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January 17, 2007

Lauranne Buchanan

Wal-Mart Tries on Cheap Chic

Wal-Mart, it seems, is at a crossroads.

For years, Wal-Mart has dominated U.S. retail with its operational efficiencies and low consumer
prices. But as the company has grown, so has its cost structure. Expansion into the upper Mid-West and
West Coast has led to escalating costs due to the higher price of land and the expense of building in
these areas. Skyrocketing energy costs have hurt the company which is the nation’s largest consumer of
electricity and the owner of the second largest private truck fleet. And as the largest retailer in the world,
it has been hurt by negative publicity over its treatment of workers, its impact on competitors, and even
its influence on the overall economy. As a result, hundreds of staff jobs have been created in PR and in
the legal department to control the damage to Wal-Mart’s reputation. Overall, in 2006, overhead in-
creased 14.8%.1

At the same time, Wal-Mart’s sales have been lackluster. By its own admission, same-store sales—
a critical benchmark for retail stores—increased only 1.9% in 2006, its worst performance ever. In
comparison, this same measure was two to five times higher for competitors such as Target, Costco,
Kroger, and Walgreens. Perhaps even more disturbing was Wal-Mart’s disclosure that same-store sales
were rising 10 times faster at the 800 best-managed outlets compared to the 800 worst-run ones and
that 25% of its 4000 U.S. stores failed to meet minimum expectations of cleanliness, product availabil-
ity, and other key store metrics. 2

With rising pressure from Wall Street, Wal-Mart has turned its attention to areas of the store with
the potential for higher margins. One obvious place: fashion goods. But, can Wal-Mart—with its em-
phasis on price and some stores in disrepair—become a credible arbiter of fashion?

Shifting Strategy
Wal-Mart’s legendary founder, Sam Walton, had a simple philosophy: “price it low, pile it high and
watch it fly.”3 Low prices were made possible by the company’s mastery of back-end operations and its
cutting edge distribution system which enabled it to move goods from factory loading dock to store
cash register faster and cheaper than competitors. As Wal-Mart grew, it added to its cost advantage by
refusing to accept routine increases in wholesale prices and continually pressing suppliers to charge less.

Wal-Mart’s low prices made the store a hero of some 45 million low-income Americans. Their
loyalty, in turn, made the store a leader in almost every consumer category—today, Wal-Mart controls

1
Blanco, Anthony, with Mara Der Hovanesian, Lauren Young, Pallavi Gogoi (2007), “Wal-Mart’s Midlife Crisis,”
Business Week, April 30.
2
Ibid.
3
Ibid.
Copyright © 2007 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor
Lauranne Buchanan for the purpose of classroom discussion only, and not to indicate either effective or ineffective
management.

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20% of dry grocery, 29% of nonfood grocery, 30% of health and beauty aids, and 45% of general
merchandise.4 To fuel its growth, the retailer has relied on a strategy of opening new stores, which it
does at the rate of almost one store a day. With newer stores and the slowdown of the economy in the
early 2000s, the middle-class joined the legion of Wal-Mart shoppers. These customers, however, were
more selective in their purchases, shopping Wal-Mart almost exclusively for grocery items and health
and beauty aids.

As same-store sales declined, the strategy for continued growth seemed obvious: convince middle-
class consumers who shop Wal-Mart for paper towels and toothpaste to cross the aisle for higher-
margin goods, including fashion. As Lee Scott, President and CEO of Wal-Mart, explained: “We do a
good job serving our core customer, the person who shops Wal-Mart for the value we provide them on
every item. That customer needs Wal-Mart. He or she relies on Wal-Mart. We will always, always be
committed to this core customer. … At the same time, we have other customers who come to Wal-Mart
to save money but frankly, [they] don’t think we’re doing a very good job on ‘high end’ apparel, home
fashion, electronics or other items. They may bypass some of these departments completely on the
assumption that competitors are doing a better job. Of course, there is a smaller set of affluent custom-
ers who don’t shop at Wal-Mart at all. Quite simply, we don’t see any reason all of those customers
shouldn’t be shopping Wal-Mart for style, selection and quality they’re looking for at an everyday low
price.” 5

The time was right. Discount competitors Kmart and Target had paved the way for low-cost
fashion items with their respective lines of designer labels. Kmart was first to collaborate in the mid-
1980s with celebrity fashion designer, Jaclyn Smith; in the late 1990s, it established a partnership with
Martha Stewart on her Everyday line of housewares and furnishings. In 2000, Target recruited architect
Michael Graves to create a private line of sleek and affordable house wares. Watching as customers
snapped up Grave’s funky tea kettles and minimalist toasters, Target quickly followed up with home
decor collections by Cynthia Rowley and Ilene Rosenzweig, and apparel by Isaac Mizrahi. By the mid-
2000s, everyone was getting into the act. JCPenney introduced the Nicole Miller line in 2005 in its
mid-tier market, and H&M launched one-off collections from Karl Lagerfeld in 2004 and Stella
McCartney in 2005.

The casual fashion introduced by these designers for lower-end stores was a departure from U.S.
norms. Formerly, consumers had purchased expensive clothing expected to last for years, or they pur-
chased inexpensive, lesser-quality basic garments that weren’t expected to last at all. Cheap Chic repre-
sents a departure from both—it is inexpensive and disposable, but stylish. And the younger generation
of consumers—reared on self-improvement fashion shows like “Queer Eye” and “What Not to Wear”—
proved eager to buy into the next trend, even if it lasted only a season.

“This is the trend that keeps on giving,” said Marshall Cohen, chief analyst of the NPD Group, a
research firm specializing in retail. NPD found that a typical appliance customer would rather buy five
or six hip-looking blenders for $19.99 over the next 10 years than a single sturdy one for $89. “Sure,
they know they are getting one that may break down in a few years, but they will be able to keep getting
the latest.”6

Wal-Mart’s Entry into Cheap Chic

Wal-Mart entered the Cheap Chic category with George, a brand acquired with its acquisition of Asda,
the largest clothing chain in the U.K. George was developed by British retail guru George Davies, for
whom it was named. The brand’s success in the U.K. stemmed, in part, from its positioning as a
“modern classic” for the entire family. Wal-Mart’s first step in its international expansion of the brand

4
Ibid.
5
Garbato, Debby (2005), “Wal-Mart Targets Affluent Shoppers,” Retail Merchandiser, July 6.
6
Barbaro, Michael (2005), “Pinch Me—Is That a Wal-Mart?” The Washington Post, August 7.

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was Canada. To introduce the brand, Wal-Mart brought over 60s fashion model Twiggy to attend the
George fashion show and link the brand with its U.K. roots. The Canadians’ sense of fashion, coupled
with lower discretionary incomes than their American counterparts, helped bolster an immediate ac-
ceptance of George. “We can offer our customers a European-designed George suit for under $100, and
it’s something that people feel comfortable in,” said Andrew Pelletier, a spokesperson for Wal-Mart.
“George epitomizes the ‘cheap chic’ phenomenon in Canada.”7

In the U.S. where the most expensive women’s jacket sold for $25, George initially failed to have
much impact despite its low price tag. Most fashion observers blamed George’s lackluster sales on Wal-
Mart’s failure to give the brand sufficient advertising and merchandising support. And many ques-
tioned whether Wal-Mart had the right stuff to create a fashion brand. “Without imagery, apparel just
becomes a basic commodity business,” said Marshal Cohen. “Without the nuances of making a brand
have an essence, as opposed to just product, there is not an additional sale. If Wal-Mart sits there and
thinks that they are going to put George on the floor and customers are going to buy it for any reason
other than as a commodity, that is not the way it is going to be.” Cohen continued, “[Even] Kmart is out
marketing Wal-Mart. The brands they have marketed have a reason to be: an identity, a personality.
What’s the personality of George?” 8

Despite skepticism by the fashion industry, Wal-Mart decided to build on George with other
private labels, rather than by bringing in established brand names. According to Lucy Cindric, SVP of
ladies’ apparel, “We value our national brands immensely. They provide us with leadership and price
parity, which is part of our every-day-low-price promise to our customers. Our mix is constantly chang-
ing, and we are letting our customers help us determine, based on their shopping habits, what ratios are
correct for each market and store… However, after our very intense market study, it came down to a
realization that creating our own brand would be most meaningful for our customer.”9

Wal-Mart’s next brand, Metro 7, was developed to appeal specifically to the 25-45 year old female
customer who previously shopped the consumable aisles. To introduce the brand, Wal-Mart summoned
members of the media to its annual media day in Bentonville, Arkansas. Thirty-nine models—enacting
real-life activities such as preparing dinner, relaxing with friends and working out in a home gym—
wore Wal-Mart brands George and Metro 7 in a “mix and match” approach. “From just a few years ago,
I can tell a huge difference in the fabrics, fit and quality of the garments, and it is very obvious when we
fit models,” said Amber Savage, of New Creature, a point-of-purchase marketing agency. “The models
liked the clothes, and it was fun to watch their reaction because some of them didn’t know the clothes
were available from Wal-Mart.”10

But the success of the lines would take more than just a good product. It would take a major
change in how Wal-Mart managed its fashion business.

Changing Direction
For most of its 43 years, Wal-Mart has been obsessed with individual bargains—the $24 DVD player,
the $12.90 twill jacket—regardless of how they fit with the rest of the store’s merchandise or even if they
were in style. “We are an item house,” conceded Wal-Mart’s VP of product development Claire Watts,
a veteran of The Limited Stores, Land’s End and May Department Stores, “but consumer expectations
require more than great items.”11 What they require is a store with a vision of itself. But developing a
look—a storewide aesthetic—so far has eluded Wal-Mart and left the store vulnerable to its more fash-
ion-oriented competitor, Target.
7
Troy, Mike (2005), “Canadians Embrace George Fashion Line,” DSN Retailing Today, November 7.
8
Scardino, Emily (2005), “Wal-Mart’s Fashion Sense Chain’s Best-Kept Secret,” DSN Retailing Today, February
7.
9
… (2006), “Wal-Mart Sharpens Its Fashion Focus,” Apparel, February.
10
… (2006), “Reaching Out to the High-Fashion Crowd,” DSN Retailing Today, First Quarter.
11
Barbaro, “Pinch Me—Is that a Wal-Mart?”

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In what CEO Scott called an “extraordinary move for us,” he hired John Fleming as Wal-Mart’s
first marketing director in Spring 2005.12 Fleming, who had spent 19 years at Target, immediately went
into action. He lined up advertising for Wal-Mart’s brands in the September issue of Vogue. During
New York’s Spring Fashion Week, Wal-Mart and ElleGirl sponsored a fashion event on Times Square’s
giant JumboTron screen with parading models wearing the latest Metro 7 outfits.
To stay ahead of the fashion curve, Wal-Mart opened a Trend Office in New York with ten people
recruited from West Elm, Nautica, Levi Strauss, Van Heusen, and OshKosh B’Gosh. This team is
charged with divining what’s hot and forecasting future trends in clothing and home décor. To do so,
they walk the streets of SoHo, sneak into boutiques in London, and snap photos of teens in Tokyo. They
then assimilate the ideas and transmit the details back to colleagues in Bentonville who ultimately
determine what reaches the shelves. But translating the vision of the Trend Office into product isn’t
always easy. The buyers at headquarters, they say, often find the process “uncomfortable. It’s like some-
thing they are not used to.” Recently the New York staff began pushing their counterparts in Bentonville
to carry more skirts. “Their response was, ‘Oh we’ve never done well with skirts.’ We said, ‘you have to
get a couple of them in your lines.’” 13
To lend cachet to the George line, Wal-Mart reached out for help from designer Mark Eisen. Eisen
worked for Ann Taylor before launching his own line, Karoo, which sells in high-end retailers including
Bergdorf Goodman, Neiman Marcus and Nordstrom. For Wal-Mart, Mr. Eisen developed a collection
of women’s sportswear, featuring $22 cardigans and $70 suede jackets, under the label George M.E.—
“M.E.” being the designer’s initials. Wal-Mart showed the collection at New York’s Fashion Week where
it received positive reviews, but did not follow-up with advertising for the line.

Management recognized that they also needed to address in-store merchandising of the fashion
lines. Apparel was given a high-traffic location on the wide aisle that divides general merchandise from
the grocery department. George was placed on the aisle, and Metro 7, which requires more rack space,
was displayed next to George. To more effectively merchandise the clothes, Wal-Mart began adding an
additional two feet of space between its apparel racks in 1500 stores. In addition, many of the apparel
departments began putting in simulated wood floors, back-wall displays, and apparel fixtures to high-
light the latest outfits. The company also created the position of fashion merchandiser, whose job would
be to travel to stores and demonstrate to sales associates how to display outfits and help customers put
individual items together. Handtags were also added to product to help customers assemble outfits.
Still, many customers complain that Wal-Mart is “hard to shop,” citing crowded display racks and
minimally private dressing rooms in the center of the sales floor. Others see the mix of clashing colors
and contemporary styles with traditional items as a turn-off.

Inventory Problems at Wal-Mart?

Despite endorsement from fashion industry observers and Wal-Mart’s internal efforts to develop a
stronger program for its fashion lines, problems began to surface. The 2005 fall line of George was
supposed to appear in mid-August, but Wal-Mart moved the introduction date to mid-July in order to
fill gaps in other lines. For many customers, it was just too soon to spark interest in fall fashion lines.

After successfully launching its Missy sizes of Metro 7 in 500 urban-area stores in October 2005,
Wal-Mart expanded the number of stores carrying both Missy and Plus sizes to 1000 by the following
year. But sales of the Metro 7 line of nightclub wear, including gold lamé vests and skinny-legged pants,
fell flat just as Wal-Mart was preparing for the Christmas holiday rush. Prices had to be slashed during
its 2006 holiday season and inventory began to clutter the aisles.14 The retailer hoped that sales would
rebound in the spring. They didn’t. Wal-Mart pulled the Metro 7 line from 500 stores in early 2007.15

12
Blanco et al., “Wal-Mart’s Midlife Crisis.”
13
Barbaro, “Pinch Me—Is that a Wal-Mart?”
14
… (2007), “Mass Movement of High Fashion,” Retailing Today, January 8.
15
McWilliams, Gary, and Rachael Dodes (2007), “Fashion Faux Pas Hurts Wal-Mart” Wall Street Journal, May 21.

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Although only 10% of Wal-Mart’s revenue comes from apparel, it was enough to put significant
pressure on store profits in the first quarter of 2007. Inventory jumped to $35.2 billion, a 10.3%
increase from the previous year. The surge in inventory was driven by approximately $2 billion in
unsold apparel, home décor and outdoor products.16

“When 10% of your business is not doing what you want it to, that’s a lot of drag,” noted one
analyst. “It’s going to be a drag until they get it right. The question is, ‘when will they get it right?’”17

16
Ibid.
17
Ibid.

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