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Wal-Mart sends a message

Chemical companies, Consumer demand, Economic growth, Financial Events, Leverage
By Paul Hodges on 17-Aug-2011

Wal-Mart Aug11.pngThe blog is a great believer in the predictive power of the retail sector.

Wal-Mart and Tesco were the first to spot the downturn in the summer of 2007, a year before it became obvious to everyone else.

Now Wal-Mart’s problems are providing some important messages about how companies need to adjust their strategies to survive as we transition to the New Normal:

• Financially-driven strategies are a dead end
• Focusing on Gross Margin loses sales

As the chart from the Wall Street Journal shows, Wal-Mart has increased Gross Margin consistently since the Great Recession began. But it has also suffered 9 quarters of declining US same-store sales. This is the key metric for any retailer.

As Wal-Mart’s COO, Bill Simon has told analysts, “I think the gross margin could be an impediment to sales growth.” The financial focus meant less attention was paid to customers’ changing needs:

• Wall Street loved Wal-Mart’s removal of low-priced, low-margin items
• But customers simply went elsewhere for their bargains

In turn, this has led to a bigger problem.

Many consumers are now living from pay-check to pay-check. They simply can’t afford to buy large sizes, even though these offer better value. As a result, they prefer the ‘Dollar Stores’, where they can cover their basic needs for the week ahead.

Wal-Mart is still the world’s largest retailer. But it will now have to move quickly, to catch up. Chemical company boards need to review their own strategies, to ensure they are not making the same mistake.