PRICING IS KEY
Wal-Mart’s impact all stems from its approach to pricing, observers said.
“Wal-Mart prices itself between 13% and 18% lower than traditional supermarkets, and that kind of difference has changed a lot of shopper behavior,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., told SN. “Over the years, Wal-Mart has maintained that price range, and many of those markets are still trying to figure out how to compete.
“Failure to compete on some level means a company proceeds at its own peril. But trying to compete on price alone means almost certain death because, for a business with a 1% or 2% profit margin, it’s only a matter of time — and not a long time — before lowering prices to Wal-Mart’s levels means you go out of business.
“So it’s been staggeringly apparent for years that no one can compete with Wal-Mart on price alone.”
The industry has come up with a variety of alternative responses, Hertel pointed out.
“Some chose to remodel their stores to add space — space they often couldn’t justify economically. Others ceded certain aisles and categories to Wal-Mart — like paper goods and household chemicals — while competing on fresh offerings with a broader assortment and better service.”
Andrew Wolf, managing director at BB&T Capital Markets, Richmond, Va., also said Wal-Mart’s pricing has reshaped industry market share around the country.
“Thirty years ago the industry was made up of a bunch of local quasi-oligopolies, where two or three companies in each market controlled the majority of share. They had high returns on capital, and there were few price operators.
“Wal-Mart used low prices to take away a lot of that market share, which turned the industry upside-down and resulted in lower profit margins across the industry.
“Because of Wal-Mart, low prices have become a more important component of how chains go to market. That’s why companies like Ahold and Delhaize and Supervalu have adopted their own low-price programs over the last few years.”
Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, said Wal-Mart’s pricing policies made supermarkets more aware of how big the grocery category could be. “Wal-Mart cut its teeth with a strong price statement on groceries, and as it saw the success it had, it moved to other supermarket categories.
“Initially, Wal-Mart used paper goods, pet foods and laundry detergents to convey a price message and build a competitive advantage — even before it got into consumables. And once consumers realized they could get the same branded items at Wal-Mart for less than they paid at the supermarket, it made them more aware of Wal-Mart.
“The immediate result was that supermarkets became more promotional in the grocery category, though they were not competitive across the board.”