How Low Can They Go? Walmart's Ill-Advised Drive to Underprice Dollar Stores
Sure, Walmart (WMT) is known for its bargain prices. But it's feeling the heat from dollar-store competitors such as juggernaut Dollar General (DG). So Walmart has a new plan: Squeeze vendors for prices so low the chain can price many items below $1.
This is a plan that will have to be executed very carefully. There are two potential problems:
Alienating vendors. The annual ritual of being asked by Walmart to give them an ever-lower price will be taken to a whole new level with this lower price target. Vendors will be scrambling to either source new, even cheaper-made items, or to lower prices yet again. It's hard to imagine any vendors are excited about this idea.
It's also hard to imagine there's much in the way of profit in offering items at such low prices. With every square foot of a Walmart superstore needing to pull its weight, it's an open question whether an under-$1 department can deliver the needed margins. When nobody profits, everybody loses.
Disappointing or confusing customers. The drive to offer something so cheaply could result in vendors coming up with crummy quality items that weaken Walmart's reputation for value. If the gadget or toy breaks on the way home, it's not a bargain, even at 57 cents.
The psychology of bargains really comes into play here. America loves dollar deals, but it's been many years since most people went to a five-and-dime store or bought penny candy -- if they're even old enough to remember that. Pricing items below $1 requires some canny marketing to present the items as desirable.
In some stores, Walmart is grouping and promoting the items together, creating a sort of mini-dollar-store within Walmart. While this gets the most focus on the new pricing strategy, it may create confusion about what Walmart is becoming if it's not clearly delineated. Walmart definitely isn't a dollar store, and will no doubt continue selling most of its items well above $1.
Of course, if the items were just scattered about in various departments, it would be harder to draw attention to them and highlight the chain's new commitment to super-low-priced items. A thematic shelf tag might be deployed so customers would see the ultra-low price repeating as they walked the aisles. It could become something to scan for in many departments and create a bargain-hunting atmosphere.
How the merchandise is placed and promoted will be key. Target (TGT) does a good job with a very small $1 bargain-bin area near the checkouts, and the quality of the items is mostly on a par with everything else in the store.
That's basically the key -- keep the under-$1 items limited and corralled so they have maximum impact but clearly stand apart from the main merchandise mix. Then, deliver on quality.
The low-price/quality combination is a challenge to achieve at a $1 price point. We'll see if Walmart can meet the challenge at an even lower price -- and if they do, if the stress on vendors will be worth it.
Photo via Flickr user lordcolus
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