By Michael Rudnick
NEW YORK–As consumer spending continues to feel the squeeze from macroeconomic factors including the lending crunch, housing slump and high fuel costs, Wal-Mart’s low-price focus should help it to survive and potentially thrive this year.
Citigroup Global Markets, in its 2008 “Broadlines Outlook” report released in December, named the world’s largest retailer as its top stock pick for 2008 due to its pricing focus. “As the weight of the macro backdrop takes its toll, we expect Wal-Mart to benefit given its strong EDLP (Every Day Low Price) message and as consumers trade down and consolidate trips,” the report stated. Wal-Mart in the past year has returned to its low-price roots following a temporary blip in which the retailer made an upscale push.
Citigroup expects a sales pickup this year in home products at the mass merchant. “We expect the company’s merchandise initiatives to drive improved sales in home and apparel, as well as continued strong sales in categories that have been performing well [grocery, electronics, health and wellness],” the report stated. Home has been an area of difficulty at Wal-Mart during the past year. However, it saw some improvement in the recently completed third quarter, due in part to reinvigoration of its low-price leadership strategy.
Low-price merchandising is wasted without a marketing voice conveying this message. Wal-Mart is addressing this issue by “integrating its merchandising and marketing strategies to convey a more consistent message,” the report stated. “We believe the new campaign—‘Save Money, Live Better’—should help Wal-Mart gain mind share as the destination for price.”
Because Wal-Mart’s home business had a difficult 2007, it is up against easy comparisons in the sector, the report added.
Not only are shoppers attempting to put a stronger clamp on spending in difficult economic times, they are trying to put a stronger clamp on shopping trips due to gas costs. The mix of general merchandise and consumables at mass retailer Wal-Mart and its rival Target creates a one-stop-shopping environment that helps consumers seeking to cut down on trips, the report said.
Wal-Mart and Target are hoping to further reduce shoppers’ drive times by “increasing their footprint to neighborhoods closer to their core customers,” the report stated. Target continues to grow its number of supercenters while Wal-Mart is planning more Neighborhood Market stores. “Wal-Mart aims to drive returns by building smaller stores, which allows the company to better serve condensed trade areas that full-sized supercenters would not otherwise be able to serve,” the report added.
Wal-Mart and Target are both top stock picks due to their improved margin potential going into this year. A large part of their bottom-line improvement is expected to stem from increased global sourcing efforts. “We believe both Wal-Mart and Target should benefit from increasing their respective levels of directly sourced merchandise,” the report stated, adding that Wal-Mart direct sources 15 percent of its product whereas Target direct sources 30 percent of its product. Citigroup said it expects these sourcing efforts to improve merchandise margins over the long term.
Other factors that should contribute to the mass merchants’ margins this year are an improved focus on expense management, new cost-saving merchandising and supply-chain technology investments.