Walmart Price Separation Leaving Retailers Behind, including Kroger

Walmart is launching another major cost cutting program that will fund an initiative to make it even more competitive: price separation.

As detailed in this blog yesterday, Walmart is applying a concept it has visited in the past, the productivity loop, to squeeze costs out of sales, general and administrative expenses, and particularly those associated with planned growth, with a significant proportion going to make Walmart more price competitive. Walmart wants to open a further gap between itself and its competition on price. The retailer calls this process price separation and promoted its value heavily at an analyst meeting last week in Bentonville, Ark., where it is headquartered.

Eduardo Castro-Wright, the company's vice chairman, said:

We believe we can reduce the cost of goods sold by quite a bit. And by doing that, taking those savings and funding further price separation, we believe that we can accelerate growth by increasing price separation where it matters. In the different channels and categories where we compete, we believe we can then drive incremental growth and accelerate growth.

Walmart believes that it can continue widening that price separation and win more sales away from grocers. But just don't take Walmart's word for it. Mark Wiltamuth, a Morgan Stanley analyst pointed out in a research note that in his own most recent pricing study Walmart had "a 10 percent advantage over Kroger, 22 percent advantage over Supervalu, and 25 percent over Safeway on everyday pricing."

Wiltamuth is taking the danger the Walmart initiative poses seriously enough to warn investors off grocery stocks generally.

The issue is particularly critical to Kroger, which has been the most successful of the top three grocery store chains in the era of the Walmart supercenter. Kroger's success is largely based on its cutting costs and sacrificing profit margins to get its prices in a designated range relative to the supercenter operator's. The range is set to be close enough to what Walmart charges to make Kroger's stores â€" which offer a broader selection of food and more service than the supercenters do --- attractive to consumers who are cost conscious but want a few additional amenities when they shop for groceries. Keep in mind that 10 percent off was a decent sale price before the recession. As a price gap, it's significant to Kroger, which will lose marginal customers any time it expands.

But Walmart doesn't anticipate pressing its productivity and price advantage over grocers only. Fleming asserted:

Another way we look at price separation is around key seasonal events. Back-to-School is an event that crosses multiple categories. We compete with many different retailers, multiple channels. And what we measured here is there's 35 items that really matter to customers around Back-to-School. And the basket of goods that the customers could get at Walmart during this timeframe, we had a price gap that was 9.6 percent against mass discount, all the way up to over 100 percent against category specialists. And the results were such that we won the season. We had a 4.5 percent gain, and the market was down eight percent, and we continue to take this through as we follow the rest of the season.