November, 2005

Walmart Pricing Study

Wal-Mart Pricing Study Round XI

Most of Wal-Mart's competitors seem to have agreed to get out of the supercenter's way...but other supercenters may be willing to compete.

As the Produce Business Wal-Mart Pricing Report rolls into Atlanta, home of this year's PMA convention, we can say that the findings are settling into a pattern. Although a few retailers address Wal-Mart's pricing in their promotional efforts, such as ad pricing, and a few chains view themselves in fierce competition on prices, most chains and independents don't try so much to compete with Wal-Mart as to ignore it.

If they have stores in neighborhoods where the consumers heavily value Wal-Mart's price and general merchandise-driven format and those stores don't have enough business to sustain them, they close those stores. The stores that stay open are the ones in neighborhoods that attract a clientele willing to pay a higher price than Wal-Mart charges.

Winn-Dixie's bankruptcy and Albertson's decision to put itself up for sale are both illustrations of the inherent implications of this strategy. Price is a significant issue to large portions of the American consumer base. Some competitors offer cheap prices but do it in ways where one doubts it is sustainable or a viable business strategy, so one can legitimately decide to wait it out while the discounter goes broke.

But Wal-Mart is a profitable, publicly held company, and the sustainability of its operations is not in doubt. So a decision not to compete on price is a decision to cede that portion of the market that is highly price sensitive. We don't know what size of a national market Wal-Mart might achieve if it basically goes uncontested for the position of low-price leader, but certainly a third of the market does not seem a wild reach.

To see that Harry's Farmers Market, with its totally different approach, wide variety, specialty angle, etc., winds up over 18 percent higher priced than Wal-Mart is not surprising. It is an upscale niche player, and its niche is very different from that of Wal-Mart.

Ingles, like most local operators, somehow finds its own way and comes in a bit over 16 percent above Wal-Mart's prices. As we've found with many strong regionals, Publix fights more aggressively and comes in at just over 13 percent over Wal-Mart, and Kroger comes in at over 25 percent over Wal-Mart. Clearly no one is desperate to beat Wal-Mart's prices.

Super Target, with its similar general merchandise heritage and superstore concept, comes in quite close, priced at just a bit more than 3 percent over Wal-Mart. So at Target we sense at least a need to be within striking distance on price.

In addition to our general market basket (page 58), we subset a market analysis consisting solely of items that at least one of the retailers has on advertised special or offers at a special cardholder price (see page 64). This more limited basket offers the high/low retailers a chance to shine.

As we have done this in market after market, though, we have seen that such specials are of only limited benefit to consumers. We don't so stack the deck that we take an individual retailer's specials and compare them against Wal-Mart. Instead we simply highlight those items that are on advertised special and adjust the overall market basket based on the price a cardholder could receive.

In this case, both Ingles and Kroger offer discounts to cardholders. In some cases, these discounts are no bargain at Kroger the cardholder discount on green beans is still more expensive than green beans at either Wal-Mart, Harry's, Ingles, Publix or Super Target! In other cases the discounts are substantial.

There are 19 items in our market basket on which Super Target is less expensive than Wal-Mart. Of these, fully 13 are on special at Super Target. There are 11 items on which Super Target is less expensive than Wal-Mart by over 10 percent and ten of them are items on which Target is on ad.

But Super Target pulls close to Wal-Mart on this market basket because on its sale items, it fights hard against Wal-Mart. The numbers speak volumes. Super Target may be trying to appear to offer bargains by trumpeting a few specials, but on non-advertised items, Super Target's produce prices still exceed that of Wal-Mart by significant margins.

We've included the Super Target concept once before in these reports (see table at left). Previously Super Target was pricing to beat supermarkets, not Wal-Mart. This time, its prices are more like Meijer's, another supercenter concept we surveyed in Detroit, indicating that Super Target is pricing more competitively. From earlier data, we drew the conclusion that it is not the supercenter concept itself that means consumers get lower prices; it is the specific use of the concept that Wal-Mart delivers that is producing values for the consumer. But now we may need to reassess.

From the first Wal-Mart Supercenter experience, industry fears have been that supercenters, by their very nature, would use cheap food and, particularly inexpensive perishables, to increase shopping frequency and thus sell more general merchandise. Perhaps there is some truth to this. But Super Target's deep discounts on specials tells us that Target's management must not feel completely comfortable with simply all-out attempting to compete with Wal-Mart on its price leader positioning.

There may be positioning issues; Target has experienced difficulties in translating its cach-based positioning built on things like getting Michael Graves, the noted architect, to design trendy but affordable housewares, into food and, particularly into produce. For clothes or houseware items, consumers may think Target (or is it Targ'e) offers a more upscale experience than Wal-Mart but how can Target impart such a cach to bell peppers

So in our 11th iteration, we see the pattern clearly: some retailers are in unique niches and don't worry about Wal-Mart. Others just don't feel they can compete on price, so they compete where and how they can while setting prices at a level they feel comfortable with. A few use specials and whatnot to create some smoke regarding their prices.

But Wal-Mart has done something very rare in business. It has basically convinced its competitors that they can't compete on its chosen battleground, and they have, for the most part, agreed to get out of Wal-Mart's way. But the most similar concept seems to be searching for a way to compete. Its success at finding it may shape the future of the industry. pb




Walmart Supercenter Price Comparison




Walmart Supercenter Price Comparison - Atlanta




Walmart Supercenter Price Comparison - Atlanta