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Further Evidence...

January 3, 2011 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

 ...that low-price strategies have a finite life. 

December 15, 2010 Bloomberg Businessweek reports that “Walmart managers in the U.S. received instructions to markup an average of 1,800 types of toys per store.”  The rationale?

According to Bloomberg “to enable your store and the company (Walmart) to have a successful financial month.”

Walmart has seen a drop in U.S. sales for six consecutive quarters.  Apparently the price increases are designed to reverse that trend.  Will it?  I doubt it.  Here’s why.  Think of Walmart and you think of low prices.  It’s how they built their brand.   

A brand is the promise businesses make to its customers.  Verizon promises dependability - no dropped calls or internet connections.  That’s its brand.  Ritz-Carlton promises exceptional service.  It’s employees each have a budget that they’re encouraged to use to solve customers problems.  Think Ritz-Carlton and you think exceptional service.

What happens when a company fails to fulfill its promise?  The same thing that happens to you and I, it loses credibility.  People become wary when promises aren’t honored.  They look for alternatives to ease their minds and simplify their lives.

Many Walmart buyers are going to resent the price increases.  They’re going to view these price increases as betrayals even though Walmart’s prices may still be lower than anyone else’s.  Why?  They’re going to assume that more increases are in their future.

If that’s the case, if they expect future price increases, then why not shift their spending to Target where the store atmosphere is more welcoming and the company’s ads are fun and exciting?  Why not shop at the local grocery where people remember your name and greet you warmly?  It’s worth a few cents more, right?

That’s the thought process Walmart’s buyers are going through.  It’s my belief that because Walmart is, of necessity, raising prices on so many fronts, it’s going to continue to see sales declines in the U.S.  That trend will continue until they make a conscious decision to rebrand themselves.

Walmart’s future is going to depend on its ability to craft a new promise to its customers.  A promise that its customers value.  Then they’re going to have to regain those customers’ trust before experiencing growth again.

The truly sad part of this story is that Walmart could have avoided this dilemma.  Their ability to offer incredibly low prices for so many years was the result of a superior data gathering system.  They designed systems that allowed them to focus on buyer preferences at the store level.  

This information helped them devise highly effective purchasing and distribution systems that helped push costs down.  If Walmart had built its brand around a promise of ‘what you want, when you want it,’ it could have charged higher prices than it did, enjoyed even more astounding financial success than it did and continue that brand even as buyer preferences changed as they inevitably do.

It’s counter-intuitive, but building your brand on low prices means that at some point in the future, you’re going to have to scrap that brand in favor of one that’s more enduring.  Given the difficulty of building a business, do you really want to set yourself up to build two? 

About Dale Furtwengler

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