August, 2014

Walmart Pricing Study

Wal-Mart 'Makes Hay' In The Heartland  

For Wal-Mart, the Des Moines, IA, market is a return to the good old days — with just a hint of problems to come. 

The Produce Business Wal-Mart Pricing Report has now been underway for more than a decade and includes 26 separate market studies. In the early years, as Wal-Mart rolled its supercenter concept out across America, most supermarkets were uncertain how to respond. Executives felt they couldn’t reduce prices, as their cost structure wouldn’t support such discounting. Some, such as Safeway, moved upscale, converting store after store in line with its Lifestyle concept. Other retailers simply froze, held their price points, and prayed for the best.

 

Wal-Mart beat all comers on price with supermarkets regularly showing up with price points 20 percent higher than Wal-Mart on fresh produce.

That differential changed as retailers that survived the onslaught of Wal-Mart have learned more effectively how to compete on price with the behemoth of Bentonville. In fact, since 2010, Wal-Mart has not won a single Produce Business Wal-Mart Pricing Study. It has been beaten by big chains, such as Kroger in Savannah, GA, and growing specialty chains, such as Sprouts in both Dallas, TX and Tulsa, OK. Growing ethnic chains also pose an emergent problem for Wal-Mart as in Lake Worth, FL, where both El Bodegon and Presidente Supermarkets (two chains with a Latino focus) beat the store.

 

In Des Moines, however, as the song goes, “Happy Days are Here Again” for Wal-Mart. Local favorite Dahl’s Foods — “Iowa’s Premier Grocery Store since 1951” — accrued lots of firsts to its name. It is believed Dahl’s had the first supermarket bakery between the Mississippi and The Rockies. Long before online orders and pick up back in 1963, there was a small brick building in the corner of the parking lot, known as the “Dahl House,” which was connected to the store by an underground tunnel and pre-ordered groceries were available for pick up. The world’s first grocery purchase using a debit card is believed to have been made at Dahl’s in 1981.

Lately, though, Dahl’s is retrenching by closing units in Ankeny and Ames, IA, leaving the chain with 11 stores. One reason may be the difficulty addressing Wal-Mart’s pricing challenge, for in The Produce Business Wal-Mart Pricing Study, Dahl’s market basket of produce came in a full 24.84 percent more than Wal-Mart.

Yet Dahl’s is an absolute bargain compared with the locally headquartered, but much larger, Hy-Vee, “Where there’s a helpful smile in every aisle.” Hy-Vee is expanding, pushing into the Minneapolis/St. Paul area, having just disclosed plans for a 90,000 square-foot store in Lakeville, MN — its third store in that market. Hy-Vee is the market leader in Iowa. And in our market basket study, it is able to price its produce a whopping 40.48 percent more than Wal-Mart. One wonders if it will be able to sustain such pricing in markets where it is less dominant than Iowa.

Target Supercenters have struggled, as Target has never quite figured out how to translate to the food sector its “Tar-zhay” high design concept at a discount. And in this market basket, its price offer, though a discount to Hy-Vee and on par with Dahl’s, still makes Wal-Mart look like quite a bargain. Target’s price point on the produce market basket was 25.11 percent higher than Wal-Mart.

And Then There Is Trader Joe’s

There are doubtless many reasons why the market sustained these pricing levels, but our experience is that once the spread between Wal-Mart and other grocers gets beyond 10 percent, it means Wal-Mart has room to grow. Today, however, it probably means that other discount retailers, such as ALDI, would find the market rich pickings.

In fact, we did a little side study, which implies that the price point of the market is likely to tumble. We did a produce market basket of Trader Joe’s in Des Moines as well.

We didn’t include it in our main price comparison, because the items carried were too distinct from what other supermarkets sell, so when we tried to find items common to all five of the stores we studied — Wal-Mart, Dahl’s, Hy-Vee, Target Supercenter and Trader Joe’s — the market basket became too small.

But in a one-on-one competition between Wal-Mart and Trader Joe’s, we were able to compare more than 50 items, and Trader Joe’s is much more competitive with Wal-Mart on these items than any of the other stores. It came in with a price point just 3.98 percent above Wal-Mart. In our experience, that is a price differential that can easily be justified to consumers by touting advantages such as location convenience, shopping experience, product quality, exclusive offerings, pleasant environment, easy parking, etc.

This seems to be the future. Although some substantial chains, notably Kroger, manage to compete with Wal-Mart on price, it is traditional supermarkets that give up market share to not only Wal-Mart but also ALDI, Trader Joe’s, Sprouts, Latino and Asian retailers, Internet shopping services, Dollar Stores that add fresh to their lineup, as well as others.

It is common to value retailers by multiples of EBITDA (earnings before interest, taxes and depreciation amortization) or other such metrics, but these historical measures may be deceiving in markets in flux. Perhaps retailers who keep earnings high are just creating an umbrella that will attract new competitors. Maybe these retailers would be better off pricing in such a way that profit opportunities in the market are not perceived as lucrative, thus making potential competitors less interested. It may make the profit position less right now, but it may also make markets here more sustainable.

How Wal-Mart and traditional grocers respond to the mushrooming of competitive concepts will become more evident through future editions of the Produce Business Wal-Mart Pricing Report. pb