Wal-Mart customers now seek more than a bargain

NEW YORK -- Wal-Mart Stores Inc. is facing a new reality: Its customers want more than just the lowest price.

The world's largest retailer, which only a few years ago could do no wrong, is now suffering from the kind of problems that have plagued weaker rivals like Kmart: cluttered stores, merchandise that turned off shoppers, and poor service. Meanwhile, Target Corp., while some six times smaller than Wal-Mart, is setting a new standard for discount retailing.

Wal-Mart's sales growth has sagged, in part because the Bentonville, Ark.-based retailer, while still a low-price leader, doesn't have products on the floor that attract today's shoppers -- particularly in apparel, home furnishings, and consumer electronics.

Target, however, keeps sharpening its appeal to a higher-income customer with affordable fashions and home merchandise from designers including Cynthia Rowley and Isaac Mizrahi.

Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm, joined other analysts in saying that rising gasoline prices and job uncertainty have hurt Wal-Mart, prompting lower-income shoppers to spend less at stores. But, he said, ''for the past six months they have dropped the ball. The fact is that Wal-Mart has failed to execute as well as they have always done."

Bob Buchanan, a retail analyst with St. Louis-based A.G. Edwards, said, ''Wal-Mart is not as crisp in their execution as they have been. Target continues to do a lot better in merchandising."

Buchanan also believes ''morale is not as high as it has been" at the company, which has had to defend its business practices from criticism by unions and community activist groups; they contend the retailer takes advantage of workers and hampers competition.

It has also defended itself in highly publicized lawsuits. Wal-Mart recently said it would pay a fine to settle federal charges that underage workers operated dangerous machinery, and it also agreed to pay $11 million to settle charges that its cleaning contractors hired illegal immigrants. Meanwhile, it faces a class-action lawsuit by female employees who claim Wal-Mart discriminated against them because of their gender.

Within its stores, Wal-Mart is already taking steps to stock better quality and trendier merchandise and to make housekeeping changes. But Davidowitz said it will take until at least the fourth quarter to see improved business given its size.

The impact of the differing shopping experiences at Wal-Mart and Target was evident in financial results released last week.

Wal-Mart, which generated sales of $285 billion last year, said first-quarter profits, while up a robust 14 percent, fell short of Wall Street expectations and that it will miss analysts' forecasts for the current quarter. The company also said it will be difficult to meet its annual profit goal.

Target, with sales of $46.8 billion last year, had first-quarter results that exceeded expectations and offered an upbeat outlook.

''Our results were not up to Wal-Mart standards," said Lee Scott, president and chief executibve, who largely blamed rising gasoline prices and unseasonably cool weather, in a pre-recorded call to investors last week.

Wal-Mart is hoping that its expansion into higher-priced, trendier merchandise, like fluffier towels and more stylish clothing will help make it less vulnerable to the economy's fluctuations. At the same time, Wal-Mart officials vow not to ignore their core customers, who shop for staples on a budget.

The new merchandising, which Scott said has gotten good reaction from customers so far, is to get more affluent Wal-Mart customers, who tend to shop just for groceries, to cross over to the other side of the store.

While priced higher than other Wal-Mart merchandise, these goods are still cheaper than at Wal-Mart competitors, the company maintains.