Wal-Mart's biggest problem: Its customers

Even after lowering prices, the company still isn't getting a traffic boost. Chief among its woes is its grocery business.

By MSN Money Partner May 19, 2014 4:35PM
Wal-Mart in Brazil
© Paulo Fridman/Bloomberg via Getty ImagesBy Krystina Gustafson, CNBC

Its prices continue to undercut competitors. It's offering a slew of new initiatives, from in-store money-transferring services to organic groceries -- even comparison shopping for auto insurance.

But despite these strategies -- and a broad consumer base driven by low prices -- Wal-Mart's (WMT) U.S. stores are still struggling to gain traction, having posted their fifth-straight quarter of negative same-store sales last week.

At the center of the discounter's domestic woes is its appeal among shoppers who are facing stagnant wage growth and simply can't afford to spend on discretionary items -- or in some cases, food.

"They're lowering prices and they're still not getting the traffic," said Belus Capital Advisors analyst Brian Sozzi.

Clearly, Wal-Mart is looking for a new lever to pull in order to boost its sales growth.

Although weather played a role in many retailers' earnings for the first quarter, cold temperatures can't be blamed for more than a year of sluggishness in domestic sales, analysts said. Among Wal-Mart's woes is its grocery business -- where the company says sales were trimmed by 0.9 percent because of last year's changes to food stamp benefits.

With food accounting for more than half of the retailer's business, it's a big blow.

'Stuck in a grey zone'

"The Wal-Mart moms . . . are shopping on Friday and Saturday after they get paid, and they're not going to the stores on Monday and Tuesday," Sozzi said.

Despite the ongoing struggles of its core customer, Sozzi said Wal-Mart is "stuck in this weird gray zone" in terms of appealing to a higher-income consumer. It ran into issues a decade ago when it attempted to shift its apparel category to skew toward higher-end labels, which "flopped" and led to deep markdowns, said Ken Perkins, Retail Metrics president.

"They've had so many missteps over the years, particularly in the apparel space," Perkins said. "I've got to believe they're a bit gunshy in that space."

A number of recent initiatives appear aimed at targeting a relatively younger, higher-income consumer, Perkins said. These include its new video-game trade-in program, which launched in March, the organics food push with the Wild Oats label, and a sharper focus on the Web. 

Wal-Mart spokeswoman Deisha Barnett said the retailer serves a broad customer range, and its new strategies are aimed at engaging its existing customers and attracting a new customer.

"Customers' needs are changing. Period," Barnett said. "This whole idea of wanting to know what is in the foods you're eating, or things to be grown locally or organically, that's not just a trend for a higher-income consumer."

In Sozzi's opinion, Wal-Mart needs to continue to go after the low-income consumer, and "hope and pray" that it offers some enticing products in home or organics, which can persuade a Macy's (M) or Nordstrom (JWN) customer to come visit.

Perkins, on the other hand, said he thinks Wal-Mart should also focus on bringing in a higher-income consumer. He added that some of the retailer's recent initiatives, mainly its improving online shopping capabilities, could bring in a new demographic. But he also pointed out that it's incredibly hard to move the needle at a retailer logging billions of dollars in sales.

This is especially true given that a number of midtier consumers who had traded down to Wal-Mart during the recession have now traded back up, Perkins said.

"They have to try something," he said of Wal-Mart. "They can't just sit and watch their market share bleed."

Bright spot? Think small

UBS analyst Jason DeRise said he thinks Wal-Mart is taking the right approach in getting its U.S. business back on track -- dropping prices across all its categories. And in an April 24 report, Credit Suisse analyst Michael Exstein gave the retailer kudos for beginning to address many of its external issues, including a "deliberate plan" to ramp up its small-store format.

Wal-Mart's smaller Neighborhood Markets stores were a bright spot in last week's earnings report, posting a 5 percent same-store sales gain against a "strong and consistent" performance, even in bad weather periods.

Perkins said these stores are less susceptible to weather swings because they are located in more urban areas and can be reached without driving. This will also help to combat high fuel prices that analysts have said contributed to Wal-Mart's woes because the bigger stores tend to be based away from city centers.

One danger in the smaller stores, however, is the possible cannibalization effect they could have on Wal-Mart's supercenters, where shoppers would load up on extra discretionary items, Perkins said.

Sozzi said the discounter needs to take its store footprint plans even one step further and shrink its supercenters. In the company's earnings call, Wal-Mart U.S. President Bill Simon said 10 percent of its domestic stores are underperforming.

Despite significant external headwinds, Perkins said there is still room for Wal-Mart to send its U.S. segment back into positive territory -- so long as the economy cooperates.

"There is a chance for this to turn around," he said. "They key hinges on that lower-income consumer finally getting some relief."

More from CNBC

May 19, 2014 6:31PM
I have an idea to help Walmart. Open more registers. It is stupid having 30 or more checkout lanes and only 4 or 5 are open at a time.
May 19, 2014 6:09PM
Can't speak for Walmart worldwide, but here in Southern Indiana people I know are dropping Walmart & seeking alternatives due to :
  1. Continual deterioration in goods quality . Example : 2.97 each G.E. UL listed wood switchplate covers replaced by defective non-UL listed "Elumina" at same price.
  2.  Poor quality & higher priced meat & produce than local competitors.
  3.  Minimal staffing that results in poor stock conditions, out-dated shelf tags and signage, filth, & harried, rude & unhelpful associates.
  People, the only vote we have is our pocketbooks, but that can be a powerful vote. Walmart needs to step it up or we will be witnessing the beginning of a long & steady decline. It's happened before.

May 19, 2014 5:13PM
I don't think they will ever appeal to the higher income shopper. That's not what they do. High income shoppers what great service and a nice environment to shop in and Wal-Mart does neither of these things.
May 19, 2014 6:04PM
I will NEVER shop at Walmart.  The stores are poorly run with empty shelves, rude or non-existant employees, and long lines.   When they do spring for an employee, they will not  give them enough hours to get benefits, so their employees end up getting taxpayer subsidies.  And they treat suppliers and vendors like crap too.  Nothing wrong with a corporation making money, but I rather spend at Target any day of the week.
May 19, 2014 5:56PM
May 19, 2014 6:35PM

1.Stop selling Chinese made crap.


2. Start hiring real employees fulltime, instead of paying painfully slow seniors and the disabled        pathetic wages.


3. Actually have floor people that can answer a question.

Do all this, and you will have my business even if you have to charge more for your stuff.

May 19, 2014 5:47PM
Shopping at walmart has become more and more frustrating. We were going every month but when you go for your usual product, they are out of it. Now I have to go elsewhere for it. Finally I decided I might as well shop at the other place than go supermarket hopping.
May 19, 2014 6:32PM
A lot of people resent the business model of this company.  Using the federal government safety net as a replacement for low wages turns a lot of people off.  I am retired and watch my pennies but I wouldn't buy ANYTHING from Wal-Mart.
May 19, 2014 7:17PM
I will not shop at Walmart or Sam's Club ever. My son had a Sam's Club job. He loved his job; he was always on time and did his work. He received a safety award and several 'high five' awards from his supervisors. Then when he was at the company almost long enough to qualify for some benefits...Sam's Club got rid of all the people in his work group and hired a new group of workers. Sam's Club and Walmart will never receive another penny of my money. 

We have a government that does nothing to help working people. Good jobs were sent overseas and the government did nothing. The jobs that are left behind for young people are poor paying, part time jobs which will not pay enough for young people to be able to buy things such as cars or houses. Many young people cannot even afford to rent their own apartments. The economy is a disaster.
May 19, 2014 6:38PM
Maybe if they weren't so determined to sell America to the Chinese, they'd be turning a profit?
May 19, 2014 6:17PM
I used to shop WalMart regularly but have found they are letting stock run down to nothing and not restocking for weeks, allowing merchandise to be broken, opened or otherwise ruined and not removing it from the shelves/replacing/restocking. The locations I used to shop no longer have a clean appearance. Everything seems disorderly and very many items out of stock multiple days. I just gave up and quit going. I can get most items elsewhere.
May 19, 2014 5:10PM
Like all capitalist ventures, WM's biggest problem is it's management.
May 19, 2014 6:41PM
do you think that maybe the US consumer has  gotten wise to their low wages and the way they drive down wages to their suppliers  and maybe we are tired of supporting China?
May 19, 2014 5:32PM
Actually their biggest problem is the 30+ minute wait in lines to buy and return items.  It's too much work to shop there just to save a few cents.  I do believe they have mastered the business model for future social distribution of goods (monthly rations of necessities) when our society gets to this point.  Also, about half of their employees already subscribe to the socialistic regime, so they are great to assist with the advancement of this model.

For comparisons, I can shop at Target and many other places in one-fourth the time.  When I am on my off time from work, I do not want to waste my time at Walmart!!!  If they want to hire me, I would be glad to make some suggestions.  

Another thing that's killing them is their whole accounting process that they subject their customers to if there's ever a problem.  They are years behind the times.
May 19, 2014 5:58PM
It my opinion, you will see Wal-Mart and other stores begin to feel the pinch of stagnant wages in the near future.

Big business wants to keep wages as low as possible and have had great success through the demonization of unions and other efforts. Just today I read an article on how many companies are strongly considering only hiring part time and contract people.

This does not give the consumer a warm and fuzzy and build their confidence to purchase.

They are fast approaching the point where consumers will not be able to buy their crap that they make outside our country.

May 19, 2014 6:50PM
it's like going to a freak show.  That's their problem.
May 19, 2014 5:55PM
We have WinCo which is employee owned the staff is friendly and asking if you found ever thing. Their prices are the same or better than Wal-mart. If they need to open extra checkout lanes they will.
May 19, 2014 5:48PM
A lot of people refuse to shop at Walmart, once they been let go or fired from there. Why would someone help a company that doesn't want to help them. They are probably high on the country's employee unemployment list....
May 19, 2014 5:57PM
There are many reasons to go to Walmart, the problem is cheap pricing only gets you so far without customer service. Customer service is not me checking out my own groceries or wondering why there are most times way to few registers open. As far as grocery it is often a concern of lower quality with the solution added meats. We also often have to go else where because selections are often limited.
Lastly the stores closed to me often looks like they had the running of the bulls just before we got there.
So in a nut shell hire about 20 more people more store, keep it neat and clean and stocked with quality products and they will come.
I do really like they are adding more organic products as a plus.
May 19, 2014 5:19PM

The biggest problem is the customers, but not just for financial reasons.  I have gone into  walmart after a long day working in the yard, covered in mud and sweat in flip-flops and torn shorts, and felt overdressed. 

Customers stocking up their trailer with Twinkies and Bush Light will cut right in front of you or just flat out run into you.  Personal space does not exist.  Love the corporation, hate the company.

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