October, 2013

Walmart Pricing Study

Sprouts Farmers Market Bests Wal-Mart Produce Pricing In Tulsa

Experts in retail point out that Wal-Mart’s positioning is now problematic. The problem? The growth of deep discount concepts such as Aldi and Save-A-Lot seems to pose the danger of positioning Wal-Mart not as a low-price leader but, instead, as somewhere in the middle. Trapped between those offering better assortment and more services and those offering better prices, the middle is usually a rough place to be.

 


 

Yet despite this looming issue, the Produce Business Wal-Mart Pricing Report has been remarkably consistent: When it comes to competing with conventional supermarkets, Wal-Mart rarely gets beat. In fact, in 25 separate studies spanning more than a decade, only once did a large scale mainstream supermarket concept beat the prices at the Wal-Mart Supercenter — a singular Kroger in Savannah, GA.

Now as the Produce Business Wal-Mart Pricing Report rolls into Tulsa, OK, we find that Wal-Mart’s position remains strong, but we also see that Wal-Mart’s position is now under siege, everywhere.

Wal-Mart did well in Tulsa. It beat supercenter rival Target, as Super Target’s prices turned out to be 12.9 percent over Wal-Mart’s. As for Winn-Dixie, it came out with prices 17.4 percent over Wal-Mart. The Warehouse Market wasn’t selling wholesale, as its prices ran out as 8.8 percent over Wal-Mart. Reasor’s was just blown out of the water, with prices a full 43.6 percent over Wal-Mart.

Yet Wal-Mart did not win in Tulsa. The low price leader was not Wal-Mart but Sprouts Farmers Market, edging Wal-Mart out of first place with prices 1.9 percent under Wal-Mart.
 

 

Now there are always complications. Reasor’s, for example, offers a frequent shopper program that earns customers discounts on gasoline that others don’t offer. This particular Sprouts Market has been open less than six months, so some of its pricing may be influenced by its “just-opened” status.

Still, there is this disturbing fact for the executives in Bentonville: for the first eight years of the Produce Business Wal-Mart Pricing Study, the Wal-Mart Supercenter won 17 out of 20 editions of the study — and another edition was won by a Wal-Mart Neighborhood Market, which was running some specials. So Wal-Mart’s low-priced leadership won in 18 out of 20 editions of the Produce Business Wal-Mart Pricing Report.

Yet in the last five editions of the study, in New Jersey; Dallas, TX; Savannah, GA; Lake Worth, FL, and Tulsa, OK, Wal-Mart has never once won the low-priced banner.

Sprouts, the Tulsa champion, also beat Wal-Mart in Dallas, making it two for two in this David and Goliath battle.

Now, of course, there is much we don’t know. The Produce Business Wal-Mart Pricing Report only covers fresh produce, so it is possible that Wal-Mart’s compromised position on produce pricing is a result of strategy shifts among the players; maybe Wal-Mart is more focused on quality — thus all its TV commercials trying to show how great its produce is. Or maybe other retailers see produce as a rare place in the store where they can be price-competitive and focus on that.

There may be some truth to the latter. It is difficult for a small player to out-buy Wal-Mart on consumer packaged goods. Heinz Tomato Ketchup and Hellmann’s Real Mayonnaise, Pampers diapers and Campbell’s soup are manufactured products, and smaller players are going to pay the same or more than what Wal-Mart pays.

In procuring produce, though, size is not necessarily an advantage. Retailers in a position to buy that extra load that a shipper has on the floor, or flexible enough to help a wholesaler out when he is hung, often can buy product for less than the price a behemoth like Wal-Mart has to pay.

Specifications and merchandising flexibility play a role as well. If a retailer is able to find tasty melons or peaches, but ones that are a different size or variety than it usually specifies and it is flexible enough to accept such product, it can offer consumers a great value, increase its own margins, and help out a shipper or wholesaler — all while creaming Wal-Mart on price.

Food safety and traceability issues play into the picture as well. Every step Wal-Mart might take, say requiring Global Food Safety Initiative (GFSI) participation by its vendors or demanding only Produce Traceability Initiative  (PTI) compliant product, serves to constrain its supply chain. This offers a double whammy: Firstly, it means when looking at the supply/demand situation for its own produce purchases, Wal-Mart, by constraining its supply chain de facto, reduces the available supply from which it can purchase. This move raises costs.

Paradoxically, however, Wal-Mart’s decision to not purchase produce that doesn’t comply with its standards means that Wal-Mart, the largest buyer in the world, is no longer increasing demand for the non-compliant product. This creates a secondary produce market, in which Wal-Mart is not a factor. Its absence has the effect of reducing demand for the product in this secondary market. Less demand means lower prices, so Wal-Mart’s actions not only raise its costs, but actually lower the costs that smaller competitors, without these standards, wind up paying for produce.

One saw this dynamic strongly at work in last year’s visit of the Produce Business Wal-Mart Pricing Report to Lake Worth, FL, which found that two Latino oriented retailers, El Bodegon and Presidente Supermarkets, were able to cream Wal-Mart on produce pricing.

Of course, it is one thing for small ethnic retailers to beat Wal-Mart. The highly specialized offers at these stores — especially in grocery — tend to limit their appeal. Produce is particularly troublesome to larger retailers because anyone can buy the apples, pears, onions or potatoes at these ethnic markets, but the grocery brands and flavor profiles tend to be specialized and make the stores not viable shopping options for large segments of the population.

Our Tulsa champion is different though, Sprouts has almost 150 stores in eight states. The fact that it won both our Dallas and Tulsa editions indicates it is not a question of our auditors hitting a particular special, but that the concept itself is low priced.

Sprouts has a complicated and intriguing history (see “Sprouts History” page 70) but traces its roots back to a fruit stand. In an age when farmers markets are booming, Sprouts is a supermarket “inspired” by farmers markets. In an age in which all the excitement is built around small format stores, Sprout’s operates stores that average 28,000 square feet.

As Wal-Mart was rolling out across the country, consultants used to preach that retailers should try to be the anti-Wal-Mart. They meant that retailers should move upscale, high service, lots of organic, lots of perishables, be great at everything Wal-Mart was not great at.

Sprouts has put its own spin on being the anti-Wal-Mart, not so much upscale and not so much high-service. For example, Sprouts likes to pre-slice deli meat. Sprouts is heavy into organic and natural, with strong emphasis on produce, and the stores are the anti-Wal-Mart in physical facility as well as corporate culture.

Sprouts is interesting and may grow into a position to give Whole Foods Market a run for its money. But the basic fact that Sprouts can beat Wal-Mart in pricing in the Produce Business Wal-Mart Pricing Report in both Dallas and Tulsa, and the fact that someone has beaten Wal-Mart in the last five match-ups, all indicate that Wal-Mart is in need of a new strategy.

 

What Does Wal-Mart Want To Be?

One thinks of the enormous cost of the physical planet that Wal-Mart occupies in thousands upon thousands of Wal-Mart Supercenters, and one thinks of the booming business of Internet shopping. Retailers in general operate with high fixed costs, and Wal-Mart has a huge investment in real estate. It sells a lot of non-food items, which means it is heavily exposed to the Amazon.com phenomenon than a typical supermarket. What percentage of retailing has to shift online for it to pose real dilemmas for Wal-Mart’s profitability? The answer: not very much.

Of course, before we worry too much about Wal-Mart, we can worry a bit about other players in the market. New management has revitalized a chain like Winn-Dixie, but look at the marketing positioning in Tulsa. If you are 17.4 percent over Wal-Mart, you are going to have trouble attracting the paycheck-to-paycheck crowd. But a store such as Sprouts, with its focus on natural and organic and its fun farmers market atmosphere, is bound to attract a better educated and foodie clientele.

Retail has become so segmented that each retailer desperately struggles to keep a clear position in the minds of consumers. One looks at the failure of the U.K.’s Tesco’s Fresh & Easy concept in the U.S., and in a litany of problems that one can identify, the key failure was an inability to ever seize a clear positioning in the consumers’ minds. Were they a convenience store? A grocery store? An organic/natural/healthy store? Nobody knew, and that fact played a significant role in its demise.

            Thus the real dilemma posed by the 25th iteration of the Produce Business Wal-Mart Pricing Report: If Wal-Mart is not the low-price leader in Tulsa, or Lake Worth, or Savannah, or Dallas, or New Jersey — if it is not the low price leader in any market any more — well what does mean for Wal-Mart? What is Wal-Mart? Recreating an image in the minds of consumers is fraught with peril. How well Wal-Mart navigates this, and what Wal-Mart decides it wants to be . . . that will soon be evident in future editions of the Produce Business Wal-Mart Pricing Report.     Pb

 

Sprouts History Excerpts taken from Sprouts Farmers Market’s website.

 

For nearly 70 years, the Boney Family has been synonymous with fresh produce, great prices and old-fashioned customer service. And today those family values are alive and well at Sprouts Farmers Market, the latest and most successful iteration of a business that began with very humble roots.

 

A Legacy Begins

Henry Boney was a strapping young man from the West Texas town of Kress, where he grew up poor. Like many people in the Dust Bowl era, he moved to California seeking better fortune. He arrived there in 1934 and did what he could to make ends meet, including driving an ice cream truck. Through that job, he met Jessie Grame and married her in 1943, at the age of 29.

The newlyweds then borrowed $600 from her parents to buy a pickup truck, and used that to haul some peaches down from the orchards of Julian. They opened a fruit stand at the corner of 71st and El Cajon Boulevard near La Mesa, and a tradition was born.

Henry was a food retailer, a man who, because of his earliest roots, cared deeply about making fresh foods affordable to everyone. Over the years, Henry Boney and his family would start and sell many retail businesses, including Speedee Mart (the original convenience stores, eventually sold to Southland Corporation, parent company of 7-Eleven), Boney's, Bradshaw's and Superama.

The second generation of Boney's stores was opened in 1969 by Henry's sons, Stan, Steve, and later, Scott. The name was changed to Henry's Marketplace in 1997, in honor of the family patriarch...and that's where things got really complicated.

The Boney family ran Henry's until 1999, when the stores were sold to Wild Oats Markets, Inc. Stan, his son Shon, and family friends Kevin Easler and Scott Wing all worked for Wild Oats for a time, but eventually left and, to avoid the terms of a non-compete agreement that prohibited them from running stores in California, moved to Arizona to found Sprouts Farmers Market. The first store opened in Chandler, AZ, in 2002.

The Road To Reunion

In 2007, Whole Foods Market, Inc. purchased Wild Oats and sold the Henry's stores to Smart & Final Holdings Corp., which in turn was purchased by Apollo Management, one of the world's largest private equity firms.

In 2011, Apollo bought a controlling interest in the 63-store Sprouts, and Smart & Final sold Henry's to Sprouts — effectively reuniting two companies that had been founded by the same family, years apart. At the time, Henry's was operating 43 total store locations, comprised of 34 stores in California and nine stores in Texas operating under the Sun Harvest banner.

 

Our Garden Continues To Grow

In 2012, Sunflower Farmers Market joined Sprouts' growing family of stores, bringing two leading grocers, together under the Sprouts Farmers Market banner. The addition of Sunflower's 35 stores expands Sprouts' geographic footprint in Nevada, Utah, New Mexico and Oklahoma and further extends its presence in California, Arizona, Colorado and Texas.

Even though Sprouts has become one of the fastest growing retailers in the United States, and an important player in the natural foods industry, we still hang our hat on that old-time, genuine feel of a little neighborhood fruit stand that started it all.                   pb