Sunday, August 26, 2007

Is Wal-Mart a Brand Killer?

Love it or hate it, there is simply no other retailer quite like Wal-Mart. Read the brandchannel debate about the Wal-Mart brand and you’ll see what we mean.

Consider these startling facts:

  • More than 138 million people shop at Wal-Mart stores around the world each week.

  • Wal-Mart employs over 1.6 million people worldwide and hires 600,000 every year.

  • Wal-Mart’s 2006 sales were over US$ 315 billion, with profit of over US$ 11 billion, second only to Exxon Mobil. For the four years preceding 2006, Wal-Mart was the US company with the highest sales.

  • Wal-Mart has 6,200 facilities worldwide, with 3,800 stores in the US.

  • In 2004, Wal-Mart purchased $18 billion of goods from China. In 2005, Wal-Mart alone was responsible for 1/10th of the US trade deficit with China.
So all this proves Wal-Mart is BIG. But what does that have to do with branding? Quite a lot, actually.

You see, some would claim that Wal-Mart, through its enormous buying power and proliferation of its own store brands is, in fact, a brand killer. Simply put, because Wal-Mart can buy for less, and get products manufactured for its own shelves for less, it can sell for less than any competitor. And because Wal-Mart is such a huge distribution channel, even brand name products cannot afford to be left off the retailer’s shelves. As a result, a manufacturer of a well-known brand may have to make price concessions that cut into its margin to be placed in Wal-Mart stores.

In fact, name brand products are in a strangely uncomfortable position with Wal-Mart. While a name brand product will be exposed to a gargantuan audience, and therefore potentially sell in huge volume, it may very well sit next to a Wal-Mart store brand product priced substantially less. It’s true that this happens in other retail stores as well, but the power of Wal-Mart’s house brands can be downright intimidating.

Take Wal-Mart’s “Ol’ Roy” brand dog food. Named for Sam Walton’s bird dog, Ol’ Roy has become the top selling brand of dog food in the United States. It has the same basic ingredients as other leading brands of dog food, but it sells at a substantially lower price. When a customer who owns a dog is buying other products at Wal-Mart, it’s just as easy (and cheaper) to heft a bag of Ol’ Roy into the shopping cart.

A key point when it comes to brand-killing is that Wal-Mart competes successfully in virtually every product category—so no name brand product is “safe.” Wal-Mart has its own lower priced private-label brands in groceries, apparel, furniture, housewares, appliances, electronics, paint, health, beauty and pharmaceuticals, vitamins, motor oil, toys, sports, outdoor equipment—and the list goes on.

Still, name brands consider it a victory to get into Wal-Mart stores. In June 2007, Dell announced that two of its lower-end PC models would be sold in Wal-Mart stores nationwide, competing head-to-head with Hewlett-Packard and other manufacturers. The PCs will be specially configured for Wal-Mart, and another model will be sold exclusively in Wal-Mart’s Sam’s Club stores. Previously, Dell relied almost solely on direct sales, with a rare foray into the traditional retail channel, so this is a significant departure from its distribution strategy (or perhaps just a test to see if it can pump up its volume through Wal-Mart).

Now comes a bit of intrigue that may suggest Wal-Mart’s brand-killing strategy has its flaws after all. In May 2007, a marketing report with research findings prepared by Wal-Mart’s previous ad agency was released to the media by “Wakeup Wal-Mart,” a union-backed group that has been critical of Wal-Mart. While the report lauds Wal-Mart for “saving people money and saving people time,” it also points out several weaknesses in Wal-Mart’s marketing strategy.

The report says: “The truth is our shoppers do not believe we are the smartest choice in the categories we need to grow. They have other needs that competitive retailers are meeting better than Wal-Mart.” The report identifies electronics, apparel, home d├ęcor, pharmacy, and grocery as weak categories, specifying Best Buy, Kohl’s, Bed Bath & Beyond, Walgreen’s, and local grocery stores as potentially better choices than Wal-Mart.

Additionally, the bad press Wal-Mart has received in recent years, especially regarding anti-union practices and low wages, has caused damage to the brand. The report says the consumer’s trust and respect for the company has “steadily declined” over at least two years.

The report is accurate in identifying at least a few chinks in the armor. For example, Wal-Mart has not been very successful in selling fashion clothing in its stores. It has struggled to duplicate the success of rival Target, which has a more upscale, trendy image in clothing. In electronics, especially with larger items like flat-screen TVs, Wal-Mart can’t present the product well on its sales floor, nor does it have technically knowledgeable sales people.

As for Wal-Mart’s down-and-dirty store appearance, with its stark lighting and huge warehouse-like ambiance, it may work well with the company’s low-price strategy, but it can seem frumpy and dated.

Wal-Mart has been experimenting with a more upscale look. In 2006, Wal-Mart opened a new store in Plano, Texas. It had the Wal-Mart name but little else one would expect of the retailer: wood floors, dressed up sales associates, slick lighting, even sushi and expensive wine. The store, targeted to the demographics of the area, carried less of the traditional Wal-Mart merchandise and more upscale products, including 1,500 premium items being tested.

Nice try, but could it backfire? Branding expert Laura Ries thinks so. In "The Origin of Brands” blog, Ries writes that the Texas store goes “against the philosophy of being the place to save money. Fancy stores mean fancy prices. Plain stores mean cheap prices. … For Wal-Mart, attempting to change the meaning of its brand is a lose-lose proposition. It has the potential to turn-off its existing core customer…”

So Wal-Mart, a supremely effective brand killer, has an interesting dilemma: Does it continue to look and feel like the low-priced retailer it is, and upon which its success is based… or does it try to increase sales in those categories where competitors are stronger? Should Wal-Mart become more stylish and sleek—with the possible consequence of changing its own brand image?

After so many years of killing other brands, Wal-Mart could be faced with the ultimate challenge: whether Wal-Mart’s quest for continued growth and profit could risk killing its own brand.

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