August, 2004

Walmart Pricing Study

Wal-Mart Pricing Report Round VI

In Round VI of our continuing series, Produce Business compares pricing at Wal-Mart Supercenters with various chains in Phoenix, AZ.

How to battle Wal-Mart? This is the question that supermarket operators across the country have been wrestling with as Wal-Mart’s Supercenter concept rolls out in region after region and finds success everywhere.

As we have traveled across the country to conduct this exclusive and continuing Produce Business study of the way supermarkets are pricing vis a vis Wal-Mart, we have found competitive markets, such as Salt Lake City, where supermarket chains had cut prices to come close to striking distance with Wal-Mart. Mostly, though, we found markets where Wal-Mart’s competitors had a kind of “price as usual and pray a lot” approach. [See “How they Stack Up” table.] In other words, in markets ranging from Connecticut to Salt Lake City to South Florida to Dallas to Portland, OR, most chains had no identifiable strategy for being price-competitive with Wal-Mart.




Walmart Supercenter Price Comparison




Walmart Supercenter Price Comparison - Phoenix




Walmart Supercenter Price Comparison - Phoenix


Outside Insights

It is premature to judge all this. Phoenix is only one market, and we don’t even know if the supermarket operations are adequately profitable.

Yet, by moving the industry to variable pricing, there is the possibility of a trend starting that should be watched closely. When American Airlines and the other big carriers, drove little People Express out of business, it was not because they became the low cost operators — People Express always operated more cheaply than the major carriers.

What Robert Crandall, then CEO of American Airlines, did was develop variable pricing so that major carriers could sell high-priced tickets to business travelers to cover costs and then sell the remainder of the seats on the plane very cheaply to leisure travelers. The great insight was that the cost of selling a seat that was going to remain empty was almost nothing.

Is it possible that supermarkets might find a way to sell high-margin groceries to non-price sensitive buyers and then work close with those who value low prices? If so it could be a revolution in marketing and change the way supermarkets battle with Wal-Mart. It also would bring to the food industry a pricing model that is becoming ubiquitous in the modern economy.

Pick out a credit card from your wallet and call and ask the credit card company for a favor. Ask them to lower your interest rate or drop the annual fee. Then ask a friend with the same credit card company to do the same.

Don’t be surprised if the company agrees to your friend’s request but denies your own.

The reason? It is not that the company has a set policy here. Instead, when you make a request, the credit card company can look up your complete history and see how profitable you are for the company.

Do you pay your balance in full every month? If so the company won’t find you very profitable and will demand that annual fee.

If you carry a big balance at 24.99%, you are a very profitable account and they may waive that annual fee without a problem.

Much effort has been put into figuring out how to become the low cost provider. But few supermarkets operate at 100% capacity. If through sophisticated pricing strategies supermarkets can offer competitive prices to those who value them and make higher margins on consumers who value other things, then it may not be necessary for supermarkets to be able to price competitively with Wal-Mart on their standard walk-in pricing.

Loyalty cards may be a kind of awkward first step to making this work. Let the record show that the first sighting of this new paradigm was in Phoenix, in the Produce Business Wal-Mart Pricing Report (Round VI). pb