For a while there, during the economic downturn that started in the second half of 2008, Wal-Mart Stores Inc. (NYSE:WMT) looked like it had found a large number of new customers for its low-priced merchandise. These new customers came from a middle class base that was feeling pinched by the lack of credit and collapsing house prices.
Then the wheels started to come off, as consumer confidence rose in late 2009 and the first quarter of 2010. Newly minted Wal-Mart customers returned to their old favorites, including Target Corp. (NYSE:TGT) and Costco Wholesale Inc. (NASDAQ:COST) stores. Wal-Mart’s apparel business was particularly hard hit as customers deserted the company’s stores in favor of earlier preferences such as TJX Companies Inc. (NYSE:TJX) and Abercrombie & Fitch Co. (NYSE:ANF), both of which had lowered prices to grab share.
The strategic decision to go after a new kind of customer came from the very top of Wal-Mart’s US executive command, and yesterday, the CEO of the company’s US stores paid the price. Eduardo Castro-Wright was shuffled off to be president and CEO of Wal-Mart’s Global.com and Global Sourcing, and Bill Simon, who had been the US division’s COO was named president and CEO of Walmart U.S.
Simon is believed to be committed to Wal-Mart’s original strategy of being the low-price leader and has indicated that he will continue the company’s long-standing practice of wringing every nickel out of Wal-Mart’s suppliers. Some observers believe he will be less abrasive than Castro-Wright has been in doing this, but this is where Wal-Mart’s chief competitive advantage lies and Simon will need to hit it hard to try to bring the US division back to its former glory.
One systemic problem he faces is the continuing high US unemployment rate. Wal-Mart’s core customers come from the lower end of the income scale and are still suffering disproportionately from high unemployment or they’re worried about continued employment. Because people always need to eat, Wal-Mart could put more focus on its grocery sales. But margins there are slim and volume would need to expand dramatically to offset lower sales in apparel or electronics.
Wal-Mart needs to find a solution to its lagging US sales. A new president/CEO with an inclination to return the company to its roots may be the best way to start.