October, 2017

Walmart Pricing Study

In Denver, Sprouts Gives Wal-Mart A Run For The Money In Both Conventional And Organic Prices

With all the attention paid to Amazon’s acquisition of Whole Foods, one would think Whole Foods offers a sure-fire path for Amazon to capture a big share of the food business. Well, if it does offer such a path, it will only be because Amazon changes Whole Foods so much that it is unrecognizable. Such a fact screams out of this month’s study as the Produce Business Wal-Mart Pricing Report swings into Denver for its 30th iteration.

Denver has the education, the income and the health-oriented culture to make Whole Foods a mainstream choice. But fresh produce prices – this study was done just before Amazon completed its acquisition of Whole Foods – belie this aspiration, with a market basket price coming in at a whopping 38.19 percent over Wal-Mart’s prices.  On our separate organic-only price check, Whole Foods came in at 11.02 percent more than Wal-Mart.

 

 

Since Whole Foods is not particularly profita

ble, only dramatic changes in its cost structure and cost of goods could allow for pricing to drop to mainstream levels.

In contrast, Sprouts manages to maintain a health food aura with highly competitive pricing. Its Denver store destroyed not only Whole Foods but mainstream supermarkets King Soopers and Safeway, bringing its pricing close to a draw with Wal-Mart in both our overall study (.09 percent more than Wal-Mart) and our organic-only study (1.6 percent more than Wal-Mart).

 

 

Indeed, in the decades since Wal-Mart first rolled out its supercenter concept, perhaps the most shocking finding of the Denver study is both King Soopers and Safeway find it acceptable to be beaten by Wal-Mart on price by such substantial margins. King Soopers’ prices were 16.96 percent more than Wal-Mart, and Safeway’s prices were 22.47 percent more than Wal-Mart. 

King Soopers does seem to be making an effort to stay competitive with Wal-Mart on organic pricing, coming in 8.68 percent more than Wal-Mart, but Safeway seems to take a “devil may care” attitude with its organics pricing clocking in at 29.97 percent more than Wal-Mart. Even its organic numbers came in above Whole Foods! Surely just as Whole Foods came to be known by the “Whole Paycheck” moniker, if Safeway is content to be so high priced on organics, it won’t be long for its “O” brand organics to gain the “Overpriced” moniker.

With FMI studies recently pointing to price as a key driver for store choice, the growth of internet tools that make consumers more conscious of, and more able to, compare price, and with the growth of deep discount options such as dollar stores, Aldi, Lidl and more, there is little evidence Kroger (which owns King Soopers) or Safeway are really prepared for the new competitive environment.

 

 

When Amazon announced its intention to acquire Whole Foods, the stock market passed its verdict: the shares of virtually every publicly traded supermarket chain collapsed. Amazon is uniquely frightening because the national scope of technology allows for more rapid change.

If Google comes up with a better search engine, Facebook a better social network, or Apple a better phone, these advancements can be introduced nationally or even globally within a very short period. But even the best retail concept still has to be built one store at a time. Peter Lynch, famous for managing the Magellan Fund at Fidelity Investments, shrewdly noted that investing in a restaurant chain or a store was less risky than investing in new technology. When Apple came out with its iPhone, however, it wasn’t very long before the Blackberry collapsed. In contrast, Lynch pointed out that even if someone developed a better fried chicken recipe, it could take decades before that restaurant could spread its way across America.

 

 

This Denver study says while Wall Street may see the threat to America’s conventional supermarkets from Amazon, there is very strong competition just from other brick-and-mortar stores — and from both sides of the economic spectrum.

There are obviously consumers willing to pay top dollar at a place like Whole Foods. Maybe they believe the prices they pay enable Whole Foods to operate in line with their values or maybe the high price itself is the draw, increasing their status. Maybe the stores have a different class of customer, and these people don’t like mingling with the hoi-polloi. Who knows? But clearly there seems to be a place for a pricy option.

Sprouts represents the classic niche marketer and shows how an operator representing a specific psychographic — those who focus on health and wellness — can compete effectively against larger companies more focused on serving a broader consumer base.

And Wal-Mart, of course, speaks to the power of price.

King Soopers is still the leader in Denver in terms of market share, but Wal-Mart has gone from last place to taking 25 percent of the market in 20 years. But with Whole Foods and Wal-Mart grabbing different ends of the price/value equation, and Sprouts — as well as stores such as Trader Joe’s — grabbing unique market segments, it doesn’t take a market genius to imagine a ramp up of delivery services and an invasion of deep discounters serving to segment the market in such a way that the old standard grocery store becomes a niche player itself.

Stay tuned as the Produce Business Wal-Mart Pricing Study rolls out to a city near you to find out if other conventional supermarkets are finding better tools to adjust to new market realities.                           pb