October, 2003

Walmart Pricing Study

A Pricing Surprise In Dallas

We began this series of price comparisons about as far from Wal-Mart’s home base in Arkansas as we could get, going to Connecticut where we found out that Wal-Mart was simply obliterating the competition when it came to pricing, with results ranging from Super Stop & Shop being 23 percent more expensive than Wal-Mart, to Big Y, which came out 36 percent more expensive than Wal-Mart.

As our study moved to Salt Lake City, we found Wal-Mart getting a bit of a run for its money as Harmon’s was a mere 2 percent over Wal-Mart, Smith’s just 6 percent, and Albertson’s being less aggressive at 12 percent over Wal-Mart.

That close price competition turned out to be a peculiarity of Salt Lake when we moved to South Florida and found that Publix came in a bit more than 30 percent over Wal-Mart, and Winn-Dixie was pricing its produce at an astonishing rate of over 51 percent higher than Wal-Mart. Casting doubts on whether it was the supercenter format that led to these price differences, even SuperTarget came in almost 22 percent higher than Wal-Mart.

In this issue, we roll into the Dallas metroplex looking for a new low-price leader. Dallas is a crucial market with a unique set of competitors. So we expanded our study to encompass six different retailers.

We included a strong regional competitor  — Brookshire’s — plus representatives of the big three supermarket chains; an Albertson’s, a Kroger and a Tom Thumb, owned by Safeway. In addition to the Wal-Mart Supercenter, we also studied pricing, for the first time, at a Wal-Mart Neighborhood Market.

And we have big news to report. No competitor in Connecticut, Salt Lake City or South Florida under-priced the Wal-Mart Supercenter. But, finally, here in Dallas, we have found a competitor not prepared to look overpriced compared to the mighty Wal-Mart Supercenter concept, a competitor who is not prepared to cede the great middle class of price-conscious buyers to the Wal-Mart Supercenter.

We finally have a competitor who beat out the prices at a Wal-Mart Supercenter.

And the winner is... Wal-Mart’s Neighborhood Market concept.

It is hard to overstate the importance of this finding. It is not that the Wal-Mart Neighborhood Market concept underpriced the Wal-Mart Supercenter by 1.2 percent that is significant. Most items were identically priced at the two concepts, and the variation may be accounted for by in-store specials, manager’s markdowns etc., on the day of our visit. But the fact that the Wal-Mart Neighborhood Market concept is even roughly equivalent to the Wal-Mart Supercenter is very significant.

After all, competitors have claimed that the supercenter concept is inherently able to offer lower prices. The explanation has been that the very offer of food was justified as an attempt to increase frequency of shopping by consumers. As such, low margins in food in general, and perishables in particular, were acceptable as they attracted consumers who then made high-margin purchases in general merchandise.

In South Florida, when SuperTarget failed to approach the Wal-Mart Supercenter in terms of pricing, we began to suspect that corporate philosophy, more than format efficiencies, was the driver behind pricing.

The Wal-Mart Neighborhood Market concept is just a supermarket. It lacks the extensive general merchandise selection of a Wal-Mart Supercenter. Therefore, it cannot compensate for inadequate food margins with generous general merchandise margins.

If Wal-Mart Neighborhood Markets can earn an adequate return on capital while selling at Supercenter prices, it tells us two things: 1) Supercenters must be phenomenally profitable as they earn good profits on food and on general merchandise. There is no loss leader here. 2) Wal-Mart’s ability to price lower than everyone else must be a function of some greater efficiency.

But what could be the cause of these efficiencies? Three possibilities:

Wal-Mart could be buying cheaper. Could it be that all these demands for slotting fees and other monies cause supermarket retailers to overpay? Perhaps by insisting on up-front monies and other special payments, retailers reduce the available procurement options sufficiently to raise their average purchase price?

Wal-Mart could be saving money on logistics. They are famous for utilization of technology and have more modern distribution centers, stores, etc., than anyone else. Often the buyer who is fighting to the death for a quarter off the box may be overpaying on logistics because the source of supply is more variable. With its contracting methods and steady supply relationships, Wal-Mart may find the real savings in the logistics, not the produce.

Perhaps, though, low prices are the cause of the efficiencies. In other words, it is believed that the typical Wal-Mart Neighborhood Market is selling around $500,000 a week, whereas a typical supermarket sells around $360,000 a week (See our cover story on page 20 for more details.).

If rent, electric, etc., stay roughly the same, the fact that Wal-Mart has higher sales will mean that expenses are lower as a percentage of sales. This means Wal-Mart can maintain its dollar profitability by lowering prices, which if it leads to higher sales, will mean costs will decline even further as a percentage of sales, which means Wal-Mart could again lower its prices and so on — a virtuous cycle.

The implication here is that if Kroger, Albertson’s or Safeway or anyone else wants to compete with Wal-Mart, the thing to do might be to pre-emptively lower prices. Right now competitors are focusing on lowering costs to gain efficiencies so that, then, they can lower prices. But this may be a chimera.

The pennies saved on shrewd buying are likely to be overwhelmed by the efficiencies that come from selling more.

Certainly competitors looking to compete head on for middle class shoppers need some strategy.

In this price comparison, we gave supermarkets every advantage. Dallas happens to be a frequent-shopper-card market, and all of the chains other than the Wal-Mart concepts offer such cards. Frequently stores offer one price to the general public and another to holders of these frequent shopper cards. To give supermarkets every advantage, the comparisons we show are Wal-Mart’s prices — which are available to everyone who walks in the door — versus the other stores’ prices available only to holders of their frequent shopper cards.

Yet even given this enormous advantage, Wal-Mart cleans up. Regional competitor Brookshire’s, whose slogan is “Great People — Great Prices”, at least is in range at just a little under 7 percent above Wal-Mart. Kroger comes in next at a bit over 19 percent over Wal-Mart. Albertson’s is more than 22 percent over Wal-Mart, and Safeway’s Tom Thumb is more than 26 percent over Wal-Mart.

In looking over the specific pricing decisions, it seems like only Brookshire’s realizes there is a battle going on for the middle class shopper. All the stores, for example, sell Del Monte jarred fruit, which both Wal-Mart concepts price at $2.98. Brookshire’s, seeing an opportunity to cast doubt in its customers’ minds as to the value proposition Wal-Mart offers, underprices Wal-Mart at only $2.50 a jar. But Albertson’s, at $3.49, is more than 17 percent over Wal-Mart. And Kroger and Tom Thumb, both at $3.99, or almost 34 percent over Wal-Mart, are perfectly content to have consumers walk through their stores every day, see a perfect parity product where there can be no doubt that the quality is identical wherever you buy it, and let consumers see that they simply won’t compete with Wal-Mart on price.

For how long, with how many consumers, in how many markets, do the executives at these chains think they can get away with this, and still be perceived as merchants to the American middle class?         pb




Walmart Supercenter Price Comparison




Walmart Supercenter Price Comparison - Dallas