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Wal-Mart goes upscale, targets urban growth

Wal-Mart's new ad campaign touts its improved health insurance policy and charitable giving programs.  At the same time, it's adding upscale goods to draw in a wider shopping audience.
/ Source: Forbes

Wal-Mart Stores has apparently decided that everyday low prices in small-town America only take you so far.

In an effort to kick-start a share price that has lost a third of its value since early 2002 — while the Standard & Poor's 500 index has risen 17 percent and discount rivals Target and Costco Wholesale are also up — the retail behemoth seems focused on the urban and upscale suburban markets as the final frontier of Wal-Mart's enormous growth.

To get there, the company is experimenting with a pair of separate-but-equal endeavors. It's making nice with urban politicians and anti-Wal-Mart activists through a new ad campaign that touts its improved health insurance policy and charitable giving programs. At the same time, it's adding upscale goods to draw in a wider shopping audience interested in more than rock-bottom prices.

"The more people learn about who we are and how we strive to do better every day, the more they know that we are good for America's working families," says Wal-Mart Corporate Affairs Vice President Bob McAdam, adding that the company picked up the health insurance tab for 150,000 people with its latest initiative. The ads are due to roll out in Tucson, Ariz., and Omaha, Neb., this week.

Pacifying the critics is indeed important, say analysts, not because their anti-Wal-Mart campaigns affect the shopping decisions of the company's core rural customers (they don't), but because these critics have the ear of liberal politicians who dominate urban legislatures. And it's these bodies that have the power to keep Wal-Mart from building in the cities. Already, the company moved a planned Chicago store to a nearby suburb after the city council tried to set worker wages.

"They're trying to send a message to the consumer directly, without it being filtered by the media," says Peter Koeppel, president of media consultancy Koeppel Direct, of Wal-Mart's attempts to spruce up its image. But he doubts the ads will be particularly effective, likening them to tobacco firms' do-gooder attempts to tout their involvement in anti-smoking campaigns.

A better idea, Koeppel thinks, would be to aggressively market in urban areas products like its organic foods, which are among several upscale products Wal-Mart is experimenting with in some stores, and which appeal to many city dwellers.

Indeed, the addition of upscale products in key future growth areas is an important tool to attract new customers without alienating the company's core shoppers in search of the lowest prices for basic goods. At a 203,000-square-foot test store in Plano, Texas, an upscale suburb of Dallas, Wal-Mart is showcasing expensive jewelry, $500 bottles of wine, plasma TV sets and other expensive items along with organic foods. Now, some of those items are trickling into other stores.

In its East Stroudsburg store in the Poconos region of northwestern Pennsylvania, a new organic foods section sprouted this month in the traditionally cut-rate produce section of the Wal-Mart Superstore. Recently, a large display of plasma televisions also appeared near the cash registers.

Mark Husson, a stock analyst who follows Wal-Mart for HSBC, thinks the fact that consumer tastes gradually change over time makes the product additions a good idea. To remain stagnant, he says, would risk becoming the next Woolworth.

"Target has managed to keep everyday low prices on most things, but also has some upscale items," Husson says, adding that offering ten toasters that all price between $15 and $25, as Wal-Mart has typically done, yields no real variety. Add a couple of more expensive options to the lineup, and traditional Wal-Mart shoppers who aspire to something more won't abandon the store once they get there.

Another key to Wal-Mart's growth, according to Husson, is the completion of a store-remodeling initiative that the company hopes will improve the customer shopping experience. That's particularly important in potential new stores in big cities and upscale suburbia, where many customers place as much emphasis on wide aisles and clean bathrooms as they do on low prices. Getting customers to stay awhile and really shop is Wal-Mart's next hurdle.

"Traditionally, when you went to Wal-Mart, the exercise was to hold your nose for about 45 seconds while you ran around and got what you needed," Husson says.

By most indications, those days are numbered.