WAL-MART CONCERNED ABOUT IMPACT OF HIGH GAS PRICES 2004-05-10 (2)

MARK HAMSTRA

NEW YORK -- Rising gas prices are a major cause of concern for Wal-Mart Stores, according to Jay Fitzsimmons, senior vice president of finance for the Bentonville, Ark.-based retailer.

"Gas prices are a real issue," he said in a presentation to investors at the Lehman Bros. Seventh Annual Retail Seminar here last month. "This is a very effective tax on lower-income consumers. It's probably $5 per week in additional expenses."

He said those extra expenses come out of the limited pool of discretionary income that might otherwise be spent at Wal-Mart.

"It impacts the bottom third of the demographic," he said, noting that consumer confidence appears to be much higher among the top two-thirds of consumers, as defined by their income levels.

Fitzsimmons also explained the company's pricing strategy for groceries, which he said generally results in a discount of about 18%, on average, below prices at traditional supermarkets.

"We don't set out to be 18% lower," he said. "We buy the products at as a low a price as we can, and then add a commission based on the risk we take in being able to sell that product."

Private label provides one means for the company to achieve high margins while keeping retail prices low for consumers, he said. In baby formula, for example, Wal-Mart's Parent's Choice brand generates three times the gross margin of Enfamil, a brand-name product that the chain also sells.

"We don't have a strategy to develop private label for the sake of private label or for the sake of gross margins," Fitzsimmons said.

Fitzsimmons said when the company rolled out its private-label baby formula, sales in the category grew, indicating that the new product was doing more than just cannibalizing sales from band-name products, but was also attracting sales away from other retailers.

He also talked about the company's strategy of increasing the number of supercenters it plans to build in the current fiscal year by about 4% over previous projections. The company said it is planning to open 230 to 240 such stores by next January.

"Our priority is on building supercenters, and whenever we have a chance to build a supercenter, we will build one."