Walmart's 'Project Impact' Craters Sales, but the Retailer Persists

For the second time this decade, the world's largest retailer has stumbled in a major strategic move.

Both times, the misstep has been over an issue that Walmart (WMT) executives have struggled to resolve: how to hold on to higher-income shoppers and get them to spend more on bigger-ticket items like apparel. Currently groceries are what wealthier buyers usually stop for at the mega-retailer, say its execs. But each time Walmart tackles this issue, its efforts have flopped.

The last time was in 2005, when Walmart bought ads in Vogue and sponsored a fashion show in New York's Times Square to launch a trendy new apparel line, with higher price points than its regular fare. That strategy bombed badly, and Walmart executives were left licking their wounds.

Cleaner, Friendlier Stores

But executives at headquarters in Bentonville, Ark., don't give up that easily. CEO Mike Duke noted at a retailing conference in September that the Great Recession attracted higher-income buyers who hadn't shopped at Walmart before. So, once again, Walmart embarked on a new strategy in 2008, this time a massive remodeling effort dubbed "Project Impact."

Aimed at reducing clutter, it eliminated around 15% of items in the stores, according to some analyst estimates. The project would create cleaner and friendlier stores since staff would have more time to help customers.

"The net effect is you open up the customer space, you improve the shopping experience, you provide access and visibility to departments in the store that were previously difficult to shop, like apparel," says Bill Simon, executive vice president and chief operating officer of Walmart U.S. At first, the company planned to roll out Project Impact to all of its stores by 2010.

"Self-Inflicted Wound"

The initial remodels seemed to ring no alarm bells, so starting in the second quarter of 2009, the retailer accelerated the operation from 40 to 600 stores, out of its over 3,500 stores nationwide.

However, things started to go horribly awry almost at once. Walmart, which is one of the few retailers that saw same-store sales rise for eight consecutive quarters during the recession, suddenly experienced sales declines. At stores open for a year or more, sales fell 1.5% in its second quarter, ending July 31, 2009. Third-quarter sales dropped 0.5%, followed by a 2% retreat in the fourth quarter.

So once again, Walmart is dialing back. On Mar. 10, COO Simon said the store is reintroducing 300 of the items that were removed. Dubbing the remodel process a "self-inflicted wound," Simon said at a consumer conference: "The traffic decline in the Project Impact remodel stores during the remodels is deeper than we projected it to be. It's responsible for some of the traffic and some of the sales decline as well."

"Inaction Alley"

One of the key Project Impact moves that hurt Walmart -- and many of its suppliers -- was the decision to clear out "Action Alley," which is the main aisle and primary traffic corridor that separates various departments in supercenter stores. This corridor has been a big sales generator over the years and usually features pallets piled high with some of the fastest-selling items, such as potato chips, Pop Tarts, bottled water, mayonnaise and diapers.

Sales started to decline immediately after the rearrangement. JPMorgan analyst Terry Bivens calls it "Inaction Alley" and notes in a report the resulting sales slowdown in various products.

Sales volume growth in several food categories, where Walmart always led all its supermarket and drugstore competitors, suddenly started to decline. For the first time on record, says Bivens, Walmart's volume of sales increases in cereals underperformed those of its competitors from the second quarter onward, as tracked by Nielsen.

In some cases, the trends were startling: Purchases of salty snacks and granola bars actually declined at Walmart in the third and fourth quarter, while the category grew at competitors. Rivals also overtook Walmart's sales growth in cookies, soups and crackers in 2009.

Knock-On Effects

One of Walmart's major suppliers, Kraft Foods (KFT), the largest U.S. food company, shared the retailer's pain. Sales of its biscuit category, which includes Chips Ahoy and Triscuit, fell, as did Maxwell House coffee.

"We saw declines in a number of our noncore biscuit brands," said Kraft CEO Irene Rosenfeld at the company's conference call. "This was the result of weaker trends in the biscuit category in the second half of the year due to reduced merchandising at a key customer."

Despite the setbacks from Project Impact, Walmart executives have reiterated their commitment to the strategy. They believe customers will appreciate the cleaner and friendlier stores. Less clutter also helps the chain manage inventory better, said Walmart Vice-Chairman Eduardo Castro-Wright in the last earnings call. The retailer still plans to remove Action Alleys in almost all its stores this year.

Give Buyers What They Want

Will the retailer's persistence with Project Impact in spite of weaker sales pay off? The outcome lies with shoppers -- and time and again, they keep reminding Walmart that both wealthier and its core low-income customers still go to the store for its everyday low prices, its slogan for years before it was changed recently to the more sophisticated "Save Money. Live Better."

Reducing the products that attract customers to the store might not be the best option, even if it makes the store look better. Customers don't walk into a Walmart for its looks. They're drawn in by its low prices on the best-known brands.