BENTONVILLE, Ark. — Analysts said Wal-Mart Stores here appears to have supermarkets in its sights as it increases its emphasis on low-price leadership, particularly in the grocery area.
The company repeatedly proclaimed a need to widen the price gap even further between itself and other food retailers during its annual shareholders' meeting and at an analyst conference it hosted following the event.
“The company acknowledged that it was serious about making sure that its prices were the lowest in the market, including when high-low supermarkets put items on special,” explained Scott Mushkin, a New York-based analyst at Jefferies & Co., in a report. “This has resulted in some goods being priced below what we believe is the cost — something we do not recall the company doing in the past. We view this as a fairly significant development.”
If Wal-Mart chooses to maintain this practice, it could depress profits “for the entire industry,” he added.
“It's hard to see a silver lining for supermarkets,” he said, noting that more food retailers could begin putting more pressure on suppliers for pricing relief if the current environment continues.
The “hyper-competitive” pricing situation, he said, is likely to continue until more job growth gives consumers more spending power.
“In a vibrant, recovering economy that is producing robust job growth, service, quality and convenience begin to take precedence over price for an increasing number of consumers,” Mushkin explained. “This is simply not happening.”
Eduardo Castro-Wright, vice chairman of Wal-Mart Stores, said during a presentation at the analysts' meeting that the company's own findings indicate a correlation between high unemployment and weaker sales.
The 25% of Wal-Mart's store base in areas with the highest employment levels outperform the quartile of the chain's store base that is in areas of the lowest employment levels by a factor of 250 basis points, he said. That is “very significant math,” he pointed out, noting that high unemployment appears to be “a major part” of the company's sluggish sales.
David Strasser, a New York-based analyst with Janney Capital Markets, noted that Wal-Mart is focusing its aggressive price cuts in particular in the grocery aisles, with hopes of making up margins in other categories.
“It was apparent that Wal-Mart is willing to sacrifice gross margin to maintain/gain market share in this category,” he said in a report. “The company is counting on global sourcing, expanded private label, new merchandising initiatives and non-grocery businesses to manage gross margin dollars.”
He said that although supermarket operators might be taking the lead on aggressive pricing in some markets, “in most markets and categories Wal-Mart is driving the price down.”
He also noted that Wal-Mart's recent price rollbacks have been more self-funded than vendor-funded, “something we have not seen to this extent for a long time.”
Neil Currie, a New York-based analyst with UBS Securities, said he expects vendors will increase their support of Wal-Mart's more aggressive pricing, although the company's increased focus on cost savings could also help fund the rollbacks. Wal-Mart's reported initiative to take over from vendors the delivery of product to its own warehouses (see the June 7 issue of SN, Page 8) could “realize substantial savings” for Wal-Mart, Currie wrote in a research report.
He noted that Wal-Mart might be gaining some share of sales volume in carbonated soft drinks and salty snacks — two categories that the company has been aggressively promoting — based on scanner data that show other retailers losing some volume in those categories.
Mike Duke, president and chief executive officer of Wal-Mart, said the rollbacks have been effective, although he did not provide details.
“What we've seen is actually in most of the basic product categories where we have rollbacks right now, the growth in unit sales is quite dramatic,” he told analysts at the meeting.
Before this year's aggressive return to rollbacks, it appears that club stores and dollar stores might have been the primary beneficiaries of losses in Wal-Mart traffic volume, Currie explained. Club stores, he noted, gained traffic at the start of the month as customers stocked up on bulk items, while dollar stores gained at the end of the month as customers filled in their needs with smaller purchases.
“We think Wal-Mart will become more thoughtful when choosing items to promote during these periods — larger pack sizes at the start of the month and smaller at the end,” he said.