Leaked Memo Suggests Wal-Mart's Upscale Strategy May Be Backfiring

May 31, 2007 — -- Wal-Mart will hold its annual shareholder's meeting Friday, and the company is bracing for a rough time.

Last month the world's largest retailer reported a 3.5 percent plunge in sales -- its worst monthly decline on record. Some say Wal-Mart's new strategy to appeal to upscale customers by adding higher-priced products to its stores may be backfiring.

WakeUpWalMart, a union-financed group that is highly critical of the retailer, has provided ABC News and other news organizations with a confidential memo from a former Wal-Mart ad agency that contains a warning to the retailer about raising prices.

According to the memo, which was written in October 2006, Wal-Mart's ad agency, GSD&M Advertising, said it knew why sales were off. The memo said shoppers simply weren't buying a new strategy to offer high-end products along with the chain's traditional low-cost goods.

Wal-Mart's reputation as a discount retailer may actually undermine efforts to sell the higher-end goods, the memo said. When shoppers compare Wal-Mart's lower prices to the prices at other retailers, according to the memo, "our low prices actually suggest low quality."

The company dismissed the report Wednesday, saying, "This particular piece of work is not very useful … not least because it's now completely out of date and in some areas just plain wrong."

Over the last few months the company has aimed at refocusing its sales and marketing toward its traditional core customers -- discount shoppers -- rather than catering to more affluent consumers.

The document adds that while Wal-Mart is still America's top discount chain, its new strategy has given new opportunities to its competitors.

"Target, Kohl's and JCPenney are eating their lunch at this point," said Patricia Edwards, a retail analyst at Wentworth Hauser & Violich.

The leaked memo is just another blow to a company that has experienced its share of blunders in the last two years, ranging from sexual discrimination lawsuits to a recent war of words with a fired ad executive.

"Wal-Mart's biggest challenge right now is its reputation and its loss of focus and really its poor values," said Chris Kofinis, director of communications at WakeUpWalMart.

The memo suggests that, overall, consumers still believe shopping at Wal-Mart saves them time and, more importantly, money, and that most Americans still have a favorable impression of the company. In fact, when asked in interviews to compare the retail behemoth to a person, some shoppers favorably compared the company to a handyman or even Uncle Sam, the memo noted.