Walmart is a Baby Boomer consumer-based business. As Boomers’ paychecks grew over the years, so did Walmart’s profits. Now, the retailer is facing a daunting challenge and haunting question: As Boomer demand falls and Boomer consumption declines, will WalMart’s sales move in the same direction? Let’s take a look from 30,000 feet.
A January 28, 2010 New York Times headline reads: “Walmart Makes Organizational Moves to Raise Efficiency.” Back at its analyst meeting in October 2009, Mike Duke, Walmart’s new chief executive, said the company is determined to become more efficient and cut costs, allowing it to offer lower prices to increase sales.
Efficiency is good, saves money. So Walmart divided the country up into three separate parts: Walmart North, Walmart South and Walmart West, and has three separate presidents running things. Is this efficiency? Walmart will combine logistics, real estate and store operations, under COO Bill Simon. Andy Barron will oversee store merchandising execution for the three new business units. Both he and Simon will deal directly with the three new presidents.
In addition, Walmart put the company's International CFO, Wan Ling Martello, in charge of international Internet sales and moved the former Internet guru, Raul Vazquez, into one of the new president positions. In January, Walmart also announced it is cutting 11,200 jobs. So there, now Walmart has the formula for efficiency. Wait, there is more! Hot off the wire in February, Walmart just announced that it will close ten under-performing Sam’s Club Stores and cut 300 support division jobs at its headquarters in Arkansas. From 30,000 feet this all looks like a frantic fire drill.
In mid-2009, Walmart announced an ambitious retail strategy called Project Impact that the company hopes will improve customer service and knock all of its more vertical competitors out of business, yes out of business. It is fair warning from Mike Duke to drug stores, toy and craft stores, supermarkets and consumer electronic giants that Walmart is going for your throat.
From 30,000 feet, Project Impact appears to be nothing more than an untenable and desperate demonstration of corporate ego. It is not a retail strategy, it is a pipe dream.
Walmart switched to a quarterly same-store sales reporting format last year. Its same-store sales dropped during the second and third quarters of its fiscal 2010 (ending in July and November 2009). Speculation is forecasting more of the same when Walmart reports quarterly earnings this month. Project Impact better kick in soon. From 30,000 feet, it sure looks like Walmart is selling less stuff to fewer people and the competition is certainly still standing.
Walmart sought to capitalize on the recession in 2008 by upping their ad spending by a whopping 15.9 percent over 2007, according to analysis by Ad Age Data Center. Total U.S. ad spending by Walmart in 2008 was reported to be $1.66 billion, and measured media spending on its flagship Walmart chain soared 66.4 percent, making the giant discount retailer the fifth-most advertised brand in the country.
Despite the "Save Money, Live Better" campaign, Walmart is receiving marginal returns from this big increase in advertising spending, with net sales essentially flat for the first three quarters of 2009, with a modest 1.7 percent year-over-year increase for U.S. stores, offset by year-over-year declines in overseas and Sam’s Club net sales.
But, after such a massive marketing investment, shouldn’t Walmart’s U.S. sales be up more than marginally? One would think that heavy advertising and discount prices should lead to bigger sales increases during a recession. 2009 ad spending numbers are not available yet for Walmart, but we have no reason to believe that their aggressive spending strategy has changed.
Can the bad economy be blamed for the company’s meager sales increases? We don’t think so. In fact, we believe that demographics may be playing a significant role in Walmart’s lackluster performance. The retail chain’s best customer, the Baby Boomer, is aging and as Boomers age their consumption is dropping precipitously and very predictably.
No matter how much money Walmart spends to chase this shrinking market, the returns are always going to be marginal. Why? Because the worst mistake you can make in marketing is to use good money to chase bad. Chasing a shrinking market is death. The most efficient advertising and marketing dollars are spent on expanding markets.
Is Walmart paying attention? We don’t think so. Walmart’s retail concept is called “Cheap and Deep” by the retail trade. It always has depth in a limited assortment of merchandise at a very low price. In Walmart’s case, this cheap merchandise is manufactured in China by near slave labor.
This retail concept is not about selection or breadth of assortment. This concept, therefore, would struggle with the fashion tastes of a new market and there-in lies the problem. The biggest generation in United States history, Generation Y, was born between 1977-2002 (although some Gen Y boundaries are different, varying from 1977-1994, 1979-2000 and even as narrow as 1981-1995). It is the new market. And new markets generally have very fickle tastes. If they don’t want something, it doesn’t matter if it is free—they just don’t want it.
Walmart is very used to dictating what their customers should buy: Large quantities of very cheap retailer’s choice items. Remember the gallon jug of Vlasic pickles?
Boomers were born between 1946 to 1964 (experts agree on that time span) and Walmart has decades of experience catering to the clearly-defined tastes of this generation, who are currently 46 to 64-years-old. Walmart has figured out what the mature Boomer market buys. They have also refined this demand to the narrowest selection possible, practically dictating to Boomers what they will buy. Boomers, in turn, are okay with this, because when you are between 46 and 64 you have pretty specific tastes and preferences that influence your buying habits. If Walmart does not have what a Boomer really wants, but does have something close at a very low price, the Boomer will buy it.
Demand Destruction and the Gen X-Gen Y Dilemma
So where is the rub? It’s simple. When consumers hit about 50-years-old, according to the U.S. Bureau of Labor Statistics, their demand for stuff begins to subside. At 60-years-old, a person pretty much has just about everything he or she needs and then some. At 60, one’s body has stopped changing so one can wear clothes longer—a lot longer.
If you want to see what was fashionable 30 years ago, visit a Miami retirement community. The point here is that the bloom is off the rose of the Boomers’ consumption of things. The Boomer population is a huge bell shaped curve with many turning 65 at its leading edge (beginning in 2011) and with its very top cresting at 50-years-old in 2007 (1957 was the peak year for Boomer births at 4.3 million). All of this means that Wal-Mart needs to find a new market fast if it wants to continue doing business as usual.
But where does Walmart turn? The two U.S. generations over 65 do not have the critical mass to serve the company’s infrastructure, and besides, for the most part they have stopped consuming. The U.S. population now 26- to 45-years-old is a non-homogeneous combination of the small native born Generation X (nine million fewer than the Boomers) and the free-standing market of Latino immigrants. (Latinos are not evenly dispersed throughout the country but live in geographical pockets, primarily concentrated in about nine states).
So who’s left? It is Generation Y, the largest and most powerful generation of consumers this nation has ever seen. Will they be the solution to Walmart’s sales problems? No, not under Walmart’s current business model.
Walmart has lost its Sam Walton connection with the customer and the rest of the retail world has caught up. As if to prove that it is no longer in touch, Walmart recently announced a major restructuring of its sourcing, a move designed to increase the amount of generic Walmart brand goods on its shelves. This tactic could improve profitability with loyal existing customers, but will be a sure turn-off to the huge emerging brand-conscious Generation Y market.
Walmart has other issues that will play into their business success or failure. Walmart and China are joined at the hip. Despite popular belief, China’s economy is not healthy or stable. China’s one child-only policy has devastated its emerging labor force. By its own official estimation, China has prevented 400 million live births in the last 30 years. A smaller labor force in China eventually means higher labor costs and higher–much higher–product costs for Walmart.
Couple this with higher shipping costs, a falling U.S. dollar, a slowing U.S. economy and Walmart will have to find a new trading partner that can produce goods as cheap as China once did because China’s prices are going up. That trading partner doesn’t exist. India? We don’t think so. India has its own demographic problems and is not a ready substitute.
Oh yes, and one more thing. Generation Y is on track to become the greenest and most humanitarian generation in U.S. history. If one wants to do business with them, they had better be very green and very nice to their fellow man. And popular perception is that Walmart has a dismal record on both counts. Perception is reality. This fact could seriously injure Walmart’s business all by itself.
From 30,000 feet, our view of Wal-Mart is not very pretty.
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Ken Gronbach is a nationally recognized expert and author in the field of Demography and Generational Marketing. He is a marketing guru who regularly provides counsel to large and small businesses across the U.S. Gronbach's book, "The Age Curve: How to Profit From the Coming Demographic Storm, was published in 2008.
Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.