Walmart's Turn to Discounts Threatens Its Everyday Low Price Advantage
Walmart (WMT) has built its business by providing everyday low prices, but its latest initiative to build store traffic and comparable store sales demonstrates that it's moving deeper into uncharted territory.
By aggressively advertising 30 percent discounts on 22 popular, everyday items, Walmart has gotten the public's attention. The retailer has drawn enough consumer spending with its discount initiative that Coke and Pepsi -- selling at less than $5 for a 24-can case -- have had trouble keeping its stores restocked.
Walmart's main problem is that it might be encouraging consumers to overlook its everyday low prices, which are set low enough to be competitive with most discount prices. The natural consequence is for Walmart to start playing the high/low game, a common pricing strategy that maintains two price tiers, one a bargain, one not so competitive. Rivals such as Kroger (KR), with its sophisticated loyalty card program, can play that game effectively.
As Walmart becomes more aggressive with its price rollbacks, shoppers may begin to see it as yet another retailer that offers better prices at some times and worse at others. In that case, rivals that offer particularly low prices on a handful of items may seem more competitive with Walmart as consumers begin to compare discounts rather than total spend.
Everyday low price traditionally meant that Walmart customers could expect a great price on any item, so good it wasn't worth shopping around or clipping coupons to get something better. As the retailer makes cost calculations more complex with its discount initiatives, consumers who want shopping simplicity may be turning away from Walmart to shop thriving rivals that have stuck to the most conspicuous everyday low price strategy of all, the dollar stores.
Walmart's resort to promotional bargains is an acknowledgment that many consumers have responded to the discounts offered by its rivals, particularly as competitors became more adept at using using sales and loyalty card data to target promotions. And Walmart wants those bargain-hunting shoppers.
Beginning in the run up to last year's holidays, Walmart had success with highly publicized discounts on items such as laptop computers, toys, DVDs and books, effectively establishing itself as the most aggressive retailer on price. It forced major rivals to match its discounts, which necessarily squeezed their margins but didn't cripple their efforts. And Walmart is keeping up the pressure in consumer electronics particularly, and a $97 iPhone looks to be the next turn of the screw.
Yet, the competitors most affected by the Walmart's promotions -- including Amazon (AMZN), Target (TGT) and Best Buy (BBY) -- still fared pretty well. Best Buy, according to an analysis by market research firm NPD Group, has done better than Walmart in winning over customers set adrift by last year's demise of electronics specialist Circuit City.
As it struggles to improve its sales performance, Walmart has extended its discounting strategy to everyday needs. It will pressure competitors such as supermarkets, but they will fall back and hone their own strategies in response, as Best Buy and others have done in discretionary product categories. Effectively wielding everyday low price for years, Walmart made the competitors that have survived it better, so its decision to take them on at their strengths will test its capacity for adapting to the market it essentially created.
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