Wal-Mart has a problem: In 93 percent of American households, one person shops at its stores at least once a year, and that's not good enough for the company.

The retailer wants to continue growing to keep investors happy. But how? If it can't attract new shoppers to push up its sales, it must get the occasional ones, who dash in for bargain dog food or paper towels and then hurry out, to cross the aisle and load up on clothes, bedsheets and flat-panel televisions.

For a year, Wal-Mart has been trying to get those sporadic and mostly higher-income customers to do that. It designed a line of up-to-the-minute clothes. It stocked its shelves with organic cotton sheets and sustainable fish. It wished its customers a "Happy Holiday," not a "Merry Christmas." It hired civil rights leader Andrew Young to burnish its image. It joined the National Gay and Lesbian Chamber of Commerce. This year, it began remodeling nearly half its stores.

On Thursday, Wal-Mart reported a decrease in November sales at stores open at least a year, a rare decline that weighed down holiday prospects for the entire retail sector.

Many of Wal-Mart's core customers disliked the new clothes and skinny jeans, which also failed to set off a serious buzz among the fashion conscious. "Merry Christmas" is back, after the American Family Association and the Catholic League launched a boycott. In May, Wal-Mart pulled out of South Korea, and followed that with a retreat from Germany in July. In August, Young quit after making inflammatory remarks about ethnic grocers in African American communities. In September, Wal-Mart said it was getting rid of layaway, which analysts said sent the wrong message to the 20 percent of its customers who do not have a bank account. Then came the November sales report.

"You got to ask yourself: What happened?" said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York that has done work for Target and Kmart.

More important for Wal-Mart, has the retail approach of stack 'em high and sell 'em cheap, which transformed a little company from rural Arkansas into a chain of more than 3,300 stores and bellwether of the American economy, run its course on its home turf?

"They're in a box," said Charles Fishman, a senior writer for the magazine Fast Company and author of the book "The Wal-Mart Effect." "There's a limit to the market for what they're offering. They're smacking up against it."

Wal-Mart's management does not have to be reminded of its predicament. In October, chief executive H. Lee Scott Jr. acknowledged the rapid switch to hipper clothing worked in urban stores but not nationwide.

"We overloaded the fashion part," Scott told analysts. "That's not who we are."

Management also described a difficult set of circumstances: Company surveys indicate that the pain of high gasoline prices and utility bills lingers for many Wal-Mart shoppers. The remodeling also has hurt sales.

Some factors have been beyond Wal-Mart's control, such as 5 million fewer people shopping on Black Friday this year. Yet Wal-Mart fared worse than many retailers that day, dragging down November sales for the entire industry by 2 percent, the International Council of Shopping Centers said. Without Wal-Mart, November sales would have increased by a healthy 4 percent.

Wal-Mart's biggest competitor may still be itself. In areas where the chain has two stores, the opening of a third siphons off 20 percent of sales from the other two, said Robert S. Drbul, an analyst at Lehman Brothers .

In the short run, Wal-Mart is falling back on what it knows best: cutting prices. Since October, it has slashed prices on toys and electronics. Last Thursday, management said that around Christmas, Wal-Mart would promote low prices on more goods in a series of advertising circulars.

Longer-term, executives say they will stop opening so many new stores to stem cannibalizing their own business and focus on improving productivity at existing ones by finding new ways to get the occasional customer to spend more.

"Unless they abandon the idea of growth," Fishman said, "they need to attract a wider array of customers."

The company is going after what it calls "selective" customers. That would describe Springfield resident Nadine McMahon, 46, who was shopping Thursday morning at the Wal-Mart on Kingstowne Boulevard in southeast Fairfax County . McMahon heads to the discount retailer for household cleaning and school supplies, but she was not the least bit tempted by the racks of the new fashion-forward Metro 7 brand camisoles and skirts she saw.

"I thought they never held up as well as clothes from other stores," she said, adding that she buys clothes from hipper rival Target. She thought for a second, trying to explain her resistance.

"Maybe it's the way the store looks," she said.

That "look" could be seen in the Kingstowne store, where 250-thread-count organic cotton sheets on sale for $52.88 sat in open boxes next to a display featuring a martini set, clear glass cheese serving plates and curvy, white, modernist vases. The sheets and the barware would look at home inside any Target store, except that they were stranded in the middle of a narrow aisle next to shelves piled nearly to the ceiling with consumer electronics.

Retail analyst Patricia Edwards of Wentworth, Hauser & Violich in Seattle said ambience is increasingly critical to holding on to price-conscious shoppers. As gasoline prices have dropped and as "they've gotten discretionary income, the core base is shopping elsewhere," she said.

Wal-Mart has simply made its competitors smarter, she said, as they followed the company's example by making supply chains more efficient and lowering costs.

In responding to competitors, Wal-Mart has struggled through an identity crisis. Management has pulled the plug on troubled undertakings so quickly lately that it has lurched from one extreme to another.

Fishman, however, looks to history. Wal-Mart has been adept at trying new strategies, jettisoning them when they do not work, and moving on. What Wall Street and others forget, he said, is "part of Wal-Mart's DNA is to test things out."

He cited experiments such as full-service auto repair, which the company gave up on, choosing to focus on replacing tires and batteries and changing oil. "That was a passion of Sam Walton: copy, copy, copy, execute brilliantly, abandon what doesn't work," he said.

The difference now is as the nation's largest employer and second-largest company by revenue, Wal-Mart's every move is scrutinized. It has an army of critics ready to pounce, such as the union-backed Wake Up Wal-Mart and Wal-Mart Watch. They are organized and well-financed. They've advocated for anti-big-box store laws in cities and counties across the country designed to keep Wal-Mart from expanding. And as one of the largest companies in the world, its missteps reverberate through the entire economy, as on the Monday after Thanksgiving, when management's warning of poor November sales figures helped drive the Dow Jones industrial average down 158 points.

Fishman said it was important not to lose sight of the fact that while it has lately fallen short of its goals -- and Wall Street's -- for same-store sales growth, the company is enormously profitable and growing overseas. Wal-Mart rang up $28.6 billion in sales in November, up 11.9 percent. Sales have been strong in Mexico, Brazil, Argentina and China, and the company is expanding into India.

But Fishman said, a larger question remains: "How much can one company own of the U.S. retail market?"

Staff writer Ylan Q. Mui contributed to this report.

© 2006 Washington Post

Visit our Merchandise Page to see these stickers, buttons, and more.

Please help support this work -- make a tax-deductible donation to ReclaimDemocracy.org today!

Go to Home Page