There's a Tinge of Desperation in Walmart's Latest Price Cuts
After three quarters of shrinking sales, Walmart (WMT) recently cut prices on 10,000 items, mostly in food and other staple goods. The move has been called a threat to competing supermarket chains by some, by others a naked marketing ploy for the giant retailer's routine rollbacks. What nobody's talking about: the smell of desperation that wafts from the company's price-cutting announcement.
Walmart cuts prices all the time. But cutting prices on 10,000 different items at once? That's nearly 10 percent of the retailer's total assortment. That's likely to put a serious dent in profits, which are already razor-thin -- less than 4 percent for Walmart's last fiscal year. This at a time when overhead costs are rising after an attempt at cutting back the number of items Walmart carries flopped and the company decided to restock thousands of items.
Cuts this widespread are what a retailer does when they're desperate to keep customers coming through the doors. Specifically, Walmart is desperate to keep the more middle-class shoppers, who gravitated to its vast stores when the downturn tightened their belts, but more recently have favored Kohl's (KSS), Macy's (M), JC Penney (JCP) and other rivals.
If the price-cutting works to lure these higher-end shoppers back to Walmart's wide aisles and gets them in the habit of being long-term Walmart shoppers, the gamble could turn out to be worth it. If customers continue to drift away, it'll just be potential profits that vanished down a hole.
Walmart's certainly got the cash to subsidize lower prices -- nearly $8 billion. But Walmart will need to watch its step here, because the price-chopping cycle can be addictive. If ever-lower prices are the only way to keep customers coming, in the long run Walmart will pay the price in lower profits.
Photo via Flickr user zieak