May, 2009

Walmart Pricing Study

WalMart Pricing Report Round XIX

Some believe that the future of American retailing can be glimpsed in Phoenix, AZ. Between its large senior citizen population and large Hispanic population, one can argue that this is what retailing in America will look like in not all that many years.

So we traveled down to Phoenix for the 19th iteration of our Wal-Mart Pricing Study, seeking not just our usual quest — the low price champion in one city — but also seeking enlightenment as to what the future might bring for retailing all across the country.

One thing is certain: Phoenix is, in fact, a place where a battle of the Titans is playing out. It is the only market in America where one has a representation of three separate Wal-Mart concepts — the Wal-Mart Supercenter, the Wal-Mart Neighborhood Market and the new, small-store Wal-Mart concept known as Marketside.

In addition, Safeway has an energetic division and Kroger is well represented in the marketplace with its Fry’s division. Tesco, the behemoth from across the sea, also used Phoenix as a launching grounds for its Fresh & Easy small store concept.

In addition to these national chain concepts, we included in our comparison a strong independent: Basha’s Supermarkets.

What can we surmise from the outcome of our produce pricing competition among this array of retailers in Phoenix?

Many things to be sure, but as a first order, this: If Phoenix is the future of American retailing, and if price for a customer walking in off the street is the key variable, then the future belongs to Wal-Mart.

Not only was the Wal-Mart Supercenter the low price leader in Phoenix, but the Wal-Mart Neighborhood Market concept came in number two, and Wal-Mart’s Marketside concept came in third! A trifecta! It hardly seems possible.

It is true, however. Yet in being true, it also reveals some dynamics that illustrate the way competition is playing out, including strategic changes in the way retailers are coming to market.

Wal-Mart itself has made a major strategic shift. In past iterations of our Wal-Mart Pricing Study when we have done cities that feature a Wal-Mart Supercenter and a Wal-Mart Neighborhood Market, the prices in both concepts have been identical, allowing for the occasional error or manager’s discretion at marketing something down.

Although Wal-Mart’s Neighborhood Market is still appealingly priced, coming in at only 6.59 percent over pricing at the Wal-Mart Supercenter, it is clearly operating now on its own pricing agenda. This is a significant change.

It may lead to a faster expansion of this concept, which has grown slowly. Wal-Mart executives have been hesitant to pour resources into the Neighborhood Market concept because, though always profitable, it has traditionally realized a return-on-capital lower than the Wal-Mart Supercenter. With higher prices, it is possible that profit margins will increase, return-on-capital will improve and we will see thousands of Wal-Mart Neighborhood markets roll out all across the country.

Of course, there are risks for Wal-Mart in allowing higher price points in the Neighborhood Market stores. For one, it may turn off consumers, both because the higher prices mean less value and because as the media gets a hold of this information that Wal-Mart Neighborhood Markets sell the same thing as Wal-Mart Supercenters at higher prices, editors will advise budget-strapped consumers to avoid the Neighborhood Markets and wait until they go to a Supercenter.

If they are going to be priced differentially, perhaps the Neighborhood Markets should drop the Wal-Mart name all together. After all, there is a danger in associating the Wal-Mart name with higher prices, even if they are still cheap in the context of the market.

It is actually unclear the concern of Wal-Mart executives with the lower returns realized by the Neighborhood Market concept was ever the right way to approach the issue. An alternative view was that to dominate a market, Wal-Mart needed both Supercenters and, located between the widely spaced supercenters, the Neighborhood Market stores.

Although the blended return-on-investment may appear at first glance to be lower than a pure Supercenter ROI, sometimes a few extra points of marketshare in a city or region is enough to persuade a competitor not to enter the market, or to persuade a poorly performing competitor to abandon a market. That lessening of competition may allow a blended Supercenter/Neighborhood Market approach to pay off well beyond a straight Supercenter approach.

Wal-Mart’s Marketside concept does not use the Wal-Mart name. Its price positioning in the market is tricky. We were told that on grocery, it would stick to pricing used at its larger brethren in the Wal-Mart family, though we have not tested this claim. On fresh produce, however, it prices significantly higher than a Wal-Mart Supercenter — 22.6 percent higher in fact. Yet this still is less expensive than Fresh & Easy, Basha’s, Kroger’s Fry’s and Safeway — if we are speaking about the price a walk-in customer gets in the stores.

Phoenix is a market, though, where loyalty cards do battle and Basha’s, Fry’s and Safeway all have such programs, and they have significant effects on price competitiveness.

The mighty Kroger keeps its price levels fairly lofty, coming in fourth in the market, behind all three Wal-Mart concepts, with a price point of 27.2 percent over the Wal-Mart Supercenter. If, however, one is a member of its loyalty card program, it is dramatically more competitive, coming in at only 12.65 percent over Wal-Mart on items affected.

Less dramatic, but in a similar fashion, Basha’s came in sixth in the market at fully 31.68 percent over the Wal-Mart Supercenter. For loyalty card holders, the difference was a more digestible 17.94 percent over the Wal-Mart Supercenter.

Among the big American chains, Safeway pulled up the rear in Phoenix, allowing itself to be 36.54 percent over Wal-Mart’s Supercenter pricing, and even after its loyalty card discounts, it came in at 24.04 percent over the Wal-Mart Supercenter in pricing.

Clearly, the big battle is being waged in Phoenix to win over loyal shoppers, which leaves the field free to the three Wal-Mart concepts to pick up consumers who don’t want to bother with the hassle of loyalty cards.

Fresh & Easy

Battle Phoenix also provides some insight as to why Tesco’s Fresh & Easy has had trouble gaining traction: Put simply, it is too expensive.

Not offering a loyalty card, Fresh & Easy came in fifth in the overall market for walk-in business with a price level 29.93 percent over the Wal-Mart Supercenter, and the small store format was beaten by its small store rival, Wal-Mart’s Marketside concept, by 15.02 percent.

Perhaps most important, after loyalty cards are considered, Fresh & Easy came in dead last of the seven retailers we studied in Phoenix.

Now Fresh & Easy has spent a lot of money giving out store coupons, although it will not accept manufacturers’ coupons. These store coupons would serve to reduce consumer outlays — if the consumer has a coupon and cares enough to save it, bring it to the store and use it.

We wonder if Fresh & Easy executives shouldn’t forget about the couponing altogether and offer prices that are competitive for the market.

One other interesting note is how it comes to be that the Wal-Mart Supercenter was so dominant in pricing. Several items were being purchased locally by store managers utilizing their prerogatives to take advantage of local market surpluses to offer value to consumers. Specials on cucumbers, avocados and other items emphasize the Wal-Mart value proposition.

So following one visit to Phoenix, here’s what we’ve learned about the future of retailing:

1) Flexible chains that can take advantage of local opportunities can offer strong value.

2) Wal-Mart has abandoned uniform pricing for its different divisions.

3) Many chains choose to save their fire to offer bargains to their loyalty card customers and so allow the walk-in to subsidize that effort.

4) Fresh & Easy may be in trouble because without a store coupon, it offers a terrible value proposition.

5) Wal-Mart remains an amazing juggernaut, barely being challenged by other mainstream retailers for the low-price-leader market positioning.

Of course, many questions remain. How are hard discounters, such as Aldi, affecting consumer value perceptions? Do high-end retailers, such as Whole Foods or Basha’s upscale sister, AJ’s Fine Foods, have to worry about cheap competitors? Will Wal-Mart’s decision to sell at two different price points both under the name Wal-Mart have long term implications? How important is assortment, location, cleanliness, etc., as opposed to price?

Still, for a few days in Phoenix, we learned a lot on what is percolating in the city many call the testing ground of future American retailing.  pb




Walmart Supercenter Price Comparison




Walmart Supercenter Price Comparison - Phoenix




Walmart Supercenter Price Comparison - Loyalty