Lord be praised . Wal-Mart (NYSE:WMT) is starting to figure it out! After three decades of a single-minded pursuit of ever lower prices, the world's largest retailer is finally discovering the law of diminishing returns: The more effort you put into doing exactly the same thing, over and over again, the less benefit you will reap from that effort over time. In other words, too much of a good thing, even lower prices, can be unhealthy.
President Lee Scott recently admitted in a Reuters article that in a bid to boost lagging sales, Wal-Mart stores prominently displayed impulse items priced at less than $1, in hopes that customers would throw an additional item into the cart. The attempt backfired: Scott said that "the further we went that way, the less relevant we got to be to the customer." He also noted the stores began to look "junky," as if the rest of us hadn't already noticed. It was becoming painfully obvious.
Wal-Mart has been struggling in its attempt to grow comparable sales lately. In the current fiscal year's first quarter, the company was able to eke out just a 2.9% gain, well below rivals Target (NYSE:TGT), Costco (NASDAQ:COST), and Best Buy (NYSE:BBY). It's fair to note that the deeper Wal-Mart gets into the grocery business, the more difficult it will be for the company to deliver strong comps. But Costco also relies heavily on food, and Best Buy has to contend with price deflation in many key product categories.
No, something else has been going on here. The company's competitors are simply doing a better job of getting into the customers' heads, as I noted a month ago. For Wal-Mart, the holy grail has always been having the lowest opening price point (OPP). That's its strength, and with a motto of "Always low prices. Always," the customers expect low OPP merchandise. But the practice of driving prices lower, year after year, eventually removes all quality from the offering.
Is the customer only looking for the lowest price? Hardly. Target is having great success with mixing a bit of style into the assortment. Costco offers exceptional prices, but often on truly upscale merchandise. Best Buy is adding labor into its stores to help the customer figure out how to use technology. None of these companies takes the customer for granted. Instead, they seek out what the customer wants, and then price it attractively.
I'm not suggesting that Wal-Mart should abandon low OPPs. But increasingly, the customer is seeking the right mix of price and quality. There's a way for Wal-Mart to strike a better balance and still remain the low price leader: Its legendary IT and logistics systems are miles ahead of the competition and will continue to provide a sustainable competitive advantage. The issue here is mindset, not supply chain.
I can't tell you how encouraged I am that the company has come to this realization -- and not just because I own the stock. I think Wal-Mart is one of the world's great companies, and it pains me to see the house that Sam built going through a soft patch. Other writers are asking whether Wal-Mart should make this kind of change. My answer is that Wal-Mart can do whatever it wants. Sure, the change will take time. You don't change the mindset of a huge merchandising organization overnight. But it appears the company has taken the first step -- recognizing the problem.
Check out more big-box retail news below:
- Costco's Healthy Values.
- Wal-Mart: We Did What?
- Turning Off the Blue Light?
- Best Buy: It's All Geek to Me
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Fool contributor Timothy M. Otte surveys the retail scene from Atlanta. He welcomes comments on his articles and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Motley Fool has a disclosure policy.
