For many years now, Pundit sister publication, PRODUCE BUSINESS, has been conducting a Wal-Mart Pricing Report. Each iteration of the report focuses on a different city and analyzes the produce pricing of the local Wal-Mart Supercenter versus other nearby retailers.
The May 2009 issue included the 19th chapter of this study and was focused on seven separate store concepts in the Phoenix, Arizona, market, specifically:
These reports are always intriguing and a good reason in and of themselves to subscribe to PRODUCE BUSINESS, which you can do right here.
This Phoenix report, though, offered several insights of great significance for the broader industry. So we thought we would highlight some of these key points for Pundit readers:
1. The Extraordinary Dominance of Wal-Mart on Price
We have studied Wal-Mart extensively, and the fact that Wal-Mart Supercenters price advantageously against supermarket competitors is nothing new. Wal-Mart has never lost a pricing study to a full range supermarket operator since the study began in 2002.
What is interesting though is that in Phoenix, the three Wal-Mart concepts we looked at — Wal-Mart Supercenter, Wal-Mart Neighborhood Market and even the small-store concept called Marketside that minimizes its identification with Wal-Mart — came in, respectively as Number 1, 2 and 3 as the three lowest priced concepts in the area.
Now, as we explain below, there are some qualifications to this related to use of store coupons and loyalty card discounts. But if you are a regular Joe walking in off the street, you will get a better price at the highest priced Wal-Mart concept than any of the other concepts we studied.
2. Wal-Mart has Decoupled Pricing at Neighborhood Markets from the Supercenter
For years, Wal-Mart’s Neighborhood Market concept has grown very slowly. This is because although the concept has always been profitable, it has always been less profitable — provided a lower return on investment — than the supercenter. Now there has long been a debate internally as to whether that fact should be determinative as to future growth prospects for the concept.
One side has held that it is a simple matter: the more Neighborhood Market stores Wal-Mart has, the lower Wal-Mart’s total return would look to Wall Street — thus better to not build many.
In contrast, other Wal-Mart executives have thought the best approach was to think of the Supercenters and the Neighborhood Markets as a team. Consumers might drive out to the big Supercenter for stock-ups but use a local Neighborhood Market for more frequent shopping. In a financial sense, these executives viewed the two concepts as partners thinking that the right approach was to average the ROIs of the two concepts to get an acceptable level of ROI while, also, taking just enough additional market share that it might discourage a competitor from entering the market.
It was the notion that Neighborhood Markets had to hold their own on ROI that won the battle within Wal-Mart. Since their ROI didn’t equal Supercenters, growth was slowed.
One reason the ROI was lower than Supercenters is that a rule had been established that pricing would be identical in both Wal-Mart Supercenters and Neighborhood Markets. Without a Supercenter’s scale, it was hard to earn the same ROI.
Now, however, our study shows — and our conversations with Wal-Mart executives confirm — that Wal-Mart has dropped the requirement that Supercenters and Neighborhood Market stores price identically.
This is a big change. In the past, differences between the Supercenters and Neighborhood Market were very tiny — the results of pricing errors or the occasional markdown done by a manager. Now we find in Phoenix that the Neighborhood Market concept is pricing 6.59% over the Supercenter. It is still a very competitive price point, beats everyone else in the market, yet that almost 7% higher price point might be enough to bring the ROI on Neighborhood Market expansion in line with the ROI on Supercenter expansion. If so, we can expect to see many more Wal-Mart Neighborhood Markets built, and soon.
3. Many Chains are Prepared to Disregard Shoppers Who Don’t Get loyalty Cards
If you just walk in off the street without a loyalty card, Bashas’ is 29.93% more expensive than the Wal-Mart Supercenter, Kroger’s Fry’s banner comes in at 27.20% over Wal-Mart and Safeway fully 36.54% over Wal-Mart. If you have a card, Bashas’ is 17.94% over Wal-Mart, Kroger only 12.65% over Wal-Mart and Safeway 24.04% over Wal-Mart.
The motivation for this approach is unclear. Perhaps these stores figure that consumers not willing to get a loyalty card are not price-sensitive. Or maybe they just want to drive people into the program so they can collect data and either sell it or use it to promote effectively.
We wonder if it is smart. Maybe a lot of people don’t like to have records kept of everything they buy. Maybe people walk in, see the high prices and get turned off. Maybe people remember the prices posted on the signs and mentally use that as the comparison basis with Wal-Mart. We don’t know, but it seems that the decision has been made by many chains to not worry about pricing even within range of Wal-Mart, except for those consumers who have loyalty cards.
4. Tesco May be Failing Because it is Too Expensive
On our main test, which is what a consumer would pay if he walked through the door without coupons, loyalty cards, etc., Tesco’s Fresh & Easy concept is more expensive than every concept in the market save Safeway. Fresh & Easy comes in 31.68% over the Wal-Mart Supercenter’s prices. If we consider loyalty card prices, Tesco’s Fresh & Easy, which, like Wal-Mart, does not offer a loyalty card program, is actually the highest price concept of the seven banners we studied.
We’ve spilled a lot of ink and burned a lot of electrons to study Tesco’s Journey to America as Fresh & Easy, and there has been a lot of analysis as to particular reasons for the failure of the concept to catch on.
Maybe a simple explanation would be more helpful: If a consumer does not have a special coupon, Fresh & Easy is likely to be seen as very expensive.
Perhaps Fresh & Easy needs to maintain these high prices because its couponing strategy — currently $10 off a $50 purchase is the main offer — would be too expensive without this extra margin. Still, this would mean that Fresh & Easy has gotten itself between a rock and a hard place. It can’t shut off the coupons, because consumers stop coming, but if it keeps the coupons it needs high margins which means that consumers who walk in without coupons find themselves paying more than they could almost anywhere else. This leads to even greater dependence on couponing.
Remember that, to the consumer, Fresh & Easy’s couponing is somewhat offset by it’s unwillingness to accept manufacturer’s coupons.
We would suggest that Fresh & Easy needs to build a reputation for aggressive pricing without any coupons. That means biting the bullet and repricing to be competitive. There is really no reason why Fresh & Easy shouldn’t at least be equal to Wal-Mart’s small-footprint Marketside concept, and there was a time when Fresh & Easy executives used to speak of Whole Foods quality at Wal-Mart prices.
In any case, we can talk all day about color schemes, the “warmth” or lack thereof regarding the concept, the locations, the assortment, etc… if the price point is going to be 31.68% over the Wal-Mart Supercenter, as our study indicates, that explains an awful lot about why Tesco is failing in America.
Wal-Mart selected Phoenix as the first test of its Marketside concept because key Wal-Mart executives believe that Phoenix, with its large elderly population and Latino ethnic tilt, is what America is going to look like. If this is true, one has to say that it seems as if the future will belong to Wal-Mart.
You can read the complete PRODUCE BUSINESS article with charts right here.