Image: George fashion line
Danny Johnston  /  AP
The George fashion line has been a success for Wal-Mart. But other attempts to become more fashionable have failed.
updated 11/15/2006 2:56:31 PM ET 2006-11-15T19:56:31

This holiday season, a big challenge at Wal-Mart is convincing shoppers like Portia Goodman and Karen Wade to buy fashion instead of just basics.

"I buy more at Target than I do here," said Goodman, a 31-year-old graduate student from Riverside, Ill., who was recently shopping for candy at a local Wal-Mart with her son. "I think they should be more like Target." At Target, known for its cheap chic offerings, Goodman is attracted to apparel by designer Isaac Mizrahi and favors athletic gear by Champion.

As for Wade, a 47-year-old from LaGrange, Ill., she shops at Wal-Mart for "shirts and jeans because the price is good."

Such reluctance from these consumers comes more than a year and a half after Wal-Mart Stores Inc. has worked hard to improve its image with new fashion brands, a trendspotting office in Manhattan, and fashion shows during New York's Fashion Week. The company's fashion faux pas, such as stocking up on too many trendy items like skinny jeans, was a big factor behind disappointing sales for September and October, and is expected to weigh down business in the critical fourth quarter, the company acknowledged late last month.

The upgrading of its fashion is part of the company's larger campaign to expand into better quality, trendier merchandise to revitalize anemic sales and sluggish profit growth, a strategy that has gotten mixed grades from its customers so far.

Wal-Mart, which has built its reputation on selling basics like socks and detergent, made a push into $2,000 flat-screen TVs and other trendy electronics, 600-thread count sheets and organic foods. The goal is to pry more money from the hands of its wealthier customers, diversifying beyond its core-low income shoppers who are more vulnerable to economic downturns.

But while the company's electronics business is "making progress," organic foods and home furnishings have gotten mixed reactions, according to company's CEO and president Lee Scott in a recent address to investors.

Fashion appears to be the most challenging. In fact, in a sign that Wal-Mart's upscale strategy has fallen flat, the company dumped its two long-time ad agencies and hired Draft FCB late last month. Draft, a division of Interpublic Group of Cos. Inc., will develop future advertising to better attract both low-price fans and higher-income shoppers.

The company, which played down its low prices over the past year, is reemphasizing its rollback, or discount strategy this holiday season, with deep price cuts on toys and electronics. On Friday it extended the price cuts to home appliances. Wal-Mart's "Be Bright" holiday campaign, produced by lame duck ad agency Bernstein-Rein Advertising Inc., focuses on value fashion.

Wal-Mart needs to win in apparel for several reasons. Shoppers are facing more fashion choices this holiday season from low to mid-price stores like Target Stores Inc. and from mid-price department stores like J.C. Penney Co. and Kohl's Corp., both of which have developed more exclusive brands.

Apparel also offers fatter profit margins compared to electronics and food, according to Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm.

But more importantly, fashion sets the tone for the entire store, said Robert Buchanan, retail analyst at A.G. Edwards & Sons

"Fashion tends to drive the train," he said.

Wal-Mart has blamed its flawed fashion strategy on execution, such as overexpanding Metro 7, an apparel brand aimed at fashionistas. Metro 7 successfully launched in 500 stores in the fall of 2005, then stalled when it expanded to 1,500 stores this past spring. The company now says Metro 7's distribution shouldn't be in more than 900 stores.

Scott told investors that the company needs to better heed to a pyramid, where the bottom is basics such as underwear and socks, the middle is fashion basics and the top is trendy fashions like skinny jeans.

"We need to remember who we are and be able to fill that center part of this pyramid and then have a little bit up there at the top, just so our customers know that we have a sense of what's happening out there in the world," Scott said.

Meanwhile, one of the company's top apparel labels George, which is offered in men's, women's and children's assortments has had "significant growth," according to Linda Blakley, a Wal-Mart spokeswoman. Wal-Mart also unveiled a hip-hop inspired men's clothing brand earlier this fall called Exsto, which is now in 600 stores. Blakley declined to comment on Exsto's performance, saying with any launch, "you listen as you roll it out."

Other big apparel brands include Faded Glory and No Boundaries, aimed at teens.

Buchanan noted that men's fashions needs to be improved, and home furnishings is another area that could be further sharpened.

Investors will probably have to wait until after the holidays for any significant improvement in apparel sales. That's when Wal-Mart will expand its strategy to give stores a more customized mix of goods and layout for six key groups of customers: Hispanics, African-Americans, empty-nesters/boomers, affluent, suburban and rural shoppers. The plan, which is currently being tested in a couple dozen stores, is to retool over 3,000 U.S. stores over the next two years.

Wal-Mart said such segmentation, welcomed by Wall Street analysts, was the missing element in the company's merchandising strategy. Scott told investors that it helps explain what happened with Metro 7 and plays a critical role in better serving its customers.

Still, a big problem with Wal-Mart is that it needs to do a better job in marketing and displaying its brands. Candace Corlett, principal of WSL Strategic Retail, noted she has spotted wrinkled clothes on the racks.

"The merchandise is more exciting than the display," observed Corlett. "Specialty clothing stores have the window advantage. They use the window to display the tempting outfits. What is Wal-Mart's window for the fashion statements? What is the style guide for their floors?"

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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