Wal-Mart is slashing prices and deepening deflation woes for retailers
- Wal-Mart’s deep investment in lowering prices — spurred by its competition with Amazon and discounters Aldi and Lidl — is putting promotional pressure on retailers already battered by deflation, according to The Wall Street Journal.
- Wal-Mart wants its prices to be 15% cheaper than the competition 80% of the time, the discounter said in an executive presentation in February.
- Wal-Mart’s low-price investments are cutting into its profits, but the company is growing its market share. In its first quarter earnings, the retailer noted an 18% decrease in profits, but its same-store sales rose for the tenth straight quarter.
Last month saw the sixteenth straight month of year-over-year food price declines, extending what’s been the longest period of food deflation since the 1950s. On top of this, grocers have had to contend with an aggressive pricing campaign from the world’s largest retailer, which began in 2015 in response to hard discounters’ growth and the looming threat of Amazon.
The promotional battles have been costly. According to the Journal, Kroger, which recently reported its first same-store sales decline in 13 years, has spent $3.7 billion over the past decade to bring down its prices. Target, meanwhile, is spending $400 million to lower its prices and boost online sales.
Wal-Mart’s ability to compete on price is unparalleled in the industry. The company is constantly pressuring its suppliers and has the size and capital to invest heavily in price promotions and updates to its store experience. Profits tumble as a result, but Wal-Mart can absorb the losses as it gains valuable market share that it plans to leverage in the years ahead.
How can grocers compete against this? For years, retailers have focused on service and product selection, but Wal-Mart has eroded those advantages as it invests in marketing, store remodels and in more fresh products. Since 2010, for instance, the Bentonville-based retailer has more than doubled its supply of locally grown produce.
Grocers do have a few advantages inside their stores. One is foodservice, particularly hot bars, salad bars and made-to-order items. The past few years have seen retailers invest heavily in becoming meal destinations, and then building sales and loyalty around those trips. Another advantage grocers have is in private labels and emerging brands, which have grown increasingly sophisticated in line with consumer tastes.
Overall, competing retailers can’t match Wal-Mart’s prices, but they can offer a comparatively good value for shoppers. This a complex equation for retailers to solve, since it means finding the right balance of quality, convenience and price for their customers. But the answer could pay off handsomely in the face of mounting competition from Wal-Mart and a host of other stores.
- The Wall Street Journal Wal-Mart Brings Price War to Groceries, Boosting Pressure on Big Food Retailers
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