Wal-Mart Rollbacks Seen Off to Slow Start

ELLIOT ZWIEBACH

BENTONVILLE, Ark — As expected, Wal-Mart Stores here has thrown down the gauntlet and begun promoting reduced pricing on consumables. How the traditional grocery industry responds to the challenge — and what impact the price cuts might have — is not yet clear.

The initial rollbacks “do not look overly threatening to the grocery channel,” said Mark Wiltamuth, managing director of Morgan Stanley, New York, “There [has been] little change in Wal-Mart' relative price advantage over conventional grocers, which should be a relief to grocery investors.”

Wal-Mart said it was cutting prices on approximately 10,000 items, mostly in the area of food and staples, with more emphasis, including beefier end displays, on branded consumables such as personal care, beverages and snack items. The company also said in published interviews it plans to expand the number of price cuts in the coming months by encouraging suppliers to reduce their selling prices in exchange for spotlighting those items.

Wiltamuth said he believes the price cuts Wal-Mart made may not be as severe as supermarket operators had anticipated, though the possibility of further cuts “does leave a cloud over the group.”

Based on surveys in Dallas and Chicago, Wiltamuth said the price gaps with supermarkets remained unchanged — with Wal-Mart priced about 15% to 20% lower on everyday pricing and 10% to 15% lower on promotional pricing than conventional operators.

“Our supplier sources tell us the more aggressive rollback campaign will continue in waves through 2010,” he said. “Wal-Mart intends to increase the intensity of its rollbacks on price, not the number of items it rolls back.”

Another pricing survey, by Charles Grom of JPMorgan Securities, showed Wal-Mart's pricing on 31-item sample basket of food and consumables has actually increased 2.3% since February, according to reports. That followed a 1.9% increase from January to February.

Prices remain about 12% lower than traditional supermarkets, however, the JPMorgan report added.

Andrew Wolf, managing director of BB&T Capital Markets, Richmond, Va., offered a similar opinion, saying his surveys do not indicate any change in Wal-Mart prices in the last few weeks.

“We've looked at 50 food items over the past 10 years, and our latest surveys show Wal-Mart prices on those items have not gone down between late March and April 14,” he pointed out.

Wolf said he expects Wal-Mart to get vendor support in its efforts to promote pricing, “but not at the expense of grocers, who will also try to promote more to keep their business up.”

Wolf said he sees Wal-Mart's actions as a battle for the support of vendors. “What Wal-Mart is doing is trying to get suppliers to fund the price rollbacks,” he explained, “though it's really in the interest of CPG companies to work with the supermarket industry to get volume back up.

“Wal-Mart wants more from vendors than it's getting now — the ‘pay-to-play’ strategy — and the quid pro quo is, the vendors that participate will get more movement.

“The irony is, while Wal-Mart will always get its pound of flesh from the vendor community, what will that leave for conventional grocers? The vendors either have to take the money from someone else to give to Wal-Mart or expand their promotional budgets.

“The result will be that vendors will get hurt if they have to increase their promotional budget support to accommodate everyone, or else the conventional retailers will get hurt if more money goes to Wal-Mart.”

With supermarket sales beginning to strengthen and item movement starting to grow, the supermarkets are likely to respond to Wal-Mart's moves by telling vendors it's in their best interst to keep promotions up, Wolf told SN; whereas if vendors disproportionately throw their support to Wal-Mart, which represents more than $100 billion in total sales, it will cut off recovery by the supermarkets, which represent $500 billion-plus, excluding Wal-Mart.

Gary Giblen, executive vice president of Quint-Miller & Co., New York, said it's still too early to tell how potent Wal-Mart's rollbacks will be, though he believes the price reductions represent “a meaningful and probably highly dramatic intensification of price competition.”

“The key thing to remember is, for the past three years or so, Wal-Mart has soft-pedaled price as it tried to appeal to a broader consumer base, though with clearly limited success,” Giblen said. “As a result the price gap between Wal-Mart and the conventional industry has narrowed.

“But now Wal-Mart has decided to try to re-establish its strong price image and strong consumer perception of its pricing, and it's doing so with bigger in-store signage and bolder pricing than I've ever seen.”

The industry had been anticipating Wal-Mart's rollbacks, Giblen said, “which explains why Kroger was so reluctant to venture more than a cautious viewpoint on its expectations.”

“Wal-Mart's actions could really contain any lift supermarkets get from the economic recovery, or else it might not translate at all. One way of looking at it is that, with more food inflation, supermarkets will enjoy better profits, whereas if Wal-Mart expands the price gap, then supermarkets might not be able to benefit by passing on any rise in inflation because Wal-Mart's rollbacks would outweigh any changes from inflation.”

Giblen said he believes supermarkets will have to maintain the same price gaps.

“If Wal-Mart's actions mean they widen too much, the sales loss for supermarkets could be painful,” he said.