Analysis: As American as apple pie, but now Wal-Mart is eating

At Wal-Mart, America's un- disputed king of low-cost retailing, some surprising things are turning up on the shelves. There are cotton sheets with a 400-thread count, and extra-thick towels in fashionable hot orange. In its fridges, 'key lime pie', a speciality of Florida, is stocked alongside nine-layer lasagne. These luxury goods are the result of months of testing behind closed doors by Wal- Mart's cooks and designers, who have been trying to come up with products to tempt a new group of middle-class customers.

Critics say the changes are overdue: the world's largest retailer has hit a block with the large slice of Americans on very limited budgets who have traditionally poured through its doors.

Wal-Mart said on Thursday that it was 'disappointed' with performance in the first quarter of the year, when sales at its US stores that have been open for more than a year grew by just under 3 per cent. The results went down badly with investors, who dumped shares, pushing down the entire Dow Jones index.

Wal-Mart, which is several times as large as its next-biggest competitors put together, posting $285bn (pounds 153bn) in sales last year, has recently made other changes to improve its image.

The retailer has been trying to show it is listening to the army of environmentalists, community groups, unions and politicians in the US, who claim it is bad news for towns when Wal-Mart moves in. The company recently announced a partnership with the National Fish and Wildlife Foundation to conserve one acre of natural habitat for every acre it develops. The agreement to save important areas of land and water is the largest-ever by a company, and will cost it $35m over 10 years.

Lee Scott, Wal-Mart's chief executive, said: 'We've changed as a company. We're trying to get past the idea that everyone who criticises you has an ulterior motive and wants you to fail.'

If Wal-Mart feels sensitive, it is perhaps understandable. The company faces a multitude of lawsuits over its employment practices, while some states are campaigning to keep it out on the grounds that it kills off local businesses.

Last month, it also became the subject of a federal grand jury investigation in Arkansas into whether its former vice-chairman was orchestrating a covert, illegal campaign against union organisers within Wal-Mart's workforce.

On Wall Street, as a result, the company is out of fashion. Its shares have been trading at a five-year low, with investors fearful that a groundswell of opposition to the retailing juggernaut may stop it in its tracks.

Perhaps in a less contrite mood than when he professed he was listening to the criticism, Mr Scott said on a separate occasion recently that it mattered 'diddly squat' if Wal-Mart had come under attack " as long as customers kept coming through the doors.

With its distinctive corporate culture and lack of sympathy with those who do not share the values of the American heartland, Wal- Mart has had a bunker attitude in the past. Until this year, few journalists have been allowed inside its HQ in Bentonville, Arkansas, and financial analysts have had to make do with few of the briefings normally given by executives at big companies.

Having gone from not existing 50 years ago to revolutionising retailing around the world, Wal-Mart has historically chosen to concentrate on churning out goods at rock-bottom prices and expanding its empire of cavernous supercentres.

The cash tills are certainly still ringing " it reported more than $10bn in profits last year " and Wal-Mart is the number one seller in America of products ranging from dog food to diamonds. It owns 3,719 stores in the US and another 1,596 around the world, including Asda in the UK.

Yet even though pockets of the Wal-Mart empire are still growing, especially in Latin America and China, there are clear signs that the growth engine overall is slowing down.

Asda, in particular, has become a drag on the business, with Wal- Mart also revealing on Thursday that the once-rising star had endured a 'challenging' first quarter. The UK chain failed to meet its operational income target, while underlying sales rose only in the low single digits " something Wal-Mart blamed on increasingly stiff competition in the UK.

Compared to its modest 3 per cent rise in US same-store sales in the first quarter, one of its largest rivals, Target, managed to squeeze out a 6 per cent increase during the same period.

In recent times, one of Wal-Mart's big problems has been that its low- income customers have been hit particularly hard by the rising price of oil, which has translated into historic highs at the gas station.

But there also concerns that the company has been tardy in picking up new trends, such as offering more fashionable lines at low prices, and targeting those on higher incomes who want value for money but also more quality and choice than has traditionally been found at Wal-Mart.

The big fear among investors is that Wal-Mart, once a pioneer followed by other retailers religiously, has lost its focus. One analyst who follows the company said: 'Its attempts to improve its public image and the changes to its range recently will go some way to eliminating some of its problems, but they do not significantly offset the headline risk.'