Complex System grounded in EDLP

Discount Store News, Oct, 1999

The core of Wal-Mart's success remains rooted in its original item merchandising strategy offered at every day low prices.

"In the early days of Wal-Mart, I really believe our emphasis on item promotion helped us make up for a lot of shortcomings we had--an unsophisticated buying program, a less-than-ideal merchandise assortment and practically no back-office support," Sam Walton reflected in his book "Made in America." "We made up for what we didn't have by being merchants."

Wal-Mart long ago made up for all those things it didn't use to have with cutting-edge technology, distribution proficiency and data mining capabilities. However, those things are simply decision-making tools and systems that enable Wal-Mart to execute the item philosophy that still dominates the merchandising presentation.

One of the best examples of the item approach is Wal-Mart's volume producing item contest, also known as VPI. Store associates are encouraged to come up with creative ways to merchandise and sell items chosen for inclusion in the program. Traditionally, VPI items have been products that can be stacked out, case cut, single-price point features that are priced to generate large sales. If a particularly successful approach emerges, the VPI gets shared with other stores.

The item merchandising philosophy, when blended with Wal-Mart's every day low price approach, is a powerful combination.

The concept of EDLP led to the birth of the discount retail industry in the 1960s, allowing chains to dramatically reduce prices in stores and attract the masses. And while Wal-Mart didn't invent EDLP, it has been its most devoted proponent. Wal-Mart's strength is an unwavering commitment to EDLP, and it remains to this day the cornerstone of all marketing and advertising initiatives.

The item and EDLP approach is particularly effective with name-brand products consumers purchase regularly. Shoppers are typically familiar with prices on branded items, making it easy for Wal-Mart to demonstrate its value proposition with a rock-bottom price and a pallet display or endcap exposed to high customer traffic. The result is typically tremendous sell-through of the product.

The brand strategy has evolved over the years to include more of the retailer's proprietary brands. Television personality Kathie Lee Gifford's enormous popularity with Wal-Mart's core customers helped generate strong sales of the value-price apparel line bearing her name.

The Sam's Choice and Great Value brands have also been expanded over the years in the areas of household chemicals, food and paper products categories. In the nonprescription drug area, Wal-Mart offers its Equate brand as a value-price offering.

In other categories Wal-Mart has created new brands or signed licensing deals. Wal-Mart is the exclusive retailer of Popular Mechanics brand tools and Better Homes & Gardens lawn and garden products. A few years ago, it introduced a wildly successful line of vitamins called One Source.

Whatever product or category Wal-Mart enters, the goal is to sell it for less than anyone else and to save the customer money.

By not succumbing, to one-time sale items, Wal-Mart avoids the pitfalls, supply chain problems and dissatisfied customers who encountered an out-of-stock. Those problems plague other retailers playing the high/low pricing game.

This efficiency and the company's ability to maintain low prices not only served Wal-Mart well in the past but virtually guarantees its dominance in any category it chooses to sell.

As Wal-Mart moves to conquer the grocery trade, its EDLP strategy continues to give it an edge. According to George Strachan, an analyst with Goldman Sachs, Wal-Mart's low pricing and one-stop shopping are driving sales at its supercenters and will help Wal-Mart steal additional market share from traditional supermarket competitors.

A comparison survey by Goldman Sachs of nearly 150 grocery products shows that Wal-Mart beat its supermarket competition on all but one item.

Even though Wal-Mart now boasts the most intelligent system in all of retail, the basic strategy hasn't changed all that much. The technology enhances Wal-Mart's ability to keep prices down and to more accurately determine which items will best benefit from even deeper discounts.

Wal-Mart uses its register system to identify what items are moving--in which regions and when. Its computer system receives approximately 8.4 million updates every minute, revealing not just customers' purchases but the relationships between those purchases.

This market basket profiling and store module traiting increases merchandising flexibility across all categories. According to Strachan, "Wal-Mart is able to tailor assortments to customer preferences at store level." For example, stores can choose from among 96 different laundry product modulars to target local tastes precisely.

Management at headquarters continues to make it easy for store managers to tailor product mix. Requests for merchandise not on a store schematic are sent to a special team in Bentonville, processed and most often approved within 72 hours.