October, 2009

Walmart Pricing Study

Wal-Mart Pricing Report Round XIX

The Produce Business study we call the Wal-Mart Pricing Report has now been going on for more than five years. With this iteration, we have conducted 19 separate studies in 16 cities across the globe, from Connecticut to California, from Oregon to Florida.

We have learned a great deal, including how much of what we expected to be true was not. We began these studies with elaborate theories on how supermarkets might compete with Wal-Mart and, specifically, its Supercenter concept. We expected to find highly sophisticated pricing decisions. For example, we thought supermarkets might look to make margin on unbranded, fresh produce, but would be careful to be competitive on what were obviously the same product, such as branded, jarred produce, salad dressings or even well known brands of fresh produce.

Yet, for the most part, these elaborate theories were shown to be wrong. Pricing consistently seemed to be driven by internal metrics for margin and if the prices that resulted were not competitive, one of two things happened — either the store did fine because of geography or because it offered other values attractive to a clientele of sufficient size and spending ability, or the store simply closed.

There have been a few exceptions that have gone toe-to-toe with the Goliath supercenter. Specialized concepts, such as A&P’s Food Basics, when it was operating in Detroit, MI, and Fiesta Mart, in Houston, TX, have given Wal-Mart a run for its money. Also, we have run into occasional special situations, such as when we stumbled onto a price war in Salt Lake City, UT, a few years back.

By and large, however, mainstream supermarkets have not so much attempted to compete with Wal-Mart for its core lower income, paycheck-to-paycheck shoppers. They have, for the most part, simply decided to get out of the way.

We would add one caveat: In city after city, we are now seeing more and more that the loyalty card programs are becoming the weapon of choice supermarkets are wielding to compete with Wal-Mart. Many stores that are simply not competitive with Wal-Mart on the basis of published prices available to all shoppers are much more competitive when loyalty card discounts are applied.

This seems like a sophisticated use of loyalty cards — letting the chain pick up additional margin on occasional shoppers, perhaps those seeing the store as a convenience because it is on a frequently traveled route or near a hotel, etc., while offering the discounts necessary to attract a regular neighborhood clientele through the loyalty card program.

Raleigh Loyalty

This general finding — stores basically not competitive with Wal-Mart on produce pricing, but some chains doing significantly better when loyalty discounts are included — continues in Raleigh, NC, where we visited five retailers in addition to Wal-Mart. We checked prices on produce at Food Lion, Fresh Market, Harris Teeter, a Kroger store and a SuperTarget.

Not surprisingly, the two retailers known to be upscale seem to step to their own drummer when it comes to produce pricing. Fresh Market comes in a full 31.3 percent over the prices at the Wal-Mart Supercenter and Harris Teeter follows right behind at 35.31 percent. Harris Teeter’s loyalty card moderates this significantly, bringing its price level down to “only” 24 percent over Wal-Mart for loyalty card shoppers.

Though Fresh Market does not offer a loyalty card program, its use of advertised specials brought its market basket prices down to 31.3 percent over Wal-Mart. Without the specials it would have been a full 36.72 percent over Wal-Mart’s prices.

The disconnect between Wal-Mart’s prices and those of upscale venues such as Fresh Market and Harris Teeter may not surprise anyone, but other retailers in the community seem to perform in unexpected ways.

Food Lion, for example, the Delhaize-owned operation, has a reputation as an economical store, yet its move over the past few years to add service departments may have also transformed the company’s position in the marketplace.

Food Lion comes in with prices a full 23.72 percent over Wal-Mart, more than enough to motivate customers focused on price to switch stores. The Food Lion loyalty card doesn’t make a significant dent in this differential since, even after the loyalty card discount, Food Lion’s loyalty card customers are still paying 18.54 percent over Wal-Mart’s prices.

This is a surprising result, so we might want to mention a caution on the interpretation of the results of this study. This is a study solely of produce, so theoretically, a chain could make a decision to be highly competitive with Wal-Mart on branded grocery items and then look to pick up margin in perishables. Whether that is the case with Food Lion or if its move into service departments has blunted its pricing edge will require further research.

Our two final competitors each have interesting twists to their performance in the study. One company’s use of loyalty cards truly changes the dynamic in the market and that would be The Kroger Company. For a customer simply walking into the store without a loyalty card, Kroger is pricey. Even if its produce prices are less than the upscale chains, it still comes in at 21.31 percent over Wal-Mart’s prices.

SuperTarget is a tad less expensive. If you were to look at its base prices without advertised specials, it comes in at 14.08 percent over Wal-Mart, but add in the dynamics of Target’s advertised specials and the differential shrinks, and then it comes in at 11.26 percent over Wal-Mart on produce prices.

In contrast, the Kroger loyalty card earns its users far deeper discounts. Kroger uses its loyalty card program to come out only 5.62 percent over Wal-Mart for its loyalty card shoppers.

Considering the cost of transportation and the value of people’s time, a 5 percent differential between a neighborhood supermarket and a typically more distant supercenter is easily justified by many consumers.

One reason Kroger has been successful in many markets where Wal-Mart is present is that Kroger uses its loyalty card program — highly influenced by Dunnhumby, the London, UK-based marketing, branding and research company — to offer regular customers prices almost on par with Wal-Mart, while picking up extra margin from less dedicated or simply less price-sensitive customers — customers unwilling, unable or indifferent to doing the simple things necessary to get and use a loyalty card.

Lessons Learned

In a sense, what Raleigh teaches us is that Kroger, America’s largest supermarket chain, really does stand alone. Everyone else in the market has either moved upscale or lacks the sophisticated technology to make loyalty cards a key profitability tool and, therefore, has to use blunt edges, such as high prices, to generate returns. Kroger, reaping the benefits of its relationship with Dunnhumby, can price with finesse.

Nobody gets all the business, so this leaves a lot of low hanging fruit for Wal-Mart to pick — customers of chains that are neither upscale enough to be serving a different clientele nor inexpensive enough to compete effectively with Wal-Mart for that large group of price-motivated shoppers.

Yet, perhaps, Wal-Mart should not get too tranquil. Technology tends to spread, and if it works for Kroger, as it seems to be doing, surely others will, in time, acquire the same competence that Kroger has and become more facile with the use of loyalty card data.

Wal-Mart can hope that this takes awhile and folks at Delhaize may wonder if they can do it fast enough.

The other question mark raised by this study in Raleigh, NC, is what place does Target really have in the food business? It’s a bit more upscale than Wal-Mart, but it is not Fresh Market or Harris Teeter by any means. Even with heavy use of advertised specials, SuperTarget allows itself to be outpriced by a supermarket chain such as Kroger, for regular shoppers who have loyalty cards. Target seems sort of lost — neither upscale, nor economy. It was always a challenge for Target to translate its “Cheap-Chic” branding to food, but now, if you have a Kroger loyalty card, at least in Raleigh, Target is not cheap at all.

Wal-Mart remains formidable, legitimately owning the low price positioning in the market, though Kroger, with loyalty card customers, at least, is close enough to blunt defections. This time, though, we saw operational weakness at Wal-Mart, particularly a surprising number of out-of-stocks on the Wednesday afternoon we visited the store. Blackberries, honeydew melons, red leaf lettuce and bags of yellow onions and radishes all had places on the shelves, prices listed, but no produce.

Was it just this one store? Just this one day? Just one afternoon? Or is this a sign of more widespread operational difficulties? It doesn’t help consumers to offer the lowest prices if one is out of stock on the items.

Future iterations of the Produce Business Wal-Mart Pricing Report will reveal the degree to which out-of-stocks on produce are, in fact, a problem for Wal-Mart.

In the meantime, during a recession and time of high unemployment, Wal-Mart has the low price positioning that is winning consumers. Of course, tomorrow is another day and the Produce Business Wal-Mart Pricing Report will move on to another city.  pb




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