Wal-Mart Rollbacks: Real or Not Really?
The holiday season is coming up and Wal-Mart is dropping
prices on key items including televisions, toys and turkeys. The company
has been churning out press releases in recent weeks to announce the latest
rollback designed to help consumers “Save money. Live Better.”
Richard
Hastings, a consumer strategist for Global Hunter Securities LLC, told Bloomberg, “This
is the proven and effective method they deploy using major categories to
drive loyalty and to take marginal sales away from the competition.”
Some
wonder if Wal-Mart’s price-cutting will be the final nail in the coffin
(the chain recently started selling those) of struggling retailers. Others
have suggested that Wal-Mart is following its traditional pattern and that
this year’s rollbacks are pretty much in line with the past but that the
company’s public relations machine has made it appear to be something bigger.
The
chain’s stores in the U.S. are selling turkeys for 40 cents a pound, about
a third of the average price of birds in 2008, according to the American
Farm Bureau Federation.
“We’re proving that we’re committed to helping
moms afford the holidays in these tough economic times,” Jack Sinclair,
executive vice president, groceries, Walmart, said in a press release.
Wal-Mart is selling a Sharp 46-inch television, which
normally retails for $1,158, for $698. The company also announced this
week that it was lowering prices on 100 additional toys.
“We’ll offer aggressive
pricing on toys this season to ensure moms can afford the gifts that help
create a holiday their kids will remember,” said Laura Phillips, vice president
of toys for Wal-Mart, told the Arkansas Democrat-Gazette.
Discussion
Questions: Is Wal-Mart being more aggressive with its pricing this year
versus past holiday seasons or is its media machine creating an impression
of more dramatic rollbacks than actually exist? As
a competitor, how would you deal with the moves Wal-Mart is making?
Seems to me that Wal-Mart is doing pretty much as it has in the past. Except this year there are more retailers in dire financial straits than ever before. The result will be Wal-Mart gobbling up dollars that could be going to competitors, and an eventual bankruptcy filing next year by some competitors. Wal-Mart can’t charge those low prices everywhere. Here in Wisconsin, we have some minimum markup laws to protect the competitors. It’s interesting to see shoppers bypass one Wal-Mart to hit the first one across the Illinois border to save hundreds of dollars.
How does one compete? Good question that usually results in the same old boring cliches about good service. However, I’m finding the service levels provided by Wal-Mart’s tennis shoe wearing employees is pretty much on par with their higher-priced competitors. The only difference is the employees at the competitors’ are dressed better.
Hard to say without doing a complete formal price analysis but it does seem they are being more aggressive in an attempt to capture discretionary holiday dollars earlier in the sales cycle.
Walmart is consistent in reinforcing its low price positioning. Aside from their size and scale, they can do it because it (and other winning retailers) insists on low prices from suppliers rather than payola which permits manufacturers to charge far more than they pay. Of interest may be major suppliers/manufacturers made about 8 times the profit and had about 13 times the market value per dollar of revenue of major supermarket chains.
Rollbacks are often at the expense of the vendor. Manufactures pay the difference to Walmart between the current regular price and the rollback price, sometimes having to protect penny profits or margins for existing inventory. This can be an expensive proposition for some of Walmart’s vendors. However, it’s not much different than buying a costly promotional program from other retailers.
You have to give credit where credit is due and Wal is great at marketing itself to the consumer. I don’t think rollbacks are going to be any more aggressive than in the past. You also have to look at the strategy they employ (which is classic for retailing). Sharp TV at $698 goes down like this: Each store gets 3. The next cheapest TV is not on sale and is sold at full points.
And as for turkeys, look at the brand. Is it one you ever heard of? Pack sizes are also shrinking, making things seem cheaper when you are actually getting less volume. There are savings but the smart shopper will find better deals and better allocation elsewhere.
In the ’80s, when the Japanese were trying to corner the market on chip production, its government subsidized “dumping”–selling below cost into the US market. The technique was effective.
I see what Walmart is doing as similar. The company is taking already low-margin items like toys, turkeys (which are actually loss leaders generally) and electronics and pricing them close to cost. While the manufacturer may be absorbing some of the pain, the purpose is clear–score points with the consumer and drive competitors out of business.
The government isn’t subsidizing Walmart, but its more profitable lines of business are…you can’t fault the strategy, whether we think it’s overall good for the country or not.
Walmart has always used the media to communicate or confuse its competitors. It either disseminates or allows the media (public and/or trade) to discuss concepts/ideas/strategies, etc, which are contrary to what the Bentonville Giant is really planning to do. An example would be Walmart’s disclosure that it intended to build a number of Marketside formats to compete with Tesco’s Fresh & Easy. It got everyone’s attention, including Tesco, Target, and the C-stores, but they have not added a single location.
However, in this case, the emphasis on price reductions during the holiday season appears to be genuine and appears to be aimed at reducing the number, size, and strength of competing retailers. With its ongoing SKU rationalization and CSI initiatives, Walmart is putting additional price and margin pressure on its vendors. In addition, the customer-confusing rollout of Project Impact and the delay in its private label transition has created a scenario that mandates a frontal price attack.
In the final analysis, whether the price cutting is real or imagined matters little if the consumer believes Walmart’s prices are lower.
Customers understand that a reduced price on a blockbuster item doesn’t mean a reduced price on everything. Safeway reduced prices on some items and announced an EDLP strategy, but seems to raise prices weekly as it sees fit. At a dinner last evening with prominent retail IT leaders in New York City, I heard a number of people suggest that all this tinkering is changing customer behavior.
I’m just curious as to the panelists’ thoughts on this.
With the exception of turkey for Thanksgiving, why is it that every single meat and deli item costs much less at my single store independent? I do price check them frequently, and yet the “perception” is, independents cannot compete. I disagree strongly as you would imagine, and until real perspective is given rather than sheer reverence for the mighty Walmart, all of us are in trouble.
I’ll continue to do battle every day until they turn off the lights, but yes folks–we can compete, and do it quite well.
This is Walmart’s DNA, so no surprise. Remember a few years ago when the economy was booming and they did less of this to preserve margin, and then returned to it after disappointing Black Friday weekend traffic? They learned a hard lesson there.
Given the economy, Walmart will do well with this strategy again this year–unless they totally wreck it with long lines, lack of service, and out-of-stocks. Those are their nemesises. To the degree they fix these problems, they gain share.
The only thing that’s going to slow Walmart down will be a booming economy, or government intervention. They’re just getting to be too big and powerful.
In general, the Robinson-Patman Act prohibits sales that discriminate in price on the sale of goods to equally-situated distributors when the effect of such sales is to reduce competition. Price means net price and includes all compensation paid. The seller may not throw in additional goods or services.
Where are Robinson and Patman when you need them?
Are those hundreds of full offices with employees of consumer product manufacturers additional services?
Just asking!
Perception is reality. Whether Walmart is actually “rolling back” prices to the degree they claim is not as important as whether those claims are driving additional traffic into their stores. Their strategy is and always has been built around driving traffic and taking market share. Their marketing message this fall is completely consistent with that strategy.
There is an underlying theme here that manufacturers are giving Wal-Mart more to allow Wal-Mart to price aggressively. That is not my experience.
When my company was supplying Wal-Mart, Target, CVS, Walgreens and Rite Aid, Wal-Mart was our most profitable customer.
We net priced everything to them. One price, the entire year. They ran the promotions out of their margin. The other retailers had a much higher list price, but by the time we got finished paying for everything from rotos to shelf cut-ins to new store openings to anything else they could think of, our net realized price was lower than Wal-Mart. The difference is that Wal-Mart reflected the lower price to the consumer and the others did not.
And the above just addresses pricing. Wal-Mart was by far the best paying customer. All payment was within 30-days. Their competition would often run 90 to 120 days. Wal-Mart never took an unjustifiable deduction; their competition took deductions for their own mistakes.
I became a Wal-Mart fan by being a vendor. They are aggressive, but fair. They have integrity far beyond that of the others mentioned above. They do business the way it should be done.
Sure they’ll lower prices because they can drive that initiative to their vendors in this environment. Walmart is everyone’s biggest client (figuratively and imagined). Sam Walton is famous for once saying, “When you see your competitor over there drowning, don’t throw him a lifeline; stick a hose down his throat!” …Looks like they’re getting the hose out.
Okay, so 40 cents per pound sets the market for turkeys this year? Big deal. Everyone does something stupid with turkeys every year. For the food retailer, it’s the least profitable holiday of the year. Sell your brains out for three days, then go dead for four days. Yet, they continue to beat their brains out every year for a $5 dollar sale that nets them nothing if not a loss.
Food retailers have never been smart about Thanksgiving. Will they ever? I doubt it. Walmart can sell turkeys for just about anything they want to sell them for and so will everyone else. Nothing smart about that.
As far as the other prices go, who knows if they are a bargain or not. And, does it really matter? Perception is reality. Wal-Mart won the perception battle long ago…long ago.
Same story, different day. Go to war on the price perception front with Walmart and you will lose–period. Poor economy or not, a fair percentage of consumers want more from a retailer. They still want an experience. Left only with the lowest common denominator to choose from, they win. Same story different day.
The battlefield of price is littered with dead retailers. The success in this battle–Walmart vs. Everyone Else, will be won by those who create an alternative and can execute better than anyone else. It may seem that it’s all about price. I continue to believe it’s about so much more. Yet, if you offer the alternative you have to deliver. There is no safety in perception with the alternative. That’s why so few have the courage to offer one–a real one.
This is nothing new for Wal-Mart. It only seems different because of the recession. Wal-Mart has consistently done price rollbacks and any change to making their profit margins would be communicated in their quarterly analyst meetings and the response from Wall Street to the impact on their profits. No such news has happened. This is just SOP for Wal-Mart.