When Wal-Mart first began rolling out supercenters, the supermarket industry was panicked. It wasn’t just that a new competitor was coming to town, or that Wal-Mart possessed operating efficiencies supermarkets would find tough to match that worried CEOs at supermarket chains. It was the recognition that general merchandise carried rich profit margins compared to food.
In theory, Wal-Mart could sell food at break-even or even use it as a loss-leader to attract consumers into the store where Wal-Mart would profit by selling general merchandise at rich margins.
Of course, now Wal-Mart’s first quarter earnings come out, showing overall profits up but same-store sales down in the US. The business has changed so much that the food tail is now wagging the general-merchandise dog, so The New York Times is running pieces with headlines such as Wal-Mart Frets as U.S. Shoppers Buy Food and Little Else.
One gets the distinct impression that Wal-Mart executives don’t really understand why same-stores sales are down — now for eight consecutive quarters.
At different times and in different places, Wal-Mart executives have pointed to various issues to explain the problem:
- To their credit they have recognized that the decision to limit assortment was a mistake. As we wrote here, what works for Aldi simply makes no sense for a supercenter whose competitive advantage is, specifically, variety. Yet Wal-Mart knew this was a mistake over a year ago. True, it is a big ship and not easy to turn on a dime. Still, at the old Saturday morning meetings, if a problem was identified at the meeting, the team used to present a solution before the meeting was out. It seems odd that to a substantial extent the problem couldn’t be rectified by now. Of course, it seems odd that Wal-Mart would have pulled all that assortment without testing its effect on consumers in the first place.
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Now executives are pointing out that the economy is really impacting Wal-Mart shoppers, and that its customers are indicating through their shopping patterns that they are running out of money before the end of the month. So much so that Wal-Mart is offering some items in smaller package sizes, and consumers are responding by buying them at the end of their pay periods, even though these items are more expensive per ounce, just to make it through until their next check.
This poor-economy argument doesn’t make 100% sense. If Neiman–Marcus or Hermes made this argument that its customers were feeling a pinch financially, one could accept it. After all, it is not as if there are even richer people who could now slum it and shop at these high-end stores. For Wal-Mart, however, there is a stratum just economically above the core Wal-Mart shopper, and if times are tough, one would expect these consumers to migrate to Wal-Mart.
- The latest argument is that because of high gas prices, consumers are reluctant to get in the car and go to Wal-Mart. This makes little sense. Traditionally Wal-Mart benefited from high gas prices because its massive supercenters offered one-stop shopping for so many items.
We would like to suggest that Wal-Mart’s problems relate to both substance and marketing that is reminding consumers of its substantive problem.
On the substance side, The Street published a piece built on research by Customer Growth Partners titled, Who Has It Cheaper? Wal-Mart vs. Target, which was not what Wal-Mart would want to hear:
According to pricing studies conducted by Customer Growth Partners, a consumer research firm, January, February and March all revealed Target’s prices were lower than Wal-Mart’s. The monthly study, which is conducted in four states, compares products across segments, including 30 fresh, frozen and non-perishable groceries, eight household chemicals, paper and other consumables like detergent, seven health and beauty aids like shampoo and counter medicines and 10 general merchandise items like apparel and toys.
In CGP’s analysis for the first three months of the year, Target held a 0.6% price differential over Wal-Mart. This was the first time since the firm began conducting these studies in 2006 that Target displayed lower prices. In the past, Wal-Mart has typically maintained a 2% to 4% advantage over Target, says CGP President Craig Johnson.
In fact, the situation may be worse for Wal-Mart:
If you then factor in Target’s new Redcard loyalty program, which offers users a 5% discount, that price difference widens. Of course, not all of Target’s customers are Redcard holders. Johnson estimates that the loyalty program makes up about 13% to 16% of sales.
But the usage and penetration of the Redcard appears to be increasing, as it provides shoppers at least a 5% discount on new, higher cost, but generally undiscounted consumer electronics items like Apple’s new iPad 2 and Nintendo’s 3DS.
Wal-Mart does not offer a similar program, which could put the company at a further disadvantage moving forward.
Now Pundit sister publication PRODUCE BUSINESS has run a comparative analysis of produce pricing between Wal-Mart and other retailers for 10 years, and we find Wal-Mart to consistently be less expensive on fresh produce.
The article also point outs that this is still true of food generally:
In a separate study conducted in January by Kantar Retail of just one Wal-Mart and one Target store in Massachusetts, it found that Target’s prices were about 2.8% lower than Wal-Mart’s. But the research firm noted that Target’s low prices are more dependent on temporary sales. This means shoppers need to be willing to change brands based upon the promotions being offered in order to really notice a few extra bucks in their wallets.
Two categories, in particular, where Wal-Mart remains a price leader are groceries and non-perishable home good like paper towels and light bulbs.
While Target has grown its P-Fresh assortment by leaps and bounds, Wal-Mart continues to dominate the sector. About half of all of Wal-Mart’s merchandise falls under the groceries segment, while CGP estimates that 15% to 20% of Target’s merchandise are groceries.
According to the Kantar study, Wal-Mart was cheaper in edible grocery items by about 1% and has a 3.4% advantage over Target with non-grocery items.
Kantar purchased a basket of 13 edible items, finding price differentiations like a tub of Land ‘O Lake butter for $3.48 at Wal-Mart and $4.39 at Target. It is also worth noting, that five of the items Kantar studied in the category were on sale that week at Target, while just one item at Wal-Mart was a special. If these items were not on sale, Wal-Mart would have been cheaper by 6.2%.
The problem, of course, is that target is not the toughest competition. What about dollar stores, Aldi, Save-a-Lot and various other deep discounters?
The truth is that every quarter Wal-Mart has been pointing to higher profits and lower same store sales. What it needs to do, of course, is invest some of its profit margin into lowering prices. This would jump start a virtuous cycle in which lower prices lead to higher sales per square foot, which would result in fewer costs per dollar sold, which could allow for lower prices ad infinitum.
In the CGP study, Wal-Mart bounced back to beat Target on prices in April — but not if one takes the 5% Redcard discount — in which case, Target is the clear winner.
This is more serious than just losing customers for a month; it is about losing positioning. As the article points out:
Wal-Mart has been struggling with its image among core shoppers since it removed thousands of items it deemed unprofitable from its shelves starting in 2009. While it is currently restocking some of this merchandise, the process is slow, and has left a sour taste among some customers.
But an even bigger concern has been the perception among shoppers that Wal-Mart does not offer the same savings it always had. “We believe that the price leadership perception, in fact, is a greater issue for Wal-Mart than destocking the fifth or sixth brands in a particular category,” Johnson says.
Although in The New York Times piece, Wal-Mart’s leadership speaks aggressively:
In the United States, Wal-Mart has been making a number of changes to revive same-store sales. Michael T. Duke, chief executive of Wal-Mart, said on Tuesday that “comp sales growth remains the greatest priority for me and the entire Wal-Mart U.S. team.”
We think the actions of Wal-Mart’s executives make us think that enhancing short-term profits is a still higher priority. If they don’t fix this, Wal-Mart will lose its most precious asset — the perception of consumers that it offers the right price.
Wal-Mart’s ‘Match It!’ marketing campaign is really not a good idea.
Although Wal-Mart has long had a policy of matching prices, it never needed to promote it when it was perceived as the low price leader. Making customers feel like they have to be detectives and researchers to get the lowest price is exactly the opposite of the experience shoppers want from Wal-Mart. They want Wal-Mart to do the research and Wal-Mart to make sure they are not overcharged.
Note that the campaign does not include any Wal-Mart promise to lower its price if someone points out that a competitor is less expensive on an item. Only the particular person complaining gets anything – and then just a match. This whole campaign basically advertises to consumers that at Wal-Mart you will be overcharged unless you are a super sleuth. What a comedown for a chain that used to advertise: “Always the low price. Always.”
