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November 26, 2006

A store fit for a Count?

OUTSIDE DALLAS, TX -- I find myself in Dallas this evening to have dinner with Gu, a high-school friend down here. Meanwhile, as I sit in a Hertz-rented Taurus outside a suburban restaurant, my mind turns to the Wal-Mart test store, some 18 miles north of here in Plano. I'm nearly giddy with excitement for this super high-end Wal-Mart that promises, among other things, some good wine. As the Washington Post relates:

And in the long, long aisle that is the wine department, there are four bottles of La Mondotte 1999 Comtes de Neipperg selling for $557.47 each. They are on a short, kiosk-type wooden shelf near an aisle-long cooler of beer. (The good beers, but also the bad.) On the other side there's a '98 Dom Perignon ($145.37), and several other wines in the $100 to $300 range.

You could just stand and watch the La Mondotte all day, as people discover it, and give it a brief gaw. Many of them are actually looking for it, having seen it on TV during a flurry of opening-day coverage. ( Y'all hear about that $500 bottle of wine they got at that new Wal-Mart in Plaaano?) Mothers forbid the picking up or fondling of it -- "Don't you put your hand on it," one scolds her kid. Friends giggle over it. A teenage girl reads the label intently and informs her mother that it's French.

But nobody is a hick about it. Nobody in the high-end Wal-Mart passes judgment on it, or haughtily proclaims that no wine is worth $557. They admire it and continue their shopping as if it had always been there.

I wonder if Count Stephan von Neipperg, the dapper nobleman of St Emilion, would be proud that his wine is in a Wal-Mart?

(Here is a picture of Count Stephan in his cellar, and scroll down here for notes from our visit to his main winery, Ch Canon La Gaffeliere.)

And what about all these people thinking a 1999 La Mondotte is actually worth $557.47? Wal-mart may have the lowest prices for Franco-American Spaghetti O's, but 1999 La Mondotte can be just as easily had for $270 at Sherry-Lehmann in New York City.

I'm still looking forward to the visit, even if the wine is insanely overpriced.

UPDATE (a few hours later): All the hype about this special Wal-Mart is really over-done. Basically Wal-Mart has sprinkled a few high-end items into their usual assortments, decluttered the store, added some wood floors, and changed the fixturing/signage. (The fixturing is now about 7' high and not as wide/deep.) It's like Wal-Mart's attempt to turn their usual 200,000-square-foot box into a Target. That's a ringing endorsement of Target's strategy, but I'm not sure that it'll work for Wal-Mart.

The biggest problem with the new Wal-Mart is actually the decluttering. The typical Wal-Mart is only slightly less cluttered than a flea market, with product stacked in the aisles, dropped on warehouse pallets in the middle of the racetrack, hanging on dozens of clip-strips hanging from the Lozier (shelving), and in just about every spare inch of usable real estate. That's how Wal-Mart drives both high margin impulse purchases as well as off-loads billions of dollars in excess inventory every year. Here's how it works: a manufacturer (let's say Franco-American) is falling short of their quarterly sales goal and needs to off-load a few million cans of Spaghetti-O's. Only Wal-Mart is big enough to take all this inventory, so they buy it at a fire-sale price, since Franco-American needs to unload the inventory this quarter and "make the numbers." (This irrational inventory management then puts the manufacturer into a sales hole at the start of the next quarter, but this is a topic for another day.) Each Wal-Mart then gets a pallet or two of Spaghetti-O's, far more than they could stock on the shelves or sell in a short time. Thus the pallet gets dropped wherever there's room on the racetrack with a big "$1 rollback" sign. Meanwhile, people who never go down the processed spaghetti aisle notice the great price and pick-up a few cans as impulse buys at a very good price.

In a way, everyone benefits from the cluttered store, most especially Wal-Mart. The consumer gets a great price and the manufacturer quickly gets rid of excess inventory. Wal-Mart drives average check higher, gets additional margin, and burnishes its image as the price leader. Meanwhile, store operating costs are low because it's cheap to drop a pallet in the middle of the store rather than stock shelves.

The grocery section of the new Wal-Mart has not a single pallet in the racetrack. (Other sections, notably electronics, resemble the old Wal-Mart more closely.) Aisles are wider, about 8' wide. The racetrack is over 16' wide. Merchandise is not inventoried above the Lozier, which means a larger back-room. Apparel racks are spaced wider and loaded with less merchandise. Big sections of the store, such as in electronics, are completely empty at a time when inventory should be at its peak. The net result is that the store's productivity (margin per square-foot) is probably well-below what other Wal-Marts run.

This new Wal-Mart makes sense if one believes a few things. First, one could believe that margin on selling higher-end products is enough to make-up for the less-intense use of floor space. That's hard to believe because the vast majority of the assortment is the same and because high-end items tend to have slower turnover. How many bottles of La Mondotte are really selling, and would the space be better utilized by a warehouse pallet of $1 Spaghetti O's?

Second, one could believe that new customers will be attracted with a decluttered store. But is going head-to-head with Target, and potentially abandoing the free-for-all bargain-basement experience really the way to draw in new customers? Can Wal-Mart out-Target Target?

Third, one could believe that current customers will shop more often or have higher checks if the store is less cluttered. But if existing customers have put-up with Wal-Mart's clutter for decades and continue to drive the chain to record sales, why change the formula?

It seems to me that Wal-Mart's best strategy is to stick to the core and continue to do what they've done all along: drive down operating costs and deliver a "good' assortment to the consumer at a better price than competitors. Selective decluttering might be beneficial, but if Wal-Mart is to be a mere copycat of Target, is Wal-Mart abandoning its lowest-price niche and leaving the hard-discount sector open to attack by the likes of Aldi, a resurgent K-Mart, or the ever-popular dollar stores?

Oh, by the way, the $557 bottles of La Mondotte are no longer carried.

Posted by adrianjo at November 26, 2006 06:05 PM