WAL-MART’S DREAM: CAN BIGGEST RETAILER BE CHEAP AND TRENDY?
Byline: David Moin
NEW YORK — What Wal-Mart wants, Wal-Mart gets. That’s been the perception.
It’s a different story in apparel, however, where the world’s largest company faces a crossroad. Over the last five years, Wal-Mart has added quality controls, recruited talent to build up a fashion office, introduced trendier casual styles and, in a show of pride, even has laid new carpeting down at many locations.
But the hard part lies ahead for the $218 billion Wal-Mart, which is pushing for higher-grade soft goods at low prices and the kind of fashion credibility already attained by Kohl’s and Target. Wal-Mart is determined to increase apparel sales productivity per square foot, bring in better brands, enhance visual displays and — perhaps its tallest order — change consumer perceptions that the only thing coming out of Bentonville, Ark., are bland basics.
Wal-Mart already is the biggest apparel and accessories business in the world, with estimated sales of at least $25 billion and at more than $30 billion if Sam’s Club is included. The retailer still has enormous growth potential in the category, since an estimated 50 to 53 percent of Wal-Mart customers still don’t buy its casual sportswear. Instead, the chain’s customers are buying hard goods, consumables and groceries and, if it’s lucky, maybe some Hanes socks and underwear, practically for pocket change.
Wal-Mart declined to be interviewed for this story, but according to supplier sources, next year could bring some very visible changes to its apparel business. Among the strategies they cite:
VF Corp. is reportedly working as a consultant to develop a more compelling apparel presentation, which would not be for only VF’s Wrangler Hero, Riders, Rustler and Vassarette brands that Wal-Mart already sells or the Faded Glory private brand that VF helps supply. It’s possible Wal-Mart pulls out some racks to make its sales floor more open and easier to shop.
Developing a more cohesive presentation of men’s and women’s wear, spurred by recent management shifts.
Further weeding out of unproductive labels and items, including downsizing the number of stores that carry the exclusive Russ by Liz Claiborne line to between 200 and 300 stores from the current 500.
Campaigns to get more hard goods shoppers crossing over to soft goods.
As one Wall Street analyst said: “Wal-Mart has a very broad customer appeal; however its apparel may not have the same broad appeal. They have the same problem that Sears has in some ways. Lots of people who buy the hard goods or toiletries probably are not going to buy apparel.”
Can Wal-Mart bring in the next generation of shoppers? The company is striving to, by seeking a more youthful and trend-right image and, with VF for example, considering broadening the new Wrangler Hero outdoor gear for men and boys.
Wal-Mart also wants shoppers to move up the price continuum, for greater dollars and margins, without sacrificing its everyday-low-price image. Wal-Mart’s average apparel ticket out the door is $10 — that’s the sweet spot, whether it’s a Faded Glory tomato red tank sweater at $9.98 or White Stag sweet pea twill short at $9.94. Yet after seeing a consumer shift to more of its lowest prices out the door last year, squeezing margins somewhat, Wal-Mart wants to layer in products at higher prices and better value, so the volume is less weighted at the low end. In the U.S. for example, Wal-Mart is rolling out the George line, a fashion import sold at Wal-Mart’s Asda supermarket subsidiary in the U.K. (see related story). George offers some higher-priced items and much snappier looks. This month, the discounter began selling Keepsake “star” collection of diamond jewelry, primarily for bridal, complementing less-expensive jewelry. Keepsake prices range from $199 to $899. Before, $399 was the highest price tag for diamond jewelry.
The latest buzz hovers over talks with Levi Strauss, a brand widely distributed to department stores. Reportedly, Wal-Mart wants to sell Levi’s jeans for spring 2003, with a sticker price at $24.99, according to one soft goods supplier. But a different industry executive close to Wal-Mart said the store should keep the price closer to $20. In any case, Levi’s would be another step up the price ladder since most jeans in the store are in the mid-teen price range. The parties are still negotiating, but there’s been some disconnect. At the MAGIC trade show in Las Vegas in February, Levi’s, as the story goes, gave a merchandise presentation to Wal-Mart for spring 2003, and the Wal-Mart buyer told the Levi’s representative: “The price you want to sell to us, is the price we sell to our customers.”
Levi’s executives have admitted they are in talks about selling to the mass merchant channel, but stress that they would not sell their core Red Tab line.
Aside from pricing concerns, Levi’s is worried about how stores such as J.C. Penney Co., it’s biggest account, would react to any deal with Wal-Mart. There also are internal conflicts over offering a sub-brand that identifies itself as “by the makers of Levi Strauss,” rather than mainline Levi’s product, which Wal-Mart wants.
And Wal-Mart has had other disconnects in apparel.
Last year, the retailer pulled apparel off its Web site, after poor sales (although the category in general has been a tough sell for many retailers online). Wal-Mart has said it may go back online with apparel one day.
In addition, its private label Kathie Lee line has seen business shrink considerably in the last three years and now seems most prevalent in plus sizes rather than misses’. Another exclusive line, Russ by Liz Claiborne for ladies coordinated tops and bottoms, has required steep markdowns.
“The problem is costs,” said one retail executive who competes with Wal-Mart. “Claiborne does not have the infrastructure for Wal-Mart. It does for J.C. Penney or other department stores. They are not low-end guys. It’s a great idea for Wal-Mart, but doesn’t make money. There wasn’t a lot of fashion. Only the name.”
Reportedly, Wal-Mart wants to keep the label at select stores to maintain its relationship with Claiborne and has been pressuring the manufacturer to bring down the prices and make the Claiborne name more prominent on the label.
The George label from Asda could fill some of the void for coordinates. The line is being rolled out in the U.S., but at this early stage it occupies far less space than other in-house brands. It offers such items as print matte black and white shirts for $16.96, matched with black pants, $14.96, that are displayed prominently on “image racks” that wrap around a corner of the selling floor for good exposure. George’s polo shirts, priced at $15.93, compare with a Puritan polo at $7.97 or Faded Glory at $11.92. Wal-Mart plans to roll George apparel out to all its 1600 discount stores and 1100 supercenters in the U.S. and, as of about a month ago, it was in about half.
“Wal-Mart does not sell fashion and they don’t have to,” said Stephanie Shern of Shern Associates consulting. “The masses don’t wear fashion. They really don’t have to do too much more than they are doing. Kohl’s is not really fashion either. It’s good-looking basics. Wal-Mart will give Kohl’s and Target a run for their money and walk all over Kmart. But Wal-Mart is not doing the best job they could. In terms of style, sizes, colors, I don’t think they do that good of a job in the buying process. They don’t have the best brands and presentation. And the problem is how do you accommodate more apparel in the stores. They’ve already allocated a lot of space.”
In Wal-Mart discount stores, typically 110,000 to 120,000 square feet, apparel occupies 15 to 17 percent of the floor space, including men’s, women’s, children’s, accessories and special sizes. Supercenters, at 170,000 square feet, devote a smaller percentage of space to apparel. There are obvious differences in how Wal-Mart runs its apparel business, compared with other retailers. “You’ve got one guy who might buy $1 billion just in underwear. At department stores, there would be 12 buyers doing that volume,” one vendor said.
The biggest brand is Faded Glory, estimated at close to $2 billion in sales. Other key labels are No Boundaries, White Stag, Jordache, Puritan, as well as the VF brands. While George and Claiborne appear to be more serious attempts at fashion, T-shirts, sweatshirts, jeans, twill bottoms, underwear and hosiery are still the bulk of the business. When it comes to dresses and careerwear, though, there’s a long way to go.
The biggest volumes are done via the “table” programs where key items, such as a T-shirt or a sweater, are displayed on tables in front, and are said to sell 1 million to 1.5 million units in a three-month cycle, or 4 million units annually. “The bestsellers are on the big table programs. They’re big unit drivers,” one retail executive said.
Accessories and intimate apparel also turn very quickly, as much as 12 times annually on some sock programs. Sportswear has five to eight turns and margins are said to be above 35 percent but below 40 percent. The lower the price point, the higher the turn, with junior tops, priced just under $6, turning eight to nine times. Department stores generally get around four turns for sportswear.
“Kohl’s has better brands, but Wal-Mart is the largest apparel retailer in the country and improving every day, and they are not going to stop. And the margins in apparel are fantastic,” said another source. “They’ve layered on quality and fashion without taking anything away from price and customer service, and also improved visual presentation. The sales associates won’t go through the stacks with you, but they might point you there, or even walk you to where you want. They’ve got glitter jeans, faux suede outerwear, tricot active pants, usually it’s represented as fashion, you couldn’t say that three or four years ago. They’re nice things, not disposables. Wal-Mart is open to new ideas, listening, asking questions, not just sitting on their perch.”
“The apparel offering has vastly improved over the past several years, in terms of quality and styles,” said Philip Emma, senior analyst, Moody’s Investor Service.
Yet, there appears to be little space available in its stores to increase its apparel offering, even if there is room for enhancing the presentation. That is a reason for reportedly hiring VF to develop a better floor presentation.
“VF is looking at every fixture, every table, that Wal-Mart gets, coordinating the merchandise better, and really wants to drive high productivity,” said another source. VF’s new floor ideas could be tested at Wal-Marts this year, the source said.
Wal-Mart’s recent reorganization of management also is said to have stirred plans to develop a more cohesive men’s and women’s apparel presentation. Celia Clancy was promoted to senior vice president of all women’s and girls’ apparel. Formerly, a divisional merchandise manager, Clancy replaced Lois Mikita, who became her counterpart on the men’s and boys’ side, as well as housewares, small appliances, furniture, fabrics, crafts and domestics, as senior vice president and gmm. Clancy previously reported to Mikita on the women’s side. Now they both report to Don Harris, executive vice president of merchandising.
“That’s a big change in management,” said one Wal-Mart supplier. “Celia and Lois know each other. Traditionally, men’s and women’s didn’t talk to each other. Now they will work together on brand selection, brand emphasis and joint marketing, monthly tabs. We’ll see results next spring. The consumer experience is going to be consistent in the male and female sides of the store.”
More so than any retailer, Wal-Mart has benefited from industry consolidation. That, and its success as the world’s largest retailer, have fashion executives flocking to Bentonville seeking jobs. “When I used to fly into Bentonville, I’d see more presidents and vice presidents of different retailers in the airport on their way to interviews,” said Tom Burns, president of the Ballinger Gold sportswear company, and a former consultant to Wal-Mart. “Wal-Mart is always networking and looking to see how to add top talent to their company.”
Eric Segal, president of executive search firm Kenzer Corp., which has done a lot of recruiting for Wal-Mart, said the retailer looks for team-oriented leaders that fit in and “will pick up the pace but not throw the train off the track or bang their own chest. They also look for individuals with growth potential who can adapt to having different responsibilities. They’re not afraid to cross-pollinate.”
Aside from recruiting Clancy from Bradlees about three years ago, Gerald Wea, men’s divisional merchandise manager, came from Ward’s, and Claire Watts, senior vice president, was brought in from The Limited to run the relatively new fashion trend and product development office, originally the vision of Vanessa Castagna, who was Wal-Mart’s former top women’s executive and who currently is president and chief operating officer at Penney’s. Watts is credited with building up the fashion office staff to about 80 or 90 people. According to Burns, the office determines trends, colors, CAD design, forecasts, develops product and helps with partners on the manufacturing side with trends, key items, fabrics and silhouettes.
“They do a lot of research, and it helps the whole buying staff involved in sourcing, design and quality control,” Burns said. The Wal-Mart team, traveling more than in the past, is listening more to market experts. “If designers are showing ruffles, we’ll show them ways to add a ruffle,” said one Wal-Mart consultant. “Years ago, Wal-Mart people never left Bentonville. They based everything on what the manufacturers felt was important and key vendors would have told them anything to get the order.”
Twice a year, Wal-Mart summons all its store and department managers in waves over a two-week period — tens of thousands of store personnel — to Kansas City, Mo., in January, for the yearend meeting, and to Dallas in August, for holiday, to meet with central management and learn about the next season’s merchandise. Vendors send merchandise six months ahead of the selling period and Wal-Mart erects a mock store, where there are merchandise presentations, workshops where management shares its goals, and employees, as one vendor said, “get their marching orders.” On the last two days in Kansas City, select vendors are invited to share in the mission for the year. “It’s really an excellent way for Wal-Mart to communicate and listen to their people,” said the source.
As far as communicating with vendors, Wal-Mart manages by “report cards.” As the vendor said: “Wal-Mart is very clear in giving vendors’ goals on margins, turns, sell-throughs and saying what kind of markdowns they will accept, and gross margin return on investment. They lay out the yardstick and you can see how your company is improving. There’s an unusual degree of clarity and openness with vendors. It’s a window for the vendors to see how they are doing. A lot of retailers keep this information very close to their vest and use it in negotiations, but with Wal-Mart, if you are vendor, you can see how you are doing every week, and that gives vendors the opportunity to manage their own business and know when to ship and how much to ship.”
Target, too, also puts much of the onus on vendors. That enables the chains to reduce their manpower and allow vendors to do things they would do better than retailers anyway. “They have more time, whereas retail buyers would have to divide their time,” said the vendor. “The report cards are by season, or year. Retail Link [the information system] is the technology that enables it. It’s the window for the supplier to see inside. It’s live.”
Wal-Mart also assigns dozens of traits to a store based on climate and ethnicity to tailor merchandise distribution better, so the same manufacturer might sell short sleeves to one Wal-Mart in California and long sleeves to another in Pennsylvania. It’s particularly relevant in the health and beauty aids.
Analysts say that mass merchandisers and discounters generally have a three-tiered price structure, with roughly 15 percent of the stockkeeping units in opening price points, 15 percent on the high end and 70 percent in the middle. People close to Wal-Mart said Wal-Mart has a different pricing matrix, more like two tiers, with opening price points up to $10, and a broad middle zone, mostly in the teens to around $20. There’s very little that would be higher, and considered upper tier. However, as Kathy Yohalem, principal of Tait Advisory Services LLC, sees it, with Wal-Mart getting more and more cross-shoppers — consumers that shop department stores and discounters — the chain has an opportunity to reach up and sell more top brands.
“Brands are equated with quality, and coming in with better visual merchandising. The challenge is a lot of brands still don’t want to see their names in the discount arena,” she said.
But as consultant Shern said: “When Wal-Mart decides to take on a category, the goal is to dominate. Nothing is a roadblock.”