Apparel is Wal-Mart Stores Inc.’s perennial Achilles’ heel — and the question remains whether it will ever be able to repair it.
Even as the world’s largest retailer powered through the Great Recession while its competitors stumbled, apparel lagged while food and areas such as consumer electronics soared. And the problem has only become more intense now that the economy has begun to recover and Wal-Mart’s competitors are closing the gap.
Wal-Mart is well aware of the weakness. Vice chairman Eduardo Castro-Wright last month said the retailer’s apparel business was “below expectations and continues to be a work in progress” as the company reported a 10 percent increase in profits to $3.32 billion in the first quarter ended April 30 on a 5.9 percent rise in sales to $99.85 billion, although same-store sales in the U.S. dropped 1.5 percent.
Contrast Target Corp.’s first-quarter results, which reflected a 2.8 percent jump in same-store sales. Target reported a 29 percent increase in first-quarter net income, driven by higher sales of more profitable categories such as clothing.
Castro-Wright’s statement was only the latest in a long litany of admissions by Wal-Mart executives that their apparel business is a headache — and it’s even more frustrating as they watch arch rival Target motor ahead in the category. Apparel is one of the most profitable categories at Wal-Mart, with margins of 31 percent. As its stores become saturated in the U.S., the retail giant needs to sell more higher-margin products.
“Wal-Mart has been a laggard for some time in the apparel arena,” said Todd Slater, an analyst at Lazard Capital Markets. “They’ve tried numerous strategies. In an effort to capture more share in this high-margin category, Wal-Mart is partnering with suppliers and labels like L.E.I., Starter, Op, and Danskin that provide exclusive, nationally recognized brands with the favorable economics of private label. Wal-Mart is most focused on women’s, teens, kids and baby.”
The rub is that while Wal-Mart offers brands, aside from juniors, it doesn’t advertise or market them as vigorously as other mass merchants.
Part of Wal-Mart’s issue is that, as apparel has struggled, it has changed strategies seemingly with the seasons. Long renowned for basics at “everyday low prices,” the retailer then tried to make the leap into more fashion with its Metro 7 and George ME by Mark Eisen collections. When both flopped — Metro 7 was cycled out of stores sometime between the end of 2007 and July 2008 and George ME was discontinued in 2007 — it went back to basics.
Since then, the retailer has developed a hybrid approach — low-cost basics supported by well-known national brands, some of which — like L.E.I., Starter, Op and Danskin — are exclusive. It also has linked with Norma Kamali to develop a lifestyle brand that includes women’s wear, children’s clothing, accessories, footwear and home.
In a sign of hope for the future in Wal-Mart’s case, Kamali has embraced the company’s populist ethos. “I’m given the support I need to make a quality product,” she said. “Wal-Mart is committed to giving their customer what she wants. They have so many customers — that’s where the challenge is. I do my thing in the context of the company. I understand my place in it and I’ve learned so much about the Wal-Mart customer. [My line] is not at all edgy, it’s well-made timeless classics at great prices. I’m not doing dumbed down clothes, but I’m also not going to design a parachute dress for Wal-Mart. I have an organic cotton program I do with them.
“People still have these old ideas about what Wal-Mart is about,” she added. “There are so many opportunities to address the needs of the Wal-Mart customer. We’re planning to experiment with a large-size collection.”
Kamali said every item in the large-size collection must be something she would want to wear herself. The large-size line will initially be sold on Wal-Mart’s Web site in the fall, in keeping with the retailer’s tradition of using the site as a testing ground for fashion-forward apparel. For example, walmart.com, which was established in 2000 as a stand-alone company based in Brisbane, Calif., introduced Uncharted Territories, a jeans collection featuring narrow-fitting premium denim in a dark wash; however, the brand is no longer sold on the Web site.
“Management is convinced that apparel at mass merchants is not brand driven, and that, instead, Wal-Mart has been ‘chasing too much glitter,’” said Bill Dreher, a retail analyst at Deutsche Bank. “They now will focus on basic items such as jeans, Ts, underwear and socks. Wal-Mart will also offer more individual pack sizes rather than the family pack size, to help consumers stretch their limited open-to-buy.”
Simon Graj, founding partner of Graj and Gustavsen, a New York strategic and creative branding firm, who worked with Wal-Mart in the past, believes the company underestimates the power of brands. “Wal-Mart wants to be viewed as a multibrand retailer,” he said. “They need brands desperately to be validated in the market. Their hidden goal is to build a vertical business. That’s where they squeeze out more margins. They haven’t figured out the creative piece yet and we’re living in creative times. We’re no longer in cookie-cutter times. Wal-Mart’s growth has to come from consumers who are more affluent.”
Wal-Mart has blamed rising gas prices for keeping its customers away in the first quarter, but experts said a contributing factor could have been the fact the retailer dropped more than 300 brands, primarily in grocery, to streamline the look of its shelves. “If we made some mistakes, we’ll correct those,” said executive vice president and chief financial officer Thomas M. Schoewe during the first-quarter conference call.
Perhaps it’s not brands that Wal-Mart finds off-putting, but brands that capture too much attention. The retailer has been burned before when it’s ceded the spotlight to high-profile brands. Kathie Lee Gifford’s exclusive apparel collection did $300 million in sales in its first year, according to Gifford, but the TV personality in 1996 was accused of using sweatshop labor to produce the line and Wal-Mart was vilified in the press. Wal-Mart in 2003 began phasing the brand out of its stores, but the episode left psychological scars on the company.
Wal-Mart also worries that raising its fashion quotient will alienate core shoppers, loyal consumers who make multiple store visits each week and have a median household income of $35,000 to $40,000. The company may be afraid that apparel linked to a designer is perceived as being more expensive.
“When you get at who the core Wal-Mart consumer is, it’s real America,” said Alicia Kriese, principal of Perspectives, a Houston-based strategic retail consulting firm. Kriese was executive vice president of GSD&M, the Austin, Tex.-based ad agency that engineered Wal-Mart’s 2005 foray into the pages of Vogue. The initiative fizzled despite the agency’s “hope that certain items could be tagged in stores as ‘As Seen in Vogue.’ [We thought] that we could consult with Vogue editors when we were in New York about what everyone was going to be wearing,” she said. “That developed a little bit, but it didn’t have a lasting effect. Some people misconstrued it as Wal-Mart trying to be something it’s not.”
Sensitive to the charge of over-reaching, Wal-Mart speaks to consumers in a friendly, folksy manner, not the voice of a hipper-than-thou designer. The retailer never embraced the designer collaboration model popular with competitor Target, a model that requires giving each limited-time designer a big advertising push and high visibility in stores.
If Wal-Mart wants to add more apparel labels, Kriese believes it’s looking for cast-off brands that won’t overshadow the most important brand of all, the Wal-Mart brand. “They were interested in acquiring brands, but it was more for the infrastructure than the brand itself,” she said. “The rationale is that people buy the trust of Wal-Mart. Wal-Mart sells more jeans than anybody in the world, but can you name what brands they are?”
A source close to Wal-Mart said, “They’re figuring out how to become fashionable through color, while still keeping it basic. They sell the most apparel in the U.S., but they’re not a fashion house. They sell a lot of goods to mainstream [shoppers]. Their customer is not the fashion elite. If they try to go the other extreme, they’ll lose their big base. Wal-Mart doesn’t devote as much space to apparel as Target because their biggest business is food.” The key to Wal-Mart’s apparel strategy, said the source, “is to take basics and give them more color, not think about acquiring brands.”
Unlike Target, Wal-Mart has never made meaningful strides in luring shoppers across the aisle from groceries to soft goods. Rather, it’s developed a stronger food business. Food, with its razor-thin margins, accounted for 51 percent of Wal-Mart’s sales last year, versus 49 percent in 2008. At Target, essentials such as groceries account for 40 percent of sales. Wal-Mart’s, apparel category, which includes jewelry, accounts for 10 percent of sales, a 1 percent decline from last year. Meanwhile, 40 percent of Target’s sales come from the more profitable home and apparel categories.
“Wal-Mart benefited from the recession when consumers were only buying what they could eat and drink,” said Dreher. “Now we’re beginning to come out of the recession. There’s strength across the board at all demographic levels. People are back borrowing. Wal-Mart doesn’t have the brands.”
While Wall Street continues to beat the drum for the higher profits that more fashionable apparel could supply and the press clamors for designs that are more interesting to write about and photograph than standard meat-and-potato fare, Wal-Mart may have a point. Of all of Target’s limited-time apparel introductions, the retailer pointed to its recent Liberty of London for Target promotion where Liberty of London prints were splashed over 300 products in several categories, instead of its quirky, avant-garde designer hook-ups. Liberty of London for Target did not fall under the Go International or Designer Collaboration rubrics, but rather was one of the stand-alone collections Target sometimes launches. “[It was] an undisputed success,” said Katheryn Tesija, executive vice president of merchandising.
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