Walmart is taking its groceries upscale

Depending on which Walmart store you choose nowadays, you might do a double take. In a growing number of stores, there’s an entire wall dedicated to organic produce, fresh sushi and a selection of about 50 gourmet cheeses, the result of a scouting trip through Europe last year. Forget just having a cold case of […]

Depending on which Walmart store you choose nowadays, you might do a double take.

In a growing number of stores, there’s an entire wall dedicated to organic produce, fresh sushi and a selection of about 50 gourmet cheeses, the result of a scouting trip through Europe last year. Forget just having a cold case of packaged deli meats — now there’s a charcuterie section. Even the layout is more appetizing: Roma tomatoes tumble down angled displays that make it easier to see what’s available and honeycrisp apples beckon from farmers market-style crates.

These Walmarts are the leading edge of what could become a grocery revolution at the giant retailer — and one of the key reasons why food sales were a factor in the company’s latest upbeat quarterly earnings report. Walmart’s produce and bakery sections are being upgraded to make them more attractive and easy to navigate, with some surprising options for the country’s largest discounter.

With the strategy, Walmart is hoping to steal grocery shoppers back from mid-level chains including Kroger, Safeway, Wegmans and Aldi — even glamour grocers like Whole Foods — and improve the company’s sluggish sales growth. Walmart has 3,465 supercenters and 633 smaller Neighborhood Markets in the U.S. where the initiatives will eventually show up.

“In the U.S., there’s been a really big step change in grocery retailing in terms of the standard of stores,” says Stewart Samuel, program director at IGD, an analytics firm that tracks grocery retailers. “The changes (Walmart has) made are really sort of making the product the hero.”

Walmart executives say customers didn’t realize stores
Walmart executives say customers didn’t realize stores sold organic items. So they rebranded everything with purple labels and dedicated an entire wall of the fresh produce section to organic. (Photo: Kelly Jordan, USA TODAY)
The stakes are high. Grocery accounts for more than half of Walmart’s U.S. business, amounting to roughly $167.1 billion of the company’s $298.4 billion in domestic revenue last year. The plan is to roll out the produce-aisle changes, currently in 180 locations, to 3,000 stores this year. So far, 3,700 stores have gourmet cheese, nearly 1,000 have sushi and 2,500 have some form of charcuterie.
As it prepares to update employees and shareholders at its annual meeting Friday, the company is banking on the strategy to drive traffic, although it won’t divulge financial results from its grocery makeover so far. In its first quarter earnings report last month, Walmart portrayed its grocery business as a bright spot. Grocery sales were positive again for the third quarter in a row, after being relatively flat — except when it was up slightly at the end of 2014 — for over a year.

Yet Walmart faces multiple challenges to its overall business. More shopping shifting online means customers may be less compelled to set foot in a store for both food and other items. Plus, more big retail chains, from Target to Walgreens, are making food a priority. The fact is simple: grocery shopping, though a low-margin business, drives store trips. Customers are more likely to splurge on a high-profit T-shirt or a new pair of shoes if you’ve already hooked them with an eye-popping selection of locally-picked berries and the aroma of freshly-baked cookies.

“When we get ‘fresh’ right at the front of the store, it has a halo effect,” says Charles Redfield, executive vice president of food for Walmart in the U.S. “That’s what’s going to create the traffic.”

New signs and displays in the bakery department are
New signs and displays in the bakery department are meant to make it easier to see what’s available. (Photo: Kelly Jordan, USA TODAY)
Grocery aisles have been a sore spot for Walmart for several years. Sales suffered as Walmart fell behind competitors that sold cheaper goods. Edward Jones consumer staples analyst Brian Yarbrough says that a decade ago, Walmart was 15% to 18% cheaper on groceries than Kroger. Now that gap is closer to 4% to 7%.

Meanwhile, dollar stores and pharmacies like CVS and Walgreens have started stocking more food, giving shoppers another, often more convenient option for fill-in grocery trips to replace milk or eggs. A dearth of staff made it difficult for customers to find help when they needed it. And as more shoppers opted to fill their carts with fresh and organic products, Walmart lacked options on both fronts.

The changes, Walmart executives say, are a direct response to customer complaints. Analysts say credit also goes to Greg Foran, a former supermarket executive for Woolworths in Australia and New Zealand who took over as Walmart U.S. CEO in 2014 and zeroed in on fresh grocery as a problem area.

“(Customers) did not feel like our assortment was equal to our competition,” says Shawn Baldwin, senior vice president of produce and global food sourcing for Walmart U.S. “And to to be honest, we carry more items than our competition. We weren’t showing them off in the most beneficial way.”
Produce is now displayed in farmers market-style crates
Produce is now displayed in farmers market-style crates and set at an angle instead of flat so that customers can see everything that’s available. (Photo: Kelly Jordan, USA TODAY)
Now, Walmart is in the process of bringing itself more in line with the evolution of competing grocery chains, some of which have gone as far to offer beer on tap.

The upgrades extend beyond what meets the eye when customers walk through the door. Further into the store, the bakery department now has chalkboard-style signs, lower tables that better showcase cakes and cookies, and bread baskets that invoke the charm of a local market.

No detail is too small. Bakers once used spoons, spatulas — whatever they could find — to frost cakes. That wasted an estimated 36 truckloads worth of frosting every year by not scraping all the last sweet dollops out of containers. Now, the bakery department relies on rounded-edge rectangular scrapers that fit into the crevices of the frosting tubs.

In the effort to revamp their bakery, Walmart is using a new scraping tool to aid in frosting cakes and to make sure they are not wasting any frosting. They estimate before this scraper they wasted 36 truckloads of frosting. Kelly Jordan, USA TODAY

“We’re trying to find where we’re losing money and wasting time,” says Kerry Robinson, senior vice president of bakery and deli services for Walmart in the U.S.

But some moves have proven costly. Walmart put department managers back in grocery after having removed many of them to improve efficiency. It hired 120 bakers to help train new associates on skills like cake decoration. Those moves came as Walmart was spending $2.7 billion to boost wages and training over two years.

With the revamped bakery area at Walmart, cake decorators and bakers are learning how to use new techniques for both money saving and time saving to provide fresh new and imporved baked goods for their customers. Kelly Jordan, USA TODAY

But investments in staff are also what have some analysts worried that Walmart’s grocery strategy won’t be enough to significantly bump up profits.

“They’re doing the right things,” Yarbrough says. “You’ve got to invest in labor, you’ve got to improve the customer experience. The problem is if sales don’t start to ramp up, they’re probably not going to get a ton of return for that.”
At the same time, Walmart is ramping up its online grocery service with store pick-up, which is now in nearly 40 markets since launching last year. The service doesn’t require customers to leave their car — a store employee brings out pre-bagged orders.Walmart spokesman John Forrest Ales says many pick-up customers then stay and shop some more.

Walmart executives say their plan is working and remain optimistic, pointing to the fact that overall same-store sales have been positive for seven straight quarters and traffic has been up for six straight quarters. “We know fresh has an impact on those things,” Redfield says.

The higher-end feel of its food offering may also attract higher-earning customers who could help increase sales in other areas too, Samuel says. Walmart can no longer rely on its bread and butter — low prices — to set itself apart.

“It’s critical that Walmart can win in food on a broader set of measures,” Samuel says, “not just price.”

Follow Hadley Malcolm on Twitter @hadleypdxdc.

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