Inside This Issue - Opinion
Active deal tactics pack a punch
May 20th, 2013
What should retailers do when the best-prepared plans still lead to the question, “Where are all the customers?”
Here’s what to do: Prepare some new plans.
For the past decade Walmart and its investors have been wringing their hands about the company’s lackluster comparable-store sales, with some blaming the economy and others citing stiffer competition or understaffed stores. There’s truth in all of those points, but these executives are missing an even bigger point: Walmart has become a victim of its long-successful and once-revolutionary business model — namely, everyday-low pricing, or EDLP.
The very idea of questioning EDLP is sacrilege. EDLP has an almost cult-like hold on current and former Walmart executives. That’s because EDLP changed everything. It created the world’s biggest retailer. And it did this by steam-rolling over legions of “high-low” promotional retailers, from Kmart to the local five-and-dime store.
But this is 2013. The industry is more sophisticated now, and there is some perspective. The smoking ruins at J.C. Penney are the latest and most spectacular example of EDLP zealotry run amok. Less appreciated is the fact that Supervalu’s recent struggles can be blamed partly on a botched move toward EDLP. Further back in history, there’s the still-chilling example of Kmart’s EDLP experiment, which landed it in bankruptcy court.
But Walmart is EDLP’s pioneer and preeminent practitioner. More to the point, it has no history with the high-low model. If it switched to high-low pricing, wouldn’t it end up like Kmart?
But there’s some nuance missing from the discussion. First of all, Walmart has for decades, in its own way, practiced high-low retailing. There are the permanent price “rollbacks,” of course. But those involve a fairly small part of all the products with prices being rolled back, and the discounts are very modest, 10% or less usually. The majority of rollbacks are temporary and work on a quarterly cycle — not a sure-fire way of creating urgency and excitement.
Walmart’s real bread and butter, promotion-wise, has been catering to shoppers who engage in what we call “passive deal tactics.” They are called passive because shoppers only have to show up at the shelf to get the deal. Walmart’s EDLP strategy and reputation as a low-price leader can be considered a part of this. In addition, Walmart has assembled lower-price private brands and sells goods in bonus sizes, value packs and even buy-one-get-one (BOGO) packs.
Indeed, the history of Walmart’s retailing in the past 15 years can largely be viewed through the story of its shifts in emphasis on these passive deal strategies. Through the mid-2000s, Walmart stores were often seen as cluttered with huge displays of special pack and rollback offers. With new management they went overboard the other way, with a “clean aisle” policy that eliminated most of these displays. Meanwhile, they doubled down on their emphasis on even lower prices and more private label. The results were negative comps for the first time in the retailer’s history.
Under new management again, Walmart brought back the displays and promotional packs, and backed off of the extreme private label push. Executives found a nice balance in their passive deal strategy and their comps once again returned to positive territory. Yet now the comp sales are straining to stay positive. That’s because these passive deal tactics will only go so far.
Indeed, a study we did recently shows that Walmart’s approach is less effective in driving sales growth than another strategy that we call “active deal search.” This comprises Sunday coupons, circulars, online coupons and loyalty cards. Active deal searchers use all of these things — and in that order — according to our research.
How does it work? Much more than passive deal offers, active deal tactics create incremental sales. For many flat-pricers, this is a difficult idea to digest. That is because of the instinctive belief that retailing is a zero-sum game. These merchants think, “If I don’t sell it at a discount now, I’ll sell it at the normal price later. Discounting this brand will just steal sales from that brand sitting next to it. Or — if I’m lucky — it will steal sales from another store.”
The fact is, the last idea misses the reality of the situation: Contrary to what many might suppose, active deal searchers are the wealthiest shoppers. They spend twice as much as their less active counterparts, and they chase promotions with their laptops, smartphones, iPads … and scissors. If it’s not being promoted, they’re less likely to buy it. And if nothing in the store is being promoted, they’re less likely to visit in the first place.
According to our data, Walmart’s share of the most active deal searchers — which, by our reckoning, account for over one-third of Walmart’s sales potential — is a full third less than its share of the least active. The share drops from a 27% to 18% of purchase occasions among the most active deal searchers.
Costco Wholesale Corp.’s drop-off is of a similar size. It is leaving the business of this lucrative demographic on the table. CVS/pharmacy’s deft promotional machine, on the other hand, has bagged a share of the most active deal searchers that’s more than a third bigger than its share of the more lackadaisical variety. At last check, CVS was pretty good at turning a profit by pursuing these penny pinchers.
Target Corp. is a peculiar case. Its share of the most active searchers is a smidgen higher than its share of the least active. Coming from a department-store background, Target used to do better than that. But as Walmart grew, Target became what can be called a “self-hating” promoter, putting out weekend circulars that engage in dirty, nasty, unspeakable price points. Company executives come into the office on Monday morning and feel icky about it. Their lack of conviction, however, is showing in the lackluster comps.
The key to success, then, is to not feel icky: Promote, and when promoting, do it right — and do it profitably.
To be clear, this is not to say that more is always better. For many, there’s a golden mean that lies between EDLP and the blue light special, and those that straddle this divide we call hybrids.
Take the example of Publix, the Southeast’s most beloved grocer. Publix — which goes toe-to-toe with Walmart on EDLP — also puts out a circular. However, its circular is typically smaller than the usual 16-page insert. Publix advertises aggressive offers on popular items, but it’s a handful of them stacked up near the front, rather than countless deals littered all over. Unlike some other grocers that profit in the high-low game, Publix does it by being a smart merchant instead of squeezing suppliers out of business.
Does any of this sound like something Walmart could never do? Last year Publix racked up $1.6 billion in earnings, up 5% on an adjusted basis, on $27.5 billion in sales, which were up 4% on a 2.2% comp. Not too shabby for a supermarket, and it points up the potential for a well-motivated mass merchant.
No discussion of Walmart’s problems would be complete without a mention of the dollar stores. Their base has always been lower-income shoppers. But their phenomenal growth of late has been fueled by consumers who are better off. Yet our data show that when it comes to shoppers with incomes of $30,000 and up, dollar stores can barely get them through the door without dangling a deal.
Maybe that’s worth pondering for Walmart, whose unconvincing response to the dollar-store threat has been to sell stuff in ever-smaller, cheaper packages. At some point, it’s necessary to turn around and start thinking bigger — and better — at a rock-bottom price … and for a limited time only.
* Editor’s note: This is the second in a two-part series.
KURT JETTA, Ph.D., is founder and chief executive officer of TABS Group. He can be contacted at email@example.com.