DILLONS CUTS PRICES TO BATTLE WITH WAL-MART

AMANDA CHATER

HUTCHINSON, Kan. -- Echoing moves by many retailers around the country, Kroger-owned Dillons here has lowered the prices of "thousands" of Center Store staple items in many of its stores to compete with Wal-Mart Stores.

Dillons has cut prices on such staples as peanut butter, pasta sauce, canned vegetables, paper goods and soda. The reductions are available to Dillons' Plus Card holders and are being announced through T.V. ads, billboards, shelf tags and circulars.

The price cuts are not a short-term offer, said Dillons spokeswoman Su-Ella McKinzie, as quoted in a local news report, but she didn't say they were permanent. Kroger did not return calls from SN.

"[Supermarkets] are trying to blunt the impact that other retail formats have had on them," said Jim Hertel, senior vice president at Willard Bishop Consulting in Barrington, Ill., noting that Wal-Mart has a price advantage of 13% to 18% vs. conventional retailers.

Kroger was one of the first supermarkets to react to Wal-Mart by reducing costs in order to cut prices, and it's likely to implement a similar strategy at other banners, said David Rogers, president of retail consulting firm DSR Marketing Systems in Deerfield, Ill. "The thing is to do it before Wal-Mart comes in, so it doesn't look like they've been forced to do it," he said.

Dillons has 85 stores in Kansas, Arkansas and Missouri. Its price reductions follow other retailers that have launched low-price programs, such as Giant Eagle and Raley's.

The retailer's challenge in making widespread, ongoing price cuts is to grow sales volume without ceding too much in profit, observers said.

"They have to reduce pricing in staple areas to within a reasonable rate of Wal-Mart, and that's often around 5%," Rogers said.

Hertel agreed. "If they cut back across the whole store to the extent that they make a 15% cut, the reality is that they're going to be under water," he said. "We know that typical supermarkets don't have to cut prices as broadly as that."

Price reductions can succeed if a store has strong perimeter departments, Rogers said, noting that Wal-Mart does a fair job of selling perishables but is weak in deli and bakery. Traditional retailers should focus on reducing their prices in grocery and consumables, with the goal of outselling Wal-Mart in a particular department, such as baby, as Wegmans Food Markets and H.E. Butt Grocery have done, he said.

"All major chains are going to have to [reduce their costs], and they'll have to have better relationships with suppliers," Rogers said. "However, many consumers say they dislike Wal-Mart, they are voting with their feet and what they really care about most is their pocketbooks."