WEGMANS ADOPTS EDLP STRATEGY

ELLIOT ZWIEBACH

ROCHESTER, N.Y. -- Wegmans Food Markets here converted more than 4,000 grocery items to an everyday low-pricing program last week -- a move apparently designed to blunt the impact of Wal-Mart Supercenters that are beginning to proliferate in its upstate New York marketing area, industry observers told SN.

Wegmans officials declined to talk with SN last week.

Billing the price change as "a simpler way to shop, a simpler way to save," Wegmans sought to explain the new approach to shoppers in videotapes that were sent to approximately 1 million consumers' homes, featuring Danny Wegman, president.

In the tape, Wegman says the new pricing was instituted "to simplify the shopping experience," and make lower prices available to Wegmans shoppers every day. He also pointed out that tests showed the company was able to increase sales when prices were lowered.

Wegman says on the tape the company tested the everyday low-price approach for several months on such items as peanut butter, eggs, milk and orange juice, "[and] the results were the same in each category."

More than merely simplifying the shopping process, however, Wegmans' move was seen by industry observers as an effort to improve its pricing position in the wake of the opening by Wal-Mart of several supercenters in its operating area, with the threat of more to come.

Wegmans competes with Wal-Mart Supercenters in at least four locations -- Gates and Springville, here in western New York, and Rome and Oneida, in the Syracuse area in central New York. Also, Wal-Mart told SN it plans to open a supercenter in Glenville, in this area, later this year.

One observer here, who asked not to be identified, told SN Wegmans' decision to lower pricing on selected items is designed to accomplish two purposes.

"First, Wegmans is trying to put out the perception that it has low prices," he explained. "It's been perceived as an upscale chain, and this is a way to speak to the masses to tell them it cares about them while maintaining its edge on quality, service and value. And second, it's a direct slap at Wal-Mart -- to let them know it's going to go after them on price, which is Wal-Mart's edge."

The observer said Wegmans is succeeding on the first count, with local newspaper and TV reports quoting customers who said they will stick with Wegmans because of its improved pricing image.

However, he doubts Wegmans will succeed on the second count, noting Wal-Mart has already lowered prices below Wegmans' level on some of the 4,000 items. "But Wegmans is not trying to match Wal-Mart price-for-price -- it's determined its own comfort level and the necessary level of profitability, and it's staying there," the observer explained.

According to Lisa Cartwright, a securities analyst with Salamon Smith Barney, New York, "Given Wegmans' upscale positioning, the strength of its existing market shares and its strong brand identity to consumers, it has the financial strength to lower prices to hold onto its market share and possibly to expand it."

Another New York-based analyst, who asked not to be quoted by name, offered a contrasting opinion. "It's been proven that EDLP is a tough way to go in the face of competition from Wal-Mart," he told SN.

"With targeted promotions, a retailer can surprise the consumer on different items from time to time. But by simply dropping 4,000 prices, Wal-Mart can price itself 15% lower on those items, and there's no way Wegmans or anyone else can match those prices. So EDLP is a very tough strategy to use going up against Wal-Mart."

Gary Giblen, managing director for C L King Associates, New York, said Wegmans' decision to switch to EDLP on the 4,000 items was somewhat of a surprise "because you would think Wegmans above all other operators would not need to get down and dirty with Wal-Mart.

"Consumers have always looked to Wegmans for superior service and perishables, but Wegmans realizes it can't be perceived to be out of line on groceries, and the easiest way to combat that perception is either to offer very hot specials or comparable prices on the most visible items with known value to customers."

Giblen said the switch to EDLP is "definitely a defensive move -- I don't think Wegmans is going for increased market share, but rather it's trying to prevent a loss of market share."

A discount store analyst, who asked not to be identified, said it's doubtful Wegmans' move will have much impact on Wal-Mart. "After all, it's only 4,000 items, which is less than 10% of the total inventory, so it's not a lot," the analyst told SN.

"When Kroger lowered prices on all items, that was a pre-emptive strike. But lowering 10% of your SKUs [stockkeeping units] is a weak attempt to shore up your traffic patterns. But perhaps Wegmans is simply putting its toe in the water to see what effect its move will have."

Cartwright said Wegmans' actions could be part of a pre-emptive strike as Wegmans faces the prospect of more supercenters moving into its operating area.

"Wal-Mart is opening a food-distribution center in Maine that will enable it to supply a host of stores throughout the Northeast," she pointed out.

Another player in the upstate New York battleground is Tops Friendly Markets, Williamsville, N.Y., a division of Ahold USA, Chantilly, Va. While some observers told SN they believe Tops will get squeezed between Wegmans and Wal-Mart, Cartwright said Tops will remain a viable player.

"Tops has been making moves to sharpen its price position already, and although it remains in the middle, it operates large stores with high-end perimeter departments and a no-frills approach in the center of the store with a wider variety than Wegmans," she pointed out.

Giblen said Tops is likely to get squeezed by Wegmans and Wal-Mart. "Shoppers usually have one store they like for general purposes and one for price, which means Tops gets stuck in the middle."