Wal-Mart Tops Fortune 500 List Again Despite Branding Blunder

At a whopping $408 billion in annual sales for fiscal 2010, Wal-Mart (WMT) reigns supreme as the largest company in America today, according to this year's Fortune 500 list. The retailing giant reclaimed the top spot from Exxon Mobil (XOM), exceeding the oil company's revenue by more than $100 billion.

Wal-Mart frequently occupies the top spot on Fortune's annual list -- and if it weren't for sky-high oil prices boosting Exxon's revenue in 2008 it would have had a shot at retaining that position last year. Exxon's revenue, by the way, fell almost 36% from 2008 to 2009, according to Fortune. (For the complete Fortune 500 list, click here.)

Wal-Mart's results, however, are still impressive given the economic environment. Last year, companies that served consumers suffered deeply -- especially retailers. Many retailers were forced to shutter stores as sales fell, and others disappeared altogether. Yet Wal-Mart's low prices attracted millions of worried Americans, allowing it to buck the downward trend and grow sales. (Granted, that growth was less than 1% year-over-year, according to Fortune.)

Yet, Wal-Mart's relative success over the past year actually conceals some seriously flawed moves by the company. In fact, some would argue that Wal-Mart's ability to outmaneuver everyone in the midst of adversity might have made it a bit too cocky: The retailer was so confident that customers would keep pouring into its stores that it decided it didn't need so many big brands sitting on its shelves.

House Brand Strategy Was a House of Cards

As part of a broader strategy last year, Wal-Mart decided to reduce the number of well-recognized national brands in its stores by almost 15%. That included cookies made by Kraft (KFT), cereals and snacks from Kellogg (K), Arm & Hammer detergent made by Church & Dwight (CHD), Hefty bags made by Pactiv (PTV), and Cat's Pride pet food made by Oil Dri (ODC), among others. Around the same time, Wal-Mart increased the number of products sold under its house brand, Great Value. House brands are more profitable for retailers, and Wal-Mart pushed Great Value hard, testing it against competitors' items and even changing the formulas on 750 items, including breakfast cereals, cookies and laundry detergent.

At a retailing conference in September, Wal-Mart CEO Mike Duke said: "Our focus is on where we put the greatest effort, which would be Great Value ... If you would look in our pantry now, you would see the new Great Value chocolate chip cookies. Those are fantastic, and the value, the price gap would often be in the 15% range compared to other comparable products."

Duke said he was responding to what customers want. "We are really about giving the customer what the customer is looking for," he said.

However, it turned out that customers didn't want the Great Value brand as much as Duke thought. In fact, shoppers started demanding their favorite brands back, and many even abandoned Wal-Mart for its competitors. Sales fell, but Wal-Mart's top executives seemed to be unwavering in their commitment to Great Value.

"Our customers now consider Great Value a brand rather than a collection of items," Wal-Mart Vice Chairman Eduardo Castro-Write said in February. "The core of our strategy will be to increase direct sourcing for the company's private brands that represent more than $100 billion at cost."

Meanwhile, its suppliers were hurting badly, especially those that rely on Wal-Mart customers for a majority of their sales. For instance, the retailer is Church & Dwight's largest distributor, accounting for 22% of annual sales. Similarly, Wal-Mart accounts for 21% of Kellogg's sales, and 16% of sales at Kraft.

Sales in Kraft's biscuit category, which includes Chips Ahoy cookies and Triscuit crackers, fell, as did sales of Maxwell House coffee. Kraft CEO Irene Rosenfeld said in the company's conference call: "We saw declines in a number of our noncore biscuit brands. 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."

Swallowing Its Pride and Giving the Customers What They Really Want

Surprisingly, one of the worst hit was Wal-Mart itself. Eight consecutive quarters of increased sales ground to a halt. No sooner had the company pulled the national brands from its shelves then sales started to fall. In the second quarter of 2009, same-store sales at Wal-Mart Stores dropped by 1.5%, followed by a 0.5% decline in the third quarter and another 2% dip in the fourth.

Now, Wal-Mart has started backpedaling. Last month, Wal-Mart Chief Operating Officer Bill Simon said: "We are a house of brands. We prefer to sell national brands because that's how we can differentiate ourselves in price better."

He said the chain was bringing back 300 brand name products it had removed, and some industry-watchers expect the retailer will end up returning even more once-banished items to its shelves.

Its pride damaged, the world's largest retailer has been forced to eat crow. For now at least, Wal-Mart has learned that it can't do without the national brands after all.