It’s working. That was the message Walmart EVP merchandising Duncan Mac Naughton shared this week with those who attended several events in which Walmart’s head merchant offered his perspective on the back-to-basics operational and merchandising philosophy on which the company’s U.S. strategy is once again dependant.
Mac Naughton spoke Tuesday at a Bentonville Bella Vista Chamber of Commerce event attended by more than 500 people and again the following day at the University of Arkansas Sam M. Walton College of Business Center for Retailing Excellence 11th annual Emerging Trends in Retailing Conference. The events may have been different, but the message was largely the same – Walmart is committed to offering everyday low prices on the broadest assortment of merchandise and being a low cost operator so it can reinvest expense savings into reduced prices to widen the competitive gap and drive increased demand.
To date, the strategy has largely consisted of adding back 10,000 products that were eliminated as part of a SKU rationalization strategy which alienated customers and cost Walmart shopper traffic. The so-called add-backs throughout the stores are credited with producing positive same-store sales during the last month of the second quarter and the first two months of the third quarter. Greater visibility into the impact of the add-back program, as well as such other initiatives as restoring promotional features to Action Alley will become evident in a few weeks when Walmart reports third-quarter results before the market opens on Tuesday, Nov.15. The company has already indicated in the strongest terms possible that same-store sales for the quarter will turn positive so all that is in question is the magnitude of the increase and the outlook for fourth-quarter sales.
Those details will come soon enough, but this week Mac Naughton’s comments to suppliers were bigger-picture, longer-term and focused squarely on the EDLP/EDLC/broad assortment strategy he described alternatively as boring and refreshingly simple.
“We are quite focused on rededicating ourselves to these three pillars of our business model,” Mac Naughton said.
On the topic of broad assortment, Walmart’s decision to add back roughly 10,000 items to its product assortment is yielding results in departments that had previously been de-emphasized due to what was perceived as limited growth potential. For example, the addition of items and brands to categories shopped by core customers, such as sporting goods and automotive, have helped the company regain traffic and is yielding results. Same-store sales in the hunting category are up 16%, and the tire category is up 7%, according to Mac Naughton. He also noted the company is interested in winning in categories even though they may be declining, highlighting a sharp reversal in thinking with his predecessor John Fleming. As an example, Mac Naughton pointed to dump bins filled with $5 DVDs and CDs located in Walmart aisles that generate $300 million in annual sales.
“Our core customers are doing head dives into these bins,” Mac Naughton said.
In addition, an emphasis on expense control is expected to enable the company to reduce prices by $2 billion in the next two years. Mac Naughton said those cuts would come across the board as opposed to the type of “atomic rollbacks” undertaken 18 months earlier when prices were slashed on a handful of select item in an ill-fated effort to convey price leadership, which Mac Naughton said violated trust with shoppers who rely on Walmart for every day low prices.
Mac Naughton made sure to remind suppliers in attendance at both events that future price investments would be funded primarily from productivity improvements and increased efficiency. For example, Walmart has lowered its new store construction and remodel costs, and is focused on improving store productivity and leveraging its distribution network to ship more cases even though trucks travel fewer miles.
The other key factor in sales improvements to date, and the anticipation of more gains going forward, is increased shelf availability of product. Walmart earlier this year introduced the metric of OSA (on-shelf availability) to its lexicon. Previously, the company had deluded itself to believing it was in stock if perpetual inventory systems showed merchandise had arrived at a particular store. The merchandise may have arrived at the store, but if it wasn’t on the shelf and available for sale then from the shoppers perspective it was out of stock. Thanks to an emphasis in this area and physical audits conducted every week by third parties, Mac Naughton said between March and September Walmart has moved the OSA needle 570 basis points to where it is now above 93%.
“I think this is a big deal and we are not done yet,” he said.