Wal-Mart (NYSE:WMT) is flailing about trying to regain relevance with consumers. At the company's analyst day conference last month, it said net sales growth over the next few years would slow and earnings would fall, especially because of the wage hikes for employees it initiated earlier this year, and the wrenching 15% slide in its stock since then has the retailer scrambling for ideas that resonate with consumers.
Some of the ideas, however, may cause an uneasy feeling of deja vu for investors.
This has a familiar ring
Wal-Mart announced it was undertaking two programs to make the shopping experience a better one for consumers. The first is a seemingly simple cosmetic change -- lowering the height of checkout area displays to make the store more clearly visible when customers enter -- while the second is more fundamental: reducing the number of items each store carries, with The Wall Street Journal reporting it's already cut some 2,500 items at its supercenters.
The problem is that this move will further reduce already-declining sales; it also risks angering its vendors, who are already chafing at the squeeze the retailer's been putting on them. Consumers themselves may balk at the changes. This is a strategy the company has previously tried and failed miserably with.
The changes come at a time when many mass merchandisers and retailers are putting an emphasis on downsizing. Target (NYSE:TGT), for example, is opening a series of small-footprint stores, while Whole Foods Market (NASDAQ:WFM) is coming out with an all-new concept called 365 by Whole Foods Market that will be more like a Trader Joe's, with its emphasis on a select core of its house brand of the same name.
No doubt Wal-Mart feels now is also the time to make the move as consumers have reacted positively to the accelerated rollout of its own smaller Neighborhood Markets stores. These 42,000-square-foot stores are about a fifth of the size of one of its typical supercenters, and they obviously carry fewer numbers of the most important brands. The stores themselves offer a more open atmosphere, and last quarter, comparable-store sales surged 7.3% at the concept. Transferring those same ideas to the supercenters could similarly help boost sales.
However, it appears management has forgotten Project Impact.
Back in 2008, the country was still in the grips of the Great Recession, and the retailer was under tremendous pressure to boost its stock price as sales and earnings faltered. The solution was a five-year plan to brighten up stores by making them more easily navigable by decluttering the aisles. It even changed its tag line from "Always Low Prices" to "Save Money. Live Better."
Called Project Impact, a program that results in less merchandise being put out on store shelves, it had a predictable outcome: Sales fell faster than they had previously, vendors that saw their own sales drop because of the change were angered, and consumers who couldn't find what they were looking for were even more disgruntled than before. The retailer was forced to abandon the project as a failure.
The effort echoed Wal-Mart's previous attempt to target higher-spending consumers -- and emulate rival Target at the same time -- by becoming a fashionista. The deep-discount retailer brought in designer clothes, took out ads in Vogue, and even sponsored a fashion show in Times Square. Yeah, that didn't go over well, either.
Consumers come to Wal-Mart for price, plain and simple. By offering low prices on the more than 100,000 SKUs it carries, the retailer makes itself the retail destination of choice. It's only when it strays from that model that it finds itself struggling.
But now, it's revisiting those failed ideas from the past. How deep Wal-Mart cuts its inventory this time will determine the effect the new remodeling program has on performance. During Project Impact, it was estimated the retailer removed 15% of the items it sold from its shelves. The current initiative could be just as deep as the Journal noted that instead of selling six different sizes of ketchup, for example, it would sell just one or two.
An expensive lesson to learn...again
Analysts estimate the merchandise rationalization program will wipe hundreds of millions of dollars in sales off of Wal-Mart's top line. Vendors are already pushing back against the retailer's attempt at squeezing them for more fees, and they won't take kindly to seeing even less product being stocked. Customers again may find it difficult to locate the items they once shopped the supercenter for.
There's a difference between the customer who shops the big format stores and the one who does occasional or fill-in shopping at the smaller ones. By making a one-size-fits-all determination, it may please no one.
The philosopher George Santayana once wrote, "Those who cannot remember the past are condemned to repeat it." Wal-Mart, it would seem, has forgotten the hard lesson it previously learned, and now investors will be doomed to relive one of the company's worst mistakes.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.