Wal-Mart Braces for a Blue Christmas

Jamie Bartosch used to be a Wal-Mart regular. Several times a month, the Arlington Heights, Ill., mother would drop $100 or more at her local Wal-Mart to stock up on staples like diapers, milk and cleaning supplies. Last Christmas, many of the gifts under her tree came from Wal-Mart. But that won't be the case this year. She's begun to notice other retailers matching Wal-Mart's low prices. And she's happy to shop the competition, rather than suffer through what she views as Wal-Mart's downscale atmosphere. "Why endure the crowds, the clogged aisles and the riffraff?" says Bartosch, 39. "Why not just go to Kohl's or Target and get the same things for the same prices?"

It's turning into a blue Christmas for Wal-Mart. While many of its rivals ring up healthy holiday sales, Wal-Mart is struggling. In the critical shopping month of November, the nation's largest retailer suffered its first decline in same-store sales in more than a decade. And December isn't shaping up to be much better. Wal-Mart recently warned that sales at stores open at least a year will either be flat or up to only 1 percent this month. That's despite a costly image overhaul. Wal-Mart is spending billions sprucing up its stores and injecting some hipness into its dowdy image by selling items like skinny jeans, chandeliers and plasma-screen TVs. It's also moved away from its simple smiley face advertising that touted low prices, to ads that highlight its new stylish approach. That effort hit a snag this week when Wal-Mart's top marketing exec, Julie Roehm, abruptly left the company after only 10 months on the job. Wal-Mart confirmed the departure, but offered no explanation.

Instead of attracting more upscale shoppers, though, Wal-Mart is losing business at the time of year when it needs it most. Last month, the number of shoppers in its aisles declined every week, bottoming out during the crucial week of Thanksgiving, says Goldman Sachs retail analyst Adrianne Shapira, who called the retailer's lackluster December outlook "particularly disappointing."

What's wrong with Wal-Mart? For one thing, America's largest retailer is reaching shopping saturation now that it has nearly 4,000 stores in the U.S. Nearly every American now lives within 25 miles of a Wal-Mart. The retail giant recently announced plans to throttle back its aggressive expansion plans. Instead of opening a store a day in the U.S., it now will open 305 to 330 new big boxes a year. That's not enough scaling back, say some analysts, who warn that Wal-Mart's new stores are mostly competing with other Wal-Marts. "Wal-Mart is overstored," says retail consultant Burt Flickinger III. "They need to go down to 100 to 125 new stores a year."

With little new territory left to conquer, Wal-Mart now is trying to lure new shoppers who have more to spend. Currently, Wal-Mart's average shopper has a household income of $50,000 a year, while those who don't shop there have annual earnings averaging $64,000, according to WSL Strategic Retail. Those lower-income shoppers have been hurt most by volatile gas prices, and they're cutting back this holiday season. "Wal-Mart is relying on a shopper whose purse has to be pried open," says WSL retail analyst Candace Corlett. "We call her Prudence."

To land the big spenders, Wal-Mart is remodeling 1,800 stores to try to improve its much-maligned shopping experience. It's rolled out a line of urban fashions called Metro7, which include form-fitting jeans trimmed with faux fur and pleather patches. And it is adding higher ticket items like iPods and $3,000 plasma TVs. So far, the results are decidedly mixed. One of the company's most successful merchandising moves is a $4 deal on generic drugs, which plays to its regular customers who rely on its rock-bottom prices. But the fancier goods risk alienating that crowd. "They're getting too big with what they're offering," says Cincinnati social worker Becky Grome. "They need to stick with the basics." Jill Shields, a mother of four boys from Park Hills, Ky., feels the same way: "Kids' socks, yes, but not a TV. It just doesn't feel right to buy a TV at the same place I buy groceries and underwear for my boys."

Wal-Mart actually reports it is doing well in home electronics. But it admits it is struggling to find its groove in fashions and housewares—two areas for which trendy Target is much better known. "The home and apparel business is challenging and this will continue through the fourth quarter," Wal-Mart's U.S. chief Eduardo Castro-Wright said in explaining November's sales decline, which was less than 1 percent but still significant since it was the first drop in such a long time. Wal-Mart also says its sales currently look particularly sluggish because it's up against tough comparisons with last year, when receipts were boosted by the post-Hurricane Katrina rebuilding boom.

But that Katrina phenomenon gets to the heart of Wal-Mart's conundrum. Consumers naturally think of the thrifty retailer for staples to fill the pantry, but not as a place to find a hip outfit or fine furnishings. And yet, Wal-Mart must cross over into that new territory if it wants to keep its torrid growth going—and Wall Street happy. (Wal-Mart's once hot stock is down 30 percent so far this decade; it closed at $46.48 in New York Stock Exchange trading Tuesday.) "Wal-Mart needs to figure out what it wants to be and who it wants to serve," says Sandy Skrovan, an analyst with the Retail Forward research firm.

When it comes to fashion, Wal-Mart is clearly confused. The Metro7 line sold well in some of its urban stores, so Wal-Mart rolled it out nationwide. But skinny jeans just didn't fit in its rural and suburban strongholds, where its average shopper wears a size 14. "These jeans they have now are really tight," says Shawn Wiggins, 50, of Elk Grove, Ill., who has stopped shopping for clothes at Wal-Mart. "The quality is much cheaper now, and I think the style is for younger people." Not, though, for younger people like 25-year-old Stacy Greenberg, a diminutive singer-songwriter in suburban Chicago who still isn't skinny enough to fit in those Metro7 jeans. "You have to be a size nothing and have no hips," she huffs.

But size is only one problem. Wal-Mart, which made its fortune moving a lot of merchandise, simply isn't adept at stocking stylish apparel, analysts say. "They just hang this stuff on the rack and they're all wrinkled and rumpled," says Corlett. "The item might be fun and cute, but no one will notice if it's all wrinkly."

Wal-Mart is now pulling back on its Metro7 rollout, but it's too late to save the season. Still, the lumbering giant is learning from its missteps and now plans to more carefully tailor the merchandise it sells by region. Gone are the days when Wal-Mart could just drop one of its big boxes anywhere and sell out the store on a simple formula of cheap, steep and deep. "We'll see them move away from the cookie-cutter approach," says Skrovan. "A one-size Wal-Mart no longer fits all." For now, finding the right fit is proving elusive for Wal-Mart.

—With Hilary Shenfeld in Chicago and Patrick Crowley in Cincinnati