Wal-Mart Classifies Customers for Growth

Discussion
Mar 07, 2007

By Tom Ryan

Wal-Mart recently renewed its commitment to low prices. But now it’s moved a step further by segmenting the unique value seekers who shop its stores. The goal is to better understand the motivation behind their shopping habits.

In their first interviews since a management shuffle in late January, John Fleming, the new chief merchandising officer, and Stephen Quinn, the new chief marketing officer, told The New York Times that after a year of intense research, Wal-Mart has partitioned its 200 million customers into three core consumer groups. The three are:

  • Brand Aspirationals – People with low incomes who are fixated on brand names like KitchenAid;
  • Price-Sensitive Affluents – Wealthier shoppers who love deals; and,
  • Value-Price Shoppers – Those with like low prices who can’t afford
    much more.

Armed with its new insights, Wal-Mart said, from now on, all product decisions would be organized around the three groups. Company officials believe these groups represent the majority of Wal-Mart’s business.

Officials said the new categories are significant because the retailer not only thinks it finally understands how people shop its stores, but why they shop the way they do.

“It explains why people who have to shop here do and why there are BMWs in the parking lot,” said Mr. Fleming, who was formerly Wal-Mart’s chief marketing officer.

The most noticeable initial change will be that Wal-Mart plans to beef up its brand assortments. Although the research reinforced the view that Wal-Mart’s most powerful traffic driver was low prices, it also found that customers place a high value on brands. With a goal of expanding its branded positions, Wal-Mart is creating teams – each with a marketing executive and merchandising executive – to tackle five “power” categories: Food, Entertainment, Apparel, Home Goods and Pharmacy.

Wal-Mart said having one or two name-brand products in each department is not enough. It must build a reputation for brands in each category to be able to compete with a Best Buy, Macy’s or Home Depot. A model for this is the electronics department, where Wal-Mart improved sales not only by bringing in the lowest prices, but offering flat-screen TVs from Sony and Magnavox.

“(Customers) really need the assurance of brands,” Mr. Quinn told the Times. “In the past, we were so focused on price…but low price on what?”

A better understanding of consumer behavior will also help Wal-Mart determine what not to sell. Last year, customers responded unfavorably to the launch of fashion-forward clothing and other high-end items. Wal-Mart now plans to slow down or scale back those efforts. The chain still wants to get customers to buy more items beyond the household staples it’s best known for, but Mr. Fleming expects deeper consumer insights will help in more selectively upgrading its mix.

The overall “low price, quality brands” approach will be showcased in new advertising slogan: “Saving people money so they can live better lives.”

Discussion Question: What do you think of Wal-Mart’s move to base brand purchasing and merchandising decisions on the behaviors of distinct consumer groups? The company has always been known for limiting assortment to the top one or two items in a category. Will expanding selection positively or negatively affect its business?

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36 Comments on "Wal-Mart Classifies Customers for Growth"


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Lisa Bradner
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Lisa Bradner
15 years 2 months ago

This is a much better strategy for Wal-Mart than the store segmentation strategy path (Hispanic, urban, affluent, etc.) that they were going down before. One, it’s “back to the future” because it aligns with their basic brand proposition (EDLP) and basic consumer rather than trying to attract a new consumer by adding high-end fashion and complicated assortments. For the same reason, it aligns better with Wal-Mart’s supply chain strength. It’s far easier to roll out a national brand in stores nationally than it is to ship different assortments to different stores within a region without disrupting the cost efficient supply chain that is Wal-Mart’s core competitive advantage. I’m not sure what took them so long but it looks like Wal-Mart is back to a strategy that is sustainable and executable for them.

Carol Spieckerman
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Carol Spieckerman
15 years 2 months ago

While the most recent segmentation categories make perfect sense, for the sake of Wal-Mart vendors and service providers, I see a real need for clarity. Do the just-announced segments supersede all previous references to “Gracie,” “Norma,” etc. AND to Hispanics, empty nesters, etc.? I have spoken with both Wal-Mart insiders and top vendors who don’t know whether the new segments are meant to integrate with the not-so-old ones or if they are the stand-alone standard going forward.

Karin Miller
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Karin Miller
15 years 2 months ago

This sounds right-on to me. I believe that this is a good starting place for their suppliers to work with to create a range of products that will match the criteria and the reach these target customers.

As I have said before, I think that Wal-Mart should not stop pressing for better aesthetics, great design, better functionality and exclusivity…as long as the products are kept very mainstream in appeal and competitively priced.

George Anderson
Guest
George Anderson
15 years 2 months ago

Living in an area where affluence is the rule and not the exception, I can say that I have never seen a BMW, Mercedes Benz or any other vehicle of a comparable price tag parked outside a Wal-Mart. If those are the vehicles you want to see at a discount store, you drive to Target.

David Mallon
Guest
David Mallon
15 years 2 months ago

For the record, I believe Wal-Mart identified 7 segments based on need and chose to target 3.

I believe we are seeing the evolution of Wal-Mart from an Operations and Merchandising company into a Marketing company.

Segmentation is an obvious early marketing step. Whether they got the segments right or not is part of what separates good marketers from bad. And, as pointed out by others, there is doubt how actionable this type of segmentation can be for a retailer.

It strikes me that the true segmentation that is actionable is the Store Of The Neighborhood initiative.

Dick Seesel
Guest
15 years 2 months ago

This feels like a smarter approach to addressing Wal-Mart’s “aspirational” customer than the over-emphasis on trend apparel that stalled last year. Wal-Mart has acknowledged that being the “lowest common denominator” store is a strategic dead end but continuing to be the leader on price is not. The key is knowing the difference.

If brands reinforce the positioning–and are underscored by cleaner stores and more predictable in-stock rates–it makes sense.

Camille P. Schuster, Ph.D.
Guest
15 years 2 months ago

It’s about time. Wal-Mart has veered away from taking care of these consumers in the past few years. The three consumer groups make sense. However, their strategy to address these groups has some flaws. Only one of the three groups is described as being interested in name brands. Why does that translate into having to have more than two name brands in a product category? Some brands do not want their products sold under the same name in discount stores as evidenced by Nike withdrawing its contract with Sears when Sears announced that product sold in Sears would now be sold in Kmart. Will more brands want their products in Wal-Mart? If they do, will they be the same products that are sold in other non-discount stores? Will those branded items be able to be sold at the low prices demanded by all three new consumer groups? Only one of the two consumer groups is focused on brands so should the new strategy be focused on brands?

Mike Mohaupt
Guest
Mike Mohaupt
15 years 2 months ago

This goes to the very fabric of Category Management. Gain knowledge of the consumer. From knowledge comes understanding. Until you understand the consumer you really cannot apply true fact based strategies.

There is an old saying that retail is detail and this is really true relative to understanding consumers. There is really not one type of consumer in the market place–it is made up of a variety of consumers even shopping the same category. So until you understand that how do you know that you are applying the right strategies?

Understanding the consumer and then the role the category plays will be the best strategy in the future.

I commend this approach.

Don Delzell
Guest
Don Delzell
15 years 2 months ago
Segmenting merchandising on the basis of consumer groupings is indeed one aspect of best practices. As others have pointed out, there are significant issues in choosing the segmentation scheme. Data can show correlative purchasing patterns. Market research can provide insight into lifestyle and aspirational beliefs those in the survey group have about themselves. Often, neither of these approaches actually result in a segmentation scheme which “works.” The critical questions to ask are how homogeneous each of these three segments are. Do the consumers, now being lumped together, actually behave comparably to each other? All we have are the high level descriptions. Based on those, I have concerns. These groupings appear to be very loose, and with considerable overlap. In examining the impact of this scheme, as a merchant, I ask how do I execute to this? Will I now have merchandise in my assortment consciously selected to appeal to each of the three groups distinctly? How do I weight the percentage of my mix toward each group? Won’t it vary by store? How do I… Read more »
Dan Berthiaume
Guest
Dan Berthiaume
15 years 2 months ago

Retailers both big (Best Buy) and small (KnowFat Grille, see November 2006 ERI Journal) have been employing a customer segmentation strategy for some time with success. Now that Wal-Mart is hopping on the bandwagon, customer segmentation will no doubt grow exponentially in popularity. Time will tell whether this strategy will work for Wal-Mart. Industry leaders often do well by imitating their competitors, but we all know what happened when Coca-Cola decided to change its formula to more closely resemble the flavor of Pepsi.

Kenneth A. Grady
Guest
Kenneth A. Grady
15 years 2 months ago

Clearly the strategy is not new. So the question is, will Wal-Mart do it better than others? Given the huge demographic base that shops Wal-Mart, I’m not sure there will be enough of a meaningful distinction in the stores for the three groups to know (intuit) what is targeted to them. It could also lead to some interesting challenges–SKU proliferation, inventory control, etc. This will take a long time to play out.

Michael L. Howatt
Guest
Michael L. Howatt
15 years 2 months ago

To narrow down their customer base to just 3 segments is truly an accomplishment, and seems to be right on. What they need to do next is to look at what the demand landscape for trips are within the segments. This will help them with category design and product assortment. This will truly keep them ahead of the curve in category management and customer satisfaction.

Ed Dennis
Guest
Ed Dennis
15 years 2 months ago
I think this is an evolution, not a revolution. Wal-Mart began as a bare bones operation with bare bones products. Over time they have learned and found that they can offer a few more “bells and whistles” to their shoppers and bring in slightly more discriminating clientele. I noticed over the holidays that our local Wal-Mart did an “in & out” on cashmere sweaters. Now I don’t really think that the typical Wal-Mart shopper knows what cashmere is, but quite a few Gap and Banana Republic shoppers went over to Wal-Mart to look and many bought. Same has happened in electronics. Five years ago there were 7 TV sets. Today there are 50. Everything is available and pricing is great and you don’t have to put up with any of the “rip off” rebates that the big Electronics Retailers are so fond of using. Look for a push in the paint department as it is relatively easy to become a “specialty” paint supplier. Mixing colors is now completely computer controlled–even a cave man can do… Read more »
James Tenser
Guest
15 years 2 months ago

So Wal-Mart is proposing a merchandising strategy based on consumer insights. Seems so simple. Sure beats a merchandising strategy based on operational excellence. Or one based on the upscale aspirations of certain executives who felt like they were slumming in Bentonville.

For Wal-Mart, growth is the addiction and complexity is the enemy. This company doesn’t need a loyalty card program to identify the big insights. It enjoys the largest audience in the world. Straight-ahead market research with samples of its own shoppers revealed the segments, not number-crunching a behavioral database. They are formulated to be inclusive–a wise choice, in my opinion, if top-line growth is the goal.

By focusing on recognizable brands, Wal-Mart may well beat back the goblin that lurks within every EDLP positioning–the perception of cheapness rather than value. No doubt it looks with envy at the job Costco has done in this regard. Who cares if the parking lots are filled with $50,000 BMWs or $30,000 crew-cab pickups–so long as they are filled.

Bernice Hurst
Guest
15 years 2 months ago

Frankly, I can’t see any sensible segmentation here. It all boils down to people shop at Wal-Mart to get big brands for low prices. This is news and took a year of analysis to figure out? And they didn’t know it before? Regular readers will know that I despair of retailers trying to box consumers into categories that suit them (the retailers). Selling what they want to sell will always be effective to a certain degree, there will always be some people who want what’s on offer. Just as there will always be some people who don’t, no matter what bright ideas the retailer comes up with. Best to be as honest as possible and not pretend that they have done some sort of sophisticated marketing magic to make sure they’re actually being “responsive” and supplying demand.

Barry Wise
Guest
Barry Wise
15 years 2 months ago

I believe Wal-Mart is finally getting back to the basics that made them successful, while updating their product selection using information on the customers that are their core. After losing their identity for a while, it’s good to see Wal-Mart starting to figure out what it wants to be when it “grows up.” Good luck, not just to Wal-Mart, but to their core customers.

Laura Davis-Taylor
Guest
Laura Davis-Taylor
15 years 2 months ago

In the end, Wal-Mart is striving for progress…so we should lighten up on them with our assumption that they’re going to be at perfection right out of the gate.

This is the biggest retailer in the world. Kudos that they finally got a foot on the right path.

Dr. Stephen Needel
Guest
15 years 2 months ago

I’m not sure they are responding to customer classification–all three groups want brands at low prices. Good for them that they pay attention to what their customers want and how they can deliver to those needs. But you would add brands at low prices regardless of the classification scheme.

Joy V. Joseph
Guest
Joy V. Joseph
15 years 2 months ago

Customer segmentation is nothing new and in fact a necessary part of a customer-centric marketing approach that most national chains need to undertake to align their product line with their customers. (Smaller chains can work with gut instinct since they usually cater to only a few broad segments both geographically and demographically.) So I am not sure what the novelty is in what Wal-Mart is doing. The hype is probably more to do with the fact that their stock price has been languishing in the $40-$50 range for the last 2 years and shareholders need to know that there are ‘new strategies’ for future growth.

J. Peter Deeb
Guest
15 years 2 months ago

Not sure how much factual documentation is at work here because of the lack of loyalty card identification of customers. With all the technology Wal-Mart uses in its logistics and supply chain to make fact based inventory and delivery decisions, this sounds like a “gut feel” approach. I think they could boost same store sales with more fact based information to help add the right items to the customers carts!

Gene Hoffman
Guest
Gene Hoffman
15 years 2 months ago

Wal-Mart has determined from research what its three core customer groups are and it plans to appeal to each of them accordingly. Wal-Mart wants more sales and this is their approach to increase sales. Doesn’t their approach tie-in with many previous suggestions on RetailWire?

Raymond D. Jones
Guest
Raymond D. Jones
15 years 2 months ago

Conceptually, this is definitely a better strategy than the previous attempts to go upscale or employ a store segmentation approach. It maintains the fundamental “low prices, everyday” value position but recognizes that all customers are not alike in their concept of value.

In the short term, it may be difficult for Wal-Mart to effectively execute this type of shopper segmentation given their current lack of shopper card or other detailed customer data. However, they could certainly develop a basic model from shopper research and apply it to different categories over time.

Ben Ball
Guest
15 years 2 months ago

“The essence of strategy is the reduction of complexity to simplicity”–that’s how the MBA says it. Grandpa just said “boy, if the answer isn’t simple it’s probably wrong.”

We protest too loudly over the “oversimplification of the segmentation scheme” and the “lack of loyalty card or other tracking systems.” The master himself identified this strategy for Wal-Mart when he founded the place, as we have often stated/paraphrased in this and other spaces. Mr. Fleming and Mr. Quinn have brought the sophistication of the definition into the 21st century. Now let’s see what they do with the efficacy of the application. We look for very good things ahead.

Paula Rosenblum
Guest
15 years 2 months ago

I agree that this is a more sensible approach than trying to go “uptown” (by the way, have YOU ever seen a BMW in a Wal-Mart parking lot?)

As others have pointed out, it also isn’t brain surgery. It’s something close to retailing 201 (retail 101 is: a strategy to go “uptown” invariably results in declining sales. It appears Wal-Mart has passed that course now).

The real question is–which customers are buying which products, in which category? I’m not sure WM knows that yet. For example, owners of any Volvos in the parking lot are likely in the store to buy kids’ clothes, because they outgrow them so fast. Maybe they’re even buying Boca burgers…but they’re not buying organic produce.

With the largest data warehouse in the world, one hopes WM can turn its data into actionable insights. The giant has stumbled badly this past year. Here’s hoping they can right themselves and focus on the retailer imperative for the 21st century–customer-centric merchandising.

Eric Togneri
Guest
Eric Togneri
15 years 2 months ago

The problem that Wal-Mart is going to encounter is that they provide a standard merchandising and marketing platform for their customers. To be sure, they could take demographic information and shape their stores for dynamics like ethnicity and age. But, the marketing segmentation they have outlined from an in-store perspective is difficult to target. I believe I could step into the majority of non-rural Wal-Mart stores and see all three segments standing in front of the shampoo section as I write.

Probably doubtful as a tactic for Wal-Mart, loyalty cards present retailers with the opportunity to identify and target by customer segmentation purchase behavior. Wal-Mart may be able to send messages through advertising to each of these segments, but they have “stayed on message” with unrivaled consistency. When you hit my knee with Wal-Mart, I kick you with low prices. I am betting it is unlikely that this one instrument band will make it as an orchestra. Stick to low prices…it seems to work.

Bernie Slome
Guest
Bernie Slome
15 years 2 months ago

This is a move that is being done at many retailers, however, probably not to the degree that Wal-Mart is and will do it. Consider this, if a retailer develops a strategy to approach the Hispanic market in addition to their traditional market, isn’t this the same thing that Wal-Mart is doing? If a retailer opens a second set of stores to sell more “value-priced” items, isn’t that the same strategy? Wal-Mart, being Wal-Mart is under the microscope. Thus whatever they do, innovative or not, is analyzed and re-analyzed and then copied.

I contend that this is being done by most progressive retailers already, but Wal-Mart will get the press and Wall Street will love the spin.

David A. Fields
Guest
David A. Fields
15 years 2 months ago

Changing the brand line-up to match customer-motivation segments is a good move. Refining the assortment would be even better. The nuances between Brand Aspirationals and Price-Sensitive Affluents point to different product configurations and bundles within a brand.

Herb Sorensen, Ph.D.
Guest
15 years 2 months ago

This is an excellent strategy, partially because it clearly calls out only three groups. Way too much segmentation is worthless because it is so complicated and detailed that it has no practical value for the retailer trying to implement it.

However, this segmentation is based on the “being” of the shoppers, not their in-store behavior. This type of segmentation is most valuable in defining the merchandising mix, pricing/promotional strategies, etc. Wal-Mart might also learn that when those three groups come into the store, they mingle, but exhibit a type of “behavioral” segmentation. That is, there are probably a small group of trip patterns that they fall into. These patterns likely are independent/orthogonal of the “being” segmentation. Knowing these patterns (behavior) is useful in determining the layout of the store. Knowing the “being” segmentation is useful in addressing the shopper as the shopper exhibits their trip behavior.

Matt Werhner
Guest
Matt Werhner
15 years 2 months ago

I’m not in the shoes of Fleming or Quinn, but it’s hard to believe they can herd their customers into just three categories. Do these three categories fully describe the majority of their shoppers? If so, what took the company so long to figure this out?

The article says Wal-Mart thinks it finally understands how people shop its stores and why they shop the way they do. This statement has me baffled. It makes it seem as if this was a mystery, and Sherlock and Dr. Watson arrived on the scene to solve it. Wal-Mart is the king of retail. They can’t tell me they finally figured their customer out. They’ve been doing something the right way for the last decade, and it’s not just low price.

It sounds as if they have a new focus on appealing to their customer’s product preferences through a revised approach to category management and merchandising assortment/planning.

Jerry Tutunjian
Guest
Jerry Tutunjian
15 years 2 months ago

For years, the two adjectives associated with Wal-Mart have been:

“Low Prices and BIG.” For some reason, the industry, media, and the public have ignored the retailer’s other great strength:

Flexibility. No day seems to pass without Wal-Mart modifying, adding, refining its offering. I think this latest–the second so far this week–initiative will garner positive results.

Jen Millard
Guest
Jen Millard
15 years 2 months ago

Understanding your customers and their behaviors is key to any retailers success. I am baffled that this is a new concept at Wal-Mart…and I am surprised that they have not done some segmentation earlier. It is certainly a better strategy than simply trying to go ‘upscale.’

Wal-Mart’s challenge will continue to be what message will support all three groups…EDLP? Promotional activities? Brand activities? How will it continue to differentiate offerings to satisfy all their customers?

Mark Lilien
Guest
15 years 2 months ago

Wal-Mart, like many other mature businesses, is disappointed in their growth slowdown. This isn’t the first time they’ve come up with a press release claiming they’ve found a better path. Investors tend to be like the fellow from Missouri who says, “Show me.” If X months from now, Wal-Mart has doubled its comp sales increases and increased its margin dollars, those from Missouri will become believers. Or they’ll see another press release.

Todd Belveal
Guest
Todd Belveal
15 years 2 months ago
Segmentation strategies are clearly not new, but this is a step in the right direction. Now that they have generated these insights and agreed on these groups, the challenge will be to not only understand what gets these groups to the parking lot and past the greeter, but how they behave once they are in the store. In other words: the process of how each group shops. There is a difference between a consumer and a shopper, and while a preference for brands or price may drive customers to the stores, the process they use to arrive at a purchase decision once in the store is different. Seems to me, Wal-Mart’s issue has never been getting people to the stores, but engaging shoppers with an experience that goes beyond just everyday low prices. You need more than that to sell fashion apparel for example. If they take this important research to the next level, and establish the link between the behaviors that classify these groups and how they actually want to shop, they will have… Read more »
David Biernbaum
Guest
15 years 2 months ago

Consumers shop at Wal-Mart because they trust the constants such as EDLP and well-stocked shelves. The widening of brand assortment will strengthen Wal-Mart’s position, particularly in the Price-Sensitive Affluent category. At present this valuable group of shoppers sometimes needs to go elsewhere to purchase the more premium or slightly less popular brands that they often do prefer. The new strategy will enhance the number of shopping trips in the affluent shopper category and bump up the median spending rates at Wal-Mart.

SANDEEP BHATT
Guest
SANDEEP BHATT
15 years 2 months ago

It’s very good to see Wal-Mart coming back to basics–that is, to their consumers. The focused approach for all their sections is certainly going to add value to their business. Good brands at best prices are going to be the key to success. Let there be a Shopper Satisfaction Survey. That will help Wal-Mart in building their own Private label brands.

Todd Craig
Guest
Todd Craig
15 years 16 days ago

What Wal-Mart has done is further identified their existing customer base. Noble is the effort to serve this base better, but not a new concept. Therefore it will yield minimal sales increases–no more than they should normally expect through regular business improvements. To grow same store sales in a big way, you have to add new customers to your base rather than just sell better to your existing. In the past, Wal-Mart has done this by building stores everywhere.

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