Walmart (WMT) Pushes Product Selection, Not Price

In an effort to correct what’s now being seen, in part, as a pricing miscalculation, Wal-Mart Stores Inc. (NYSE: WMT) is looking to increase in-demand items and retool its pricing format, with the hopes that this will re-energize revenues by the end of this year.

The race to the bottom of the pricing barrel was at one time seen as Wal-Mart’s way to beat back the competition. Its ‘Everyday Low Prices’ slogan hasn’t seen quite the punch lately, however, as other low-cost stores abound and consumers are demanding more brands and better quality.

The shift at Wal-Mart Stores is being put into place by newly minted president and CEO of the company’s U.S. operations, Bill Simon. Under Simon’s direction, Wal-Mart is adding back anywhere from 5% to 25% more items in areas like groceries, according to the company. Analysts note that business was hurt by merchandising changes, and so the largest retailer is aggressively restoring items cut last year and ditching the pricing “rollbacks” that largely didn’t engage shoppers.

The company’s new focus should result in revenue improvement in the second half of the company’s fiscal year, according to a Citi Investment Research analyst. Wal-Mart’s overall store sales dropped -1.4% and shares have fallen 4% in 2010. The company reported its fifth consecutive quarter of revenue declines in stores open at least a year, in part hurt by its U.S. division. Analysts note this is a key indicator of a retailer’s health.

In effect, Wal-Mart is seeing a new reality that price cuts only take you so far – even for a company of their scale that can pretty much have its way with distributors. At the end of the day, you have to stock the shelves with clothes consumers will actually wear, food people actually want to eat and merchandise that doesn’t end up in the trash after a year.

The reality is that there is no loyalty in the stingiest of consumers, since they go wherever the deals are. The economic crisis showed how quickly consumers opted out of Wal-Mart’s low prices for bargain-basement ‘Dollar Store’ prices – giving those stores a huge boost. Dollar Tree (NASDAQ: DLTR) is not only up a stunning +43.63% year-to-date against the Dow, it’s consolidated net sales for the second quarter were $1.38 billion, a nearly 13% increase from the same quarter last year. Retail sales for 99-cent Only Stores (NYSE: NDN) increased +4.6% to $336.6 million with stock rising +16% since June.

But it’s telling that Wal-Mart’s low-end retail competitors were adding quality products to their roster – brand names such as Kraft food, Smucker’s jams and even Prego sauces. Management seems to know that consumers aren’t likely to stick with “dollar stores’ forever, especially if Wal-Mart moves to quality, in-demand items that these so-called dollar stores’ just can’t afford.

A good example of providing value but still providing quality is the Wal-Mart pharmacy and its big successes in recent years. That’s due in part to Wal-Mart’s policy of $4 prescription generics and other low-cost medications. Now it’s joining the CVS (NYSE: CVS) and Walgreens (NYSE: WAG) bandwagon with discounted flu shots at more than 4,100 select Wal-Mart and Sam’s Club locations nationwide. While CVS and Walgreen have theirs priced at around $30, Wal-Mart flu shots are $24. Prescription drugs and flu shots are obviously something where quality counts in addition to price. Consumers may suffer through bland breakfast cereal or watered-down dish detergent, but it’s a different ballgame when it comes to drugs and their health.

In the coming months, the stores will expand its clothing brands (such as Danskin Now and Faded Glory) to higher- visibility areas in the clothing department. Plus, following the demands and needs of its customers, it’s adding more “Plus-Sized” options in these brands.

Now that the rollbacks are being rolled back, perhaps middle class consumers will return to the store for the real value that should have been the focus all along.

As of this writing, Burke Speaker did not own a position in any of the stocks named here.

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