MEASURING THE PRICE IMPACT OF WAL-MART

A recent pricing survey indicates that traditional supermarket chains offer prices that are significantly lower in markets where they compete with Wal-Mart than they do in a market where they don't compete with the discount-store giant.

BR> As expected, the survey revealed that Wal-Mart offers prices that are 17% to 29% lower than traditional supermarket chains in the three markets where the Bentonville, Ark.-based chain has supercenters.

However, in Sacramento, where Wal-Mart does not have a supercenter presence yet -- it recently said it would open up to 40 locations in California -- supermarket chains offered prices that were higher than they offered in areas where they compete with Wal-Mart.

"In California, some of it is accounted for by higher real estate prices, but not all of it," said Neil Currie, analyst, UBS Warburg. "A lot of it is just having no Wal-Mart competition, but now Wal-Mart prices are going to come to California."

The survey found that the total price of a market basket of identical grocery items was similar at all four chains surveyed in Sacramento: $145.81 at Albertson's, $154.38 at Safeway, $152.78 at Kroger and $154.91 at Raley's. In Houston, the same basket cost about 8% to 12% less at Albertson's, Safeway and Kroger.

Currie said the survey attempted to factor in any discounts that the chains offered through loyalty cards, coupons and buy-one, get-one-free promotions.

He said Wal-Mart is taking market share away from supermarkets at the rate of about 1.5% per year, but studies of market share don't give a clear picture of Wal-Mart's effects because retailers can simply add stores to retain their share of the market.

"It's not how Wal-Mart impacts market share, it's how they impact profitability," he said. "It's the cost of competing in these markets, and that changes when Wal-Mart enters."

Although he said supermarkets are gaining some market share from weaker competitors that fold under Wal-Mart's price pressure, he said those share gains are coming at a cost, either through the capital costs of building new stores or from the margin pressure that comes from cutting prices and conducting promotions.

Analysts disagree about Wal-Mart's impact, however.

"Everyone says Wal-Mart is taking over," said Meredith Adler, analyst, Lehman Bros., New York. "Well, I don't think so. Sales are sluggish in the New York metro market, where there are no Wal-Marts."

However, she noted that the slow economy could be driving more consumers to experiment with Wal-Mart or other low-price specialists.

"You do worry that when the economy recovers, people will have had the opportunity to explore another store, and to get to know that store, and that's never good. You don't want anything to change people's loyalty."

A December survey by Information Resources Inc., Chicago, found that about 39% of consumers in the U.S. shop at both Wal-Mart supercenters and traditional supermarket formats. In the South that figure is 92%, while in the West it is only 20%.

Mark Husson, analyst, Merrill Lynch, New York, said the slow economy and lack of consumer confidence are driving more consumers to conduct one or two shopping trips per month at Wal-Mart.

"Consumers know the things they won't get there: Good meat and produce, good service, convenience," he said. "But they will get good prices. And they are willing to put up with it in this kind of a market."