Looking to grow beyond its core customer, Wal-Mart has appointed a chief merchant for the first time.

The world’s largest retailer, in a shake-up of U.S. operations, said Tuesday that chief marketing officer John Fleming had been named chief merchandising officer. He will be responsible for almost everything the $210 billion U.S. division sells under a new structure that creates five merchandise divisions and, four of them (apparel, home, entertainment and grocery) under his supervision.

The fifth division, pharmacy/optical, will be run by Bill Simon, executive vice president of professional services and new business development, who developed the Bentonville, Ark., retailer’s successful $4 generic prescription drug program.

Stephen Quinn, a former Frito Lay executive who helped steer Wal-Mart back to its core low-pricing message in recent months, will succeed Fleming as chief marketing officer.

“This is a continuation of the rapidly changing picture at Wal-Mart U.S.,” said Richard Hastings, analyst with Bernard Sands. “The relationship between Wal-Mart and its core customer is not yielding satisfactory results — basically, those customers don’t have a lot more money to spend at Wal-Mart — so they have to try different things and different people.”

Wal-Mart is struggling to turn around its U.S. operations after two years of disappointing same-store sales results, including November’s 0.1 percent drop, the first decline in a decade. The retailer has announced that it will slow the pace of U.S. expansion to upgrade the profitability of existing stores by selling more high-margin goods.

Wal-Mart, which has a culture focused on logistics and technology, has never had a chief merchant. The company’s merchandising operations had been split; executive vice president Claire Watts ran soft goods and Doug Degn headed grocery and hard goods. Degn is retiring, and Watts will retain responsibility only for apparel. She will report to Fleming.

Executives in charge of grocery, home and entertainment, also reporting to Fleming, will be named later, said Wal-Mart spokeswoman Linda Blakely.

“We believe that there will be additional changes on the merchandising side in the near future to enhance the talent in the organization,” said Deborah Weinswig, retail analyst at Citigroup. The “announcements were not a surprise, based on the recent weakness in sales. The addition of John Fleming as the chief merchandising officer will give the company a more unified approach to merchandising and allow the organization to tap into his significant experience at Target.”

This story first appeared in the January 25, 2007 issue of WWD. Subscribe Today.

Fleming spent 19 years at Target Corp., rising to senior vice president of merchandising for Marshall Field’s. He joined walmart.com as chief merchant in 2000 and launched features such as music downloads, one-hour photo, a gift registry and an online pharmacy. He also began testing customers’ willingness to buy more fashionable and higher-end products, such as leather jackets and diamonds.

Neither Fleming nor Quinn was available for comment. Both executives will report directly to Wal-Mart U.S. president and chief executive officer Eduardo Castro-Wright.

Speaking at the WWD CEO Summit in November, Fleming said, “I think the future retail model is about thinking like a marketer, but acting like a merchant….Merchants spend all their time obsessing over product [and] tend to be somewhat tactical. Marketers spend all their time thinking about [the] customer. They’re actually slow. Merchants are fast.”

Charles O’Shea, senior analyst with Moody’s Investor Service, cited Fleming’s experience working with more affluent customers through walmart.com, where the retailer first experimented with selling plasma TVs and cashmere sweaters.

“Moving a merchant up internally makes sense because he knows the culture and hopefully knows what will fly and what won’t,” O’Shea said. “They have a lot more work to do with apparel, but if you look at electronics as guide, some people didn’t think they could be a player [in high-end merchandise] and they’ve pretty well debunked that.”

Bob Buchanan, analyst with A.G. Edwards, said apparel and home must be high on Fleming’s fix-it list.

“Wal-Mart has struggled mightily in apparel in recent months and it looks like [president and ceo] Lee [Scott] felt the need to make some decisive changes,” Buchanan said.

Fleming’s elevation also underscores the retailer’s commitment to a customer segmentation strategy that tailors stores to reach different shoppers. The stores are being given designations: rural, suburban, urban, Hispanic and African-American. Within those parameters, merchants will aim for a mix of goods that satisfies price-value shoppers, brand-aspirational shoppers and price-sensitive affluent customers, Wal-Mart’s Blakely said.

“We have put together a team of about 25 people that weren’t with us before that have deep experience in market research, and that’s really at the center of our strategy,” Fleming told Wall Street analysts at a conference in November.

He has helped guide market research that defined “skeptics,” a group with disposable income that shops Wal-Mart regularly for groceries, but rarely buys higher-margin items such as apparel and electronics. The company has been pursuing this customer with initiatives like organic foods, luxury bedding, high-end TVs and trendier clothing.

An ambitious expansion of the Metro 7 line overreached customer demand and the retailer has struggled with fit, pricing and trend in its core George, George ME and No Bo private brands.

Buchanan said the Metro 7 miscues have been exaggerated and that “the main problem is in their tonnage business — Faded Glory, George and No Boundaries, where they have not adequately interpreted trend and where they are taking their big markdowns.”

Fleming comes to his new role after an occasionally rocky stint running marketing.

Controversy surrounded the firing of one of Fleming’s deputies, Julie Roehm, former senior vice president of marketing communications, amid speculation that she had accepted gifts from advertising agencies angling for Wal-Mart’s business. Wal-Mart ultimately canceled the selection of DraftFCB as its lead agency. Fleming led a new review that selected the Martin Agency and MediaVest. Roehm denied any impropriety.

Fleming also has struggled to build a marketing organization at a company that has historically not valued or integrated the function within its operations. A high-profile holiday 2005 ad campaign starring Beyoncé Knowles and Garth Brooks looked great, but did not effectively drive purchasing on specific items or convey Wal-Mart’s low-price brand proposition. This season, Wal-Mart pulled an advertisement that featured a couple cooing provocatively over satin pajamas.

Recently, Fleming seemed to be steering back to the company’s roots, with the return of an ad campaign focused on price rollbacks and the return of smiley faces to in-store signs.

In November, Fleming articulated to analysts what he sees as Wal-Mart’s brand promise: “It’s about saving money so you can live better,” he said. “That’s really what the essence of the brand is all about for all of the customers, even the high-end customers; they come to us because they save money and then they can use that savings to do something else.”

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