Wake Up Wal-Mart

It looks like the 800 lb gorilla is starting to lose some weight. In the most important piece of news that was barely covered last week, Wal-Mart CEO Lee Scott came to an agreement with the Service Employees International Union on the issue of affordable health coverage. Something that once seemed impossible has finally happened: Wal-Mart is losing its leverage and unions are using it to their advantage. The issue is not that unions are any more powerful now than they were a year ago - the issue is that Wal-Mart is significantly weaker. In an ironic turn of events, the business strategy that led Wal-Mart to become the biggest and most powerful company in the world is now leading to what will become its slow and painful down slide.

People grew to love Wal-Mart because of its low low prices. Where else could you go and buy everything you could possibly need at a lower price than anywhere else, guaranteed? Wal-Mart was able to grow because it continued to lower its prices and attract new business. Eventually Wal-Mart overpowered industries like grocery, pharmacy and car maintenance, offering the lowest prices for those goods and services. Unfortunately, when Wal-Mart was magically offering the lowest prices in town, nobody cared to ask how they did it... or maybe they were afraid to ask because they didn't want to know? Whichever the case, Wal-Mart's cost cutting strategy is now being felt across America: good jobs moving overseas, high paying service jobs turning into low-paying Wal-Mart jobs, high quality goods turning into inferior goods and nice stores with good help turning into dirty stores with none. After all, this is how Wal-Mart was able to offer such low prices in the first place.

Shopping at Wal-Mart isn't actually "shopping." Most people think of shopping as something they enjoy to do; they like to go to the store, look at the merchandise, compare the different products, talk with the salesperson and check out quickly and painlessly. Going to Wal-Mart is a chore; merchandise is thrown everywhere, the stores are a mess, they look like giant warehouses, there are no salespeople to help with your purchase, and the salespeople that are there are completely apathetic minimum wage workers, and checking out can often take as long as 30 or 45 minutes... not fun. People were originally able to tolerate Wal-Mart because the prices were just too good, but there comes a tipping point when customers are willing to pay for intangibles like a nice store with friendly employees.

In a Zogby poll, 38% of Americans surveyed hold an unfavorable opinion toward Wal-Mart and when asked "is Wal-Mart good for America?" 56% said yes. In his popular book The Wal-Mart Effect, Charles Fishman points out that a huge portion of Wal-Mart's customers do not even like the company. It is not a good sign when your core customer base is unhappy with the company and on the brink of shopping elsewhere. Fishman also points out that Wal-Mart is the only retail store in America that has a huge following of people who refuse to shop there. Granted, every company has customers who had a bad experience and prefer not to shop there anymore, but nothing compared to those who refuse to shop at Wal-Mart.

The problem Wal-Mart faces is that low-prices aren't enough to bring people in anymore. Many former Wal-Mart shoppers have switched to rival Target because of its hip and trendy image and fashionable clothing selection. Wal-Mart tried to lure these customers back by offering a new line of clothes but failed miserably - nobody wants to buy clothes from a warehouse. Upscale shoppers who used to shop at Wal-Mart for the prices have switched elsewhere for better service. Wal-Mart has tried to lure wealthy shoppers away from Whole Foods Market and other upscale retailers by offering organic foods in its grocery department; but the truth is, someone who shops at Whole Foods Market is about as likely to shop at Wal-Mart as I am to buy perishable food at Marcs... in other words, pretty unlikely. In a customer service disaster, Wal-Mart sold super-hot HDTVs this Christmas at steep discounts. The problem... HDTVs are not something that consumers should be buying without any help. Most got them home, hooked them up and couldn't figure out why the picture looked like crap. After all, the HDTV in Wal-Mart looked beautiful. Wal-Mart didn't have any experienced salespeople to tell these customers that they needed to buy special cable service, new set-top boxes, and special cables in order to get such great picture... oops.

Wal-Mart's caving to union interests is a sign of the trouble Wal-Mart seems to be facing. Over the past several years Wal-Mart's same store sales growth has been gradually declining and indications show that growth is likely to continue falling in the future. The best way Wal-Mart can win back its old customers is to re-make its image: renovate stores to make them more appealing, increase employees wages, hire more employees and train them to be knowledgeable about the things they sell, offer health coverage and other benefits to motivate employees, and show America that the company is devoted to change. The problem with my suggestions? They increase cost!. and increasing costs lead to increased consumer prices. Wal-Mart has created the expectation in the minds of its customers that it will always keep prices down, and raising prices would be stabbing their not-so-loyal customers in the back.

I know that my critics will say that Wal-Mart is the most efficient company in US history... they have perfected cost cutting and benefited consumers with lower prices. But remember, pure capitalism is only concerned with efficiency, once human emotions get thrown into the equation things start to change. Wal-Mart can be the most perfectly efficient company in economic terms, but customers don't always care solely about efficiency, and sometimes you have to understand that to succeed.