With the sales tax story, equating Amazon to Brer Rabbit begging the fox to spare him from the briar patch, we put a fork in our review of the convenience growth lever. We’re now onto Selection, that second of three growth levers in which Amazon – by virtue of its web-based business model – has a clear and distinct advantage over traditional retailers.
But as I’m prone to do, we’ll pick some more on Walmart (the embodiment of traditional retail success) en route to making the larger points about Amazon’s business.
Back to the Broad Middle
So far we’ve approached discussions of the broad middle exclusively from the left-hand entry point. This is where the right combination of investments in the growth levers (price, selection, convenience) will earn a retailer access to that middle part of the market. This is where the vast majority of customers reside, and it’s where they balance their overarching desire for low prices with their preference for convenience and a wide selection of products from which to choose.
Retailers that press the right combination of those levers win the patronage of the broad middle, increase their sales, and grow their businesses.
But there’s more than one way into the broad middle. There’s also a right-hand entry point. I’m saving the bulk of that topic for explaining the ways Zappos and Quidsi posed a serious threat to Amazon, but we’ll go ahead and take a sneak peak here to setup the Selection discussion.
Price is the lowest common denominator of the growth levers, so when all other variables are equal, we (the shoppers) tend to buy the lowest price option available. But most of us will spend a bit more if a store offers better convenience or wider selection. This defines the left-hand entry point to the broad middle.
The right-hand entry appeals to the consumers who are far less price sensitive. They’re willing to pay a higher price for better customer service, a tailored shopping experience, or because they identify better with the brand of the store. For example, many of the consumers who wear high-end fashion are notoriously price insensitive. They’re at the extreme right of this bell curve. They have lots of money to spend, and they’re willing to pay premiums. They will pay an absurd markup to buy a handbag with the Gucci logo or sunglasses that say Chanel.
When a retailer can offer these products and simultaneously sport economies of scale – allowing it to operate at a lower cost and pass some price savings on to customers (another feedback loop) – this creates another mix of levers in which a retailer can invest to gain access to the broad middle.
Consider that a teaser. We’ll go in much more detail in future articles.
How Target Competes with Walmart
Think Walmart versus Target. Walmart earned its way into the fattest chunk of the broad middle via the left-hand side. It pressed the hardest on price but also offered a wide selection of products and enough stores to be a convenient shopping destination for much of the consumer market. Its success is undeniable, and no one would succeed by challenging Walmart on that turf.
At some point in its history, Target came to understand this. It could not go toe-to-toe with Walmart on price and selection, but it could earn the patronage of less price sensitive customers by pressing on the right hand levers. And on brand in particular. While it will never be as big as Walmart, Target has built a strong business doing discount merchandising in its own way.
During times of economic hardship, price sensitivity increases, pushing the fat part of the curve even further to the right (i.e., more customers begin making buying decisions based on low price). These have traditionally been good times for Walmart, bringing more bargain hunters into its doors.
But during this most recent recession, Walmart fumbled the opportunity badly. Instead of opening its arms to the rush of new shoppers, the company decided to reverse its normal strategy, easing its investments in the selection levers and putting that cash into branding like Target. The goal seemed to be capturing more of the upscale-discount (yes, the sort of oxymoron term you get so frequently when slicing deep in the market segmentation game) shoppers. But in the process it chased its core customers into the open doors of the dollar stores.
Eduardo Castro-Wright Gets Target Envy
Eduardo Castro-Wright had success presiding over Walmart’s Mexico and then international divisions, overseeing tremendous growth during his watch. He was rewarded in 2005 with the plum assignment of CEO, U.S. Stores.
In that role he developed a serious case of Target envy. He grew tired of Walmart’s reputation as the dingy bargain basement; that place where consumers hold their noses, foregoing a more pleasant shopping experience in exchange for cheap stuff.
“Tar-jay,” on the other hand, has cachet. It is a brand that evokes some pleasant sense from customers. Though it too is a discounter, people actually don’t mind saying they shop there. Castro-Wright wanted that for Walmart.
And so he pushed Walmart into investing billions to revitalize supercenters, to update the store-front facades, to make cheerier signs, and (most significantly) to take out inventory so aisles could be wider for moms pushing carts and lines of sight less cluttered. To achieve this, he significantly reduced selection. Targeting those items that his data analysis identified as low-demand, slow sellers…that stuff which clogged up valuable shelf space for far too long.
For example, Castro-Wright thought Walmart should be able to sell fashionable clothes. This required no small set of changes. Rather than offer, say, garish holiday sweaters, a favorite of that elderly lady customer that shares her home with a dozen feline companions, he cleaned out that rack and decided to sell stylish skinny jeans instead. This would attract the middle-class teenage girl and her mom, introducing Walmart to a new – more affluent – demographic that would come to buy clothes and stick around to fill up her cart with all sorts of goods. Most importantly, he would be taking the shopper away from Target.
This is not how things unfolded. No one wanted skinny jeans from Walmart. The fashion items (which Walmart sourced from a new, chic New York City office and promoted in the pages of magazines like Vogue) failed to produce new customers. Worst yet, they chased out the cat lady who could no longer get that Frosty the Snowman sweater she so desperately loved. As Walmart failed to move upstream and steal Target customers, it also sent existing customers downstream to more convenient dollar stores. The cat lady, it would seem, took her business – not just the sweaters, but all those cans of cat food as well – to Dollar General.
This was a double-whammy failure for Castro-Wright and Walmart. Under his watch, U.S. stores had their worst decline in same store sales. Walmart had for years stood tall on the premise that its supercenters were the place for one-stop shopping; that place where a mother could reduce the burden of shopping errands by replacing her stops at several stores with one big-basket Walmart run. By reducing that selection (even though Castro-Wright thought he was only discarding low-demand, low-turn items), he was forcing all the moms and cat ladies to go elsewhere to satisfy their shopping needs. Walmart was no longer meeting their one-stop criteria. Some were leaving Walmart altogether, others were just buying less.
The results for the business were terrible. By abandoning its commitment to carrying the deepest selection, Walmart was straying from the path that had always brought it so much success. Off in a Bentonville cemetery, Mr. Sam was rolling in his grave.
Well, Walmart abandoned that strategy after too many consecutive quarters of poor performance. They sent Castro-Wright* over to run the much smaller e-commerce business and put Bill Simon, a retired naval officer, on a mission to get this ship back on its previous course.
Simon was quick to bring back the selection, returning Walmart’s U.S. stores to the time honored tradition of investing hard in the levers of lowest price and widest selection. The renovations initiated by Castro-Wright have stopped, and the aisles are getting packed again with hard-to-resist bargains.
Next: Even with all that selection coming back to its shelves, Walmart can still only fight Amazon with one arm tied behind its back. Walmart is constrained by the four walls (though large they may be) of its supercenters while Amazon brings selection down the long tail of the demand curve.
*Eduardo Castro-Wright, it should be noted, is no longer with Walmart. He was systematically stripped of responsibility in his new role and finally ushered out the door as the New York Times exposed a history of corrupt practices in Walmart de Mexico that occurred under his watch. Don’t feel too bad for him. While his ego is bruised, financially speaking he’s quite comfortable in retirement.