Wal-Mart: 'Cheap' better than 'chic'?
Discounter says Oct. sales rose a dismal 0.5%; sees unexpected setback with its trendy 'Metro 7' clothing line
By Parija B. Kavilanz, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Is Wal-Mart, the king of "cheap," shooting itself in the foot by straying from its low-priced strategy in favor of more upscale offerings?

In its weekly sales update on Saturday, the world's largest retailer reported that October sales at its U.S. stores open at least a year -- a key retail metric known as same-store sales -- rose a much weaker-than-expected 0.5 percent.

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Hoping to attract a more upscale trend-conscious clientele, Wal-Mart picked former Miss Universe Dayanara Torres as the face of its fashion clothing brand "Metro 7."
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Wal-Mart launched the "George" organic baby clothing line earlier this year.
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This figure is even lower than Wal-Mart's recently reduced guidance of a 1 percent increase. It initially saw a 2 to 4 percent rise.

Wal-Mart and other chain store merchants will report their final October sales results on Thursday.

Upscale fashion to blame?

In his presentation to a group of Wall Street analyst last week, Wal-Mart (Charts) CEO Lee Scott admitted the world's biggest retailer has seen at least one big setback to its attempts to boost sales by offering fancier, higher-priced merchandise.

"We have to understand why Metro 7 does well in 600 stores but [doesn't] do well when you expand it [into more stores]," Scott said. Scott was referring to Wal-Mart's fashionable private-label clothing brand called "Metro 7" that the company launched last year.

Compared to the basic T-shirts, sweatshirts and jeans Wal-Mart typically sells, Metro 7 was a step up in fashion - and price.

Moreover, Wal-Mart supported the brand's launch with a splashy and expensive marketing campaign.

The strategy worked, at first. Wal-Mart couldn't get the product into stores fast enough. The retailer expanded Metro 7 into 600 stores quickly, hoping to leverage the brand's early success.

Then the unexpected happened. Metro 7 failed to take off in some markets. Wal-Mart had planned to roll out the line in more than 1,000 locations but has since scaled back that target to between 700 to 800 stores.

"We overexpanded it. We had a pretty good idea. I think what happened is we didn't follow the strategy. We overloaded the fashion part. We need to remember who we are," Scott said.

"We need to have a little bit of fashion so our customers know we have a sense of what's happening in the world. If we try to do more [with fashion], we're not going to do well," he added.

With Wall Street breathing down its neck over sluggish sales and a stock price that's been stagnant for five years, Wal-Mart is under intense pressure to rev up growth and fight growing competition from archrival Target (Charts), other "big-box" retailers like Costco (Charts), and value-priced department store chains like J.C. Penney (Charts).

To that end, Wal-Mart in recent months set in motion a plan to court wealthier shoppers and boost profits and sales by introducing more upscale items that generate fatter profits.

For instance, in addition to Metro 7 Wal-Mart has added other fashion labels like the trendy urban line for men called "Exsto" and a clothing line from designer Mark Eisen. It's introduced organic baby clothing under its "George" label, expanded its higher-priced organic food offering and added more brand-name flat screen TVs and personal computers in electronics.

It would appear that Wal-Mart is trying to emulate Target's tremendous success with its "cheap-chic" merchandise approach. But some industry watchers warn that Wal-Mart is no Target.

"Wal-Mart is not cool. It's impossible for Wal-Mart to be cool because they would have to discredit their entire business to do that," said veteran retail consultant Howard Davidowitz.

For its part, Target created the "cheap-chic" market by being the first to enter into collaborations with high-profile designers like Mossimo, Isaac Mizrahi and Todd Oldham to market affordable clothing, home furnishing and kitchen products.

Target, the No. 2 discounter, is now among the leaders in the "cheap-chic" space. Despite its roots as Wal-Mart-like discounter, Target's become synonymous with the term "trendy." Many consumers say it's "cool" to pay just a bit more, and walk out carrying Target's well-known bull's-eye logo on their shopping bags.

But retail experts said Wal-Mart simply isn't there yet in terms of changing its image.

"Any time that Wal-Mart tries change, it's tricky because of who they are," Davidowitz said."There are very few retailers with such a solid established image as Wal-Mart. To consumers Wal-Mart means every-day low prices. In apparel, Wal-Mart sells body covering. It's what its customers expect."

Not that there's anything wrong with that. "Wal-Mart's been very successful selling basic apparel," he added.

Davidowitz, for one, hopes the Metro 7 setback doesn't scare Wal-Mart away from pushing ahead with tinkering with its merchandise mix, especially in organics and electronics, two areas where it's already luring wealthier shoppers.

"Wal-Mart has to seek out new customers in order to grow. That's a given. But the Metro 7 issues show they can't do a blanket upscale push," he said.

Doing it on a region by region basis makes more sense. "Store profiling is key. Look at your customer base in each market and target the merchandise accordingly," Davidowitz said.

Wal-Mart's Scott told analysts that the company has to become better at the "idea of customer segmentation " and "which stores to put which merchandise."

Richard Hastings, senior retail analysts with Bernard Sands, agreed the chain has work to do.

"Going upscale in clothing is not the solution for Wal-Mart. It won't work because of Wal-Mart's discount store experience and layout," he said. "You can't put clothing 20 feet away from groceries and create the same ambience that consumers have shopping for clothes in a specialty or department store."

He, too, suggested that Wal-Mart go more upscale in food, beverages and other household products. "Wal-Mart can get really competitive in these areas and get a good payout."

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.