Supermarket/Supercenter Price War Could Suck in Costco, BJ's, Sam's
A price war among supermarkets and supercenters may cause some consternation among warehouse clubs, although the danger it threatens isn't so much from direct action as an undermining of member morale.
It all relates to membership fees, the annual outlay that club members make to get those big bulk discounts. Thus far, clubs are doing relatively well in the recession and renewals have not yet emerged as a major problem.
Yet, a price war among supercenters and supermarkets could change that. Citi analyst Deborah Weinswig downgraded Kroger, Safeway and Supervalu this week due to concern about what she termed a "modern price war," one that would also include Wal-Mart. Reasons she cited:
• Cost cutting by regional supermarket such as Wegmans and Weis. • Wal-Mart taking margin dollars from its soon-to-be-relaunched-and-enhanced Great Value private label and using them to lower prices throughout the food assortment.
• Retailers promoting ahead of lower product costs and vendor price breaks.
The last is a particularly important point relative to clubs as, in its last conference call, CFO Richard Galanti said Costco had been doing just that sort of thing recently, and particularly in the holiday season, to "wow" members. Of course, holiday promotions are inevitable, but by getting ahead of price decreases, Costco got a jump on its competition, making a statement about the value it offers.
Yet, warehouse clubs have two problems if supermarkets and supercenters start fighting it out. First, it's easier to compare prices among supercenters and supermarkets than it is between them and warehouse clubs because consumers have to calculate down to the price per ounce or price per unit, which can be tricky in food. If Kroger drops its price on Skippy peanut butter 25 cents below Wal-Mart's, that is immediately evident.
Second, the overwhelming majority of consumers, even devoted club members, still visit supercenters and supermarkets weekly to buy items they have to regularly replace such as milk, diapers, dish soap, prescriptions, etc., while they may make only monthly club trips. Supermarkets and supercenters can push bargains right up into the face of consumers each time they enter the store. On top of that, major food retailers, particularly Wal-Mart and Kroger, have become increasingly sophisticated in applying consumer data. As a result, they can target promotions that are attractive to shoppers and less expensive to themselves because they can focus on products that motivate behavior instead of dropping prices across the board and losing margin on items of less consumer concern.
Weinswig predicted trouble regarding warehouse club memberships in a Jan. 4 research note. She asserted that the weakening economy would cause club members who don't visit clubs regularly to reconsider their memberships and those who are signed up for multiple clubs to pick one. Add a supermarket/supercenter price war to the mix, and warehouse clubs may be pressured into promoting memberships, perhaps with price breaks, or promoting discounts more heavily. That might not help their valuations but it may maintain operational vitality, even in the case of Sam's, Wal-Mart owned but operated under its own auspices.