August, 2014

Fruits of Thought

Will Wal-Mart's Price First Brand Lead It To Lean First On Produce Shippers?

Last year, Wal-Mart began a test of a new private label “brand” called Price First. The brand was identified by Wal-Mart executives as an “opening price-point” brand, meaning its appeal was to those customers wholly or primarily focused on price.

Consumer perceptions of value are tricky. A warehouse club such as Sam’s Club, Costco or BJ’s might actually provide the best “value” if defined as the lowest cost per unit of an item. For some consumers, however, the issue is quantity. That low price per ounce may be pointless if a single person has to buy a 4-pound container of 18 kiwifruits that have to be eaten in a few days or a jar of sliced jalapenos with more peppers than one will use in a lifetime. Sometimes the issue is storage space. It is all fine to get a cheap deal on paper goods, but if one doesn’t have space to store 30 rolls of paper towels, the bargain is moot.

For many of Wal-Mart’s customers, living paycheck to paycheck or food-stamp payment to food-stamp payment, the value proposition focuses heavily on out-of-pocket expenditure. This group of shoppers may have only 30 bucks to last the week, and they need to feed their families.

One reason Wal-Mart executives are carefully monitoring the efforts by both Dollar Tree and Dollar General to buy Family Dollar is that it is here where these concepts just kill Wal-Mart. At Dollar Tree, for example, everything is actually priced at one dollar. The package may be smaller than what Wal-Mart sells, the price-per-ounce may be higher than at Wal-Mart, but certain consumers really prize that they can get an assortment of items they need — each at a low price point. In addition, the single price point makes shopping easy; people shop with 20 bucks, and they know they can walk out with 20 items.

It is beginning to fade in one’s memory when Wal-Mart last had favorable comparable store sales in the U.S. To compensate, it is investing heavily in its Internet business, and global e-commerce sales for Wal-Mart are now more than $10 billion a year, and this segment is growing faster than the general Internet commerce business.

Another effort Wal-Mart is investing in is its small store initiative. Back in February, Bill Simon, Wal-Mart’s president and chief executive, announced the company intended to open almost 300 Neighborhood Market and Wal-Mart Express stores in the coming year. He further explained that, unlike the big supercenters, these stores are delivering favorable comparable store sales. He mentioned that comparable store sales at Neighborhood Markets, excluding fuel, grew 5 percent.

Wal-Mart, though, is such a behemoth that even fast growth on the Internet, and with new store sizes, can’t really compensate if supercenters don’t perform well. So finding a way of dealing with Dollar Stores, Aldi and other discount operations is crucial.

The new private label line has a retro look, harkening back to the age of generics and to a time when private label suggested cheaper and lower quality. This look has not necessarily pleased sophisticates. Christopher Durham, a vice president of retail brands at Charlotte, NC-based Theory House, a branding and marketing agency, commented that “the 1970s flashback design is at best disappointing, but at its worst could set the industry back 20 years.”

We would suggest Wal-Mart knows exactly what it is doing, and the retro look suggests “cheap” and that is the emotional response it hopes to induce when people see the brand. In test markets Wal-Mart ran many promotions declaring Price First to be its “lowest price brand for all your grocery staples.”

The need for this imagery is urgent. An annual study done by Louisville, CO-based MarketForce recognized Aldi as America’s low-cost price leader in groceries for four years in a row, and London-based Kantar Retail found Dollar General beat Wal-Mart on a market basket of opening price points. The basket was 18 percent more expensive at Wal-Mart. For a company that built its business on a slogan: “Always low prices. Always,” these results are a serious problem.

Wal-Mart has heavily focused on its price-match promise — even developing an App to make it easier — as a way to deal with this problem. Yet this may be counter-productive, as raising consciousness of the promise raises awareness that unless one does a lot of work, one will be paying more than necessary at Wal-Mart.

What all this means for perishables, and especially produce, is unclear. Wal-Mart has continuously expanded its trademark application for Price First to incorporate many categories, including meat, fish, poultry and game. It requested the trademark cover dried and cooked fruits and vegetables — but its plans for Fresh are unclear.

What is clear is the largest buyer of fresh produce on earth is under pressure, struggling to identify its path to growth and profitability in the future. If relentless pressure to reduce prices cuts margins on all the “grocery staples,” it is highly likely that Wal-Mart will try to boost margins elsewhere. That means more pressure on produce suppliers. pb