s apparel objectives remain unclear, especially given the news that apparel general manager Dottie Mattison will now share her duties with Lisa Rhodes, who was recently hired as senior vice president and reported to Mattison.

Castro-Wright recently said there is still room for growth in the domestic business. By entering urban markets, which are underpenetrated with smaller stores, Castro-Wright predicted that Wal-Mart could add $80 billion to $100 billion in U.S. sales. The smaller store formats generally focus on food and grocery, reducing space for apparel, home and large bulky items.

But Sandy Skrovan, senior vice president of the Kantar Retail consultancy, said Wal-Mart “needs to get the shopper who’s buying groceries to pick up some higher-margin merchandise,” such as apparel. More than half the space in Wal-Mart’s 75,000-square-foot to 100,000-square-foot “high-productivity” units, including one opening in Torrance, Calif., is devoted to food and groceries. Signage directs shoppers to kiosks where products the store doesn’t carry — such as sporting goods — can be ordered from the Web site, which offers site-to-store service.

In addition, a new 20,000-square-foot Neighborhood Market by Wal-Mart concept is being tested in the company’s hometown of Bentonville, Ark. Wal-Mart’s U.K.-based ASDA recently bought the Netto chain, which it plans to convert to smaller-format supermarkets by next year. The Netto stores could be a model for urban units in the U.S.

“Wal-Mart’s grocery business has been under siege by virtually every other retailer,” Skrovan said. “Our ShopperScape [survey] found that conventional supermarkets like Kroger picked up shopper share by quite a bit in the past year. They’ve been investing a lot in very aggressive pricing. Bargain grocery chains Aldi and Save-a-Lot offer extreme value with no frills and prices that are as good or better than Wal-Mart’s. The dollar stores have been getting more and more into food, and shoppers have been responding.”

Target’s P-Fresh expanded grocery selection, although in just 350 of Target’s stores, seems to be accepted by consumers. “While shoppers are in Target looking at apparel and home products, they pick up a carton of milk and a dozen eggs,” Skrovan said. “It’s another point of pain for Wal-Mart to consider Target.”

Some of Wal-Mart’s problems in food and grocery are self-inflicted. For example, overzealous sku rationalization, where the company eliminated about 300 brands to make room on its shelves, partly for private label, didn’t have the intended effect. Consumers complained about the missing brands and rather than buy the other things on their shopping lists, went elsewhere. John Fleming, executive vice president and chief merchandising officer of Wal-Mart U.S., who took the rap for the sku debacle, resigned after Simon’s appointment.

“I’m sure John [Fleming] felt he was the guy who should have been the logical successor to Eduardo [Castro-Wright],” said a source close to the company. “John probably made the decision to leave because he thought he should be the heir apparent.”

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