Dear God, what if Wal-Mart sold Manolo Blahniks in the shoe section? Or stocked copies of Dwell and the New York Review of Books in the magazine aisle?
At Wal-Mart's annual meeting last week, CEO Lee Scott unveiled what may be a subtle shift in just that direction. The company is doing fine selling goods in massive quantities to lower- and middle-income shoppers who patronize Wal-Mart because, in Scott's words, they "have to save money." But these customers can get tapped out. Indeed, the retailer's same-store sales have been plodding along, increasing less than 3 percent per year.
To grow more rapidly, Scott said, Wal-Mart needs to attract customers with lots of discretionary income who shop where they want to. So Wal-Mart plans to appeal to them by improving the quality of its clothes and goods and by stocking more "organic and natural food."
Wal-Mart is a remarkably resourceful company, but this seems like a tough cultural shift. (For example, "low-carb" Twinkies wouldn't be considered health food in Manhattan.) The logic behind Wal-Mart's phenomenal growth and market power is twofold: 1) It understands the needs and habits of middle-American consumers better than anybody else; and 2) it's a machine that relentlessly seeks out lower prices on goods of adequate quality that it can sell in huge quantity with very small markups.
To appeal to higher-income customers, however, Wal-Mart will have to do the sorts of things that hurt margins. Upper-income shoppers live in places where real estate and labor costs are higher, where unions have clout, and where politicians tend to oppose Wal-Mart's arrival. Look what happened when Wal-Mart tried to plant a big box in Queens, N.Y.
But the real issue is more conceptual. There are foodies who spend thousands of dollars annually at Whole Foods and yet buy their socks at street fairs. And there are dandies who will only buy their shirts at Thomas Pink but are perfectly happy dining on ramen noodles. The problem is trying to get people to buy the good stuff from a place associated with the bad stuff. (As James Cramer unkindly puts it, the Wal-Mart experience is like shopping at GUM, the Soviet-era department store.)
Retailers can drop from the luxury market to the mass market. (See, for example, the cheaper Jaguar X-types and the more expensive XK models.) But it's not clear they can do the reverse and move from low-end to high-end. What if Hyundai were to unveil a $50,000 luxury SUV? It would have difficulty getting its existing customers to trade up. If they could afford to—or wanted to—pay $50,000 for a car, they probably wouldn't be Hyundai customers in the first place. And snobbish Lexus owners wouldn't deign to consider a premium-priced Hyundai. McDonald's probably wouldn't do too well with a $15 McKobe burger. The connoisseurs would wrinkle up their well-trained noses in distaste, and the regulars would be priced out of the market.
What's more, Wal-Mart has been until recently a famously inward-looking company. Its competitive advantage has always been the stuff behind the scenes—sourcing, logistics, inventory control, cost control. Wal-Mart has always been less interested in, and comparatively weak on, external factors like public relations and marketing. For four decades, that formula has worked fine. The coastal elites who run ad agencies, the media, and large companies have long been forced to trek to Bentonville, Ark., to educate themselves about the consuming and retailing habits of middle America, to acknowledge Wal-Mart's power, and to nod dutifully at the hokey Wal-Mart cheer. Now, the calf-skin shoe will apparently be on the other foot. Seeking growth, Wal-Mart will have to familiarize itself with the shopping habits of people with whom they are not familiar: yuppies, urban sophisticates, bourgeois bohemians, suburban nondesperate housewives, kids with trust funds, foodies, health nuts.
A few pointers for Wal-Mart as it embarks upon its new upscale course:
Make an intense study of Restoration Hardware's inventory management. Rather than pile up cheap goods to the ceilings, Restoration tastefully sprinkles expensive tchotchkes around even-more-expensive leather chairs. Charging $20 for a basic wall hook isn't just chutzpah; it's a form of retail genius.