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Wal-Mart cuts prices to boost business
NEW YORK -- Wal-Mart is counting on $1 ketchup bottles and sub-$4 cases of Coke to get its low-price mojo back.
The cuts at its U.S. Walmart stores, which came ahead of Memorial Day weekend, have already pushed rivals such as Target into price wars. And the markdowns are expected to keep coming throughout the summer.
They're one of the boldest moves the world's largest retailer is making to turn around sluggish business at its U.S. namesake chain and win back shoppers from rivals. The cuts aren't across the store but target 22 foods and other essentials at an average savings of 30 percent -- splashy enough to get attention and perhaps change perceptions.
The world's largest retailer is also restoring items like certain soups and laundry detergent it stopped carrying when it tried to declutter its stores. It's also pushing more basic clothing such as socks and underwear after putting too much focus on trendy items that didn't sell.
Wal-Mart was one of the few beneficiaries when the Great Recession began, as shoppers traded down to save money. Now it's having trouble keeping customers in a slowly recovering economy. Cash-strapped shoppers are looking elsewhere for better deals such as dollar stores and local grocery chains. And some wealthier customers, feeling more flush, are starting to head back to the mall.
Wal-Mart, which generated more than $400 billion in revenue in 2009, has blamed stubbornly high unemployment and tight credit for adding even more financial strain on its blue-collar customers, some of whom have limited access to financial services and are running out of unemployment benefits.
But it also takes part of the blame for four straight quarters of declines in revenue at Walmart stores open at least a year. That's a key indicator of a retailer's health.
"Wal-Mart is all about price, and they're all about one-stop shopping. Those are the key ingredients," said Bob Buchanan, a former retail analyst who now teaches finance at Saint Louis University. "Now, you kind of scratch your head and wonder if either of them are true."
"Wal-Mart has made a lot of noise, but customers want to see it in the stores," he continued. "This action is long overdue. They need to drive that message hard."
Deloris Harris, 72, of Ridgeway, S.C., said she pulled back from food shopping at Wal-Mart in the last year because chains such as Food Lion were offering even better deals.
"Some of the stuff isn't that cheap," said Harris, who picked up 10 ears of corn for $2 and hamburger rolls for 99 cents at Food Lion on Friday. But the 24-pack of Coke for $5 at Wal-Mart caught her attention Thursday night on a run to buy Tylenol. She grabbed it and planned to go back Friday to pick up deals on cleaning supplies.
Wal-Mart acknowledged during its latest conference call with investors that its moves to carry fewer items went too far. It's now replenishing 300 it had dropped. Analysts estimated that Wal-Mart pared up to 15 percent of its inventory, sending shoppers elsewhere in search of their favorite brands.
Wal-Mart is still making big profits. Its first-quarter net income rose 10 percent, fueled by cost-cutting and growth overseas. Wal-Mart's thinking: Lower costs let it lower prices, which in turn should drive up revenue and that money would be invested to yield more cost savings.
In fact, Wal-Mart is bearing the cost of some of the deep price cuts, not its suppliers, according to Bill Pecoriello, an analyst who heads ConsumerEdge Research LLC, based on discussions with industry officials.
According to Pecoriello, on a basket of five food items, from Coke to Lay's potato chips, the total price was $11.23 at Wal-Mart, 24 percent less than it was a year ago. It's also almost 14 percent lower than Kroger and almost 26 percent lower than Safeway, according to Pecoriello's estimates. The firm gathers pricing data representing 15,000 stores across the country.
That doesn't include Wal-Mart's move to lower cans of name-brand Coke and Pepsi further in the past few days, from the announced discounted price of $5 to as low as $3.77 in certain markets. The original price was $6.98 for a 24-pack.
Pecoriello noted in his report that Target was selling 12 packs of soda for $2, roughly matching Wal-Mart's price, while Kroger was selling 12 packs for $2.50, less than a year ago.
Some Wal-Mart stores have sold out of the cans and suppliers are having trouble keeping up, Pecoriello said. He added he hasn't seen such low prices on soda in at least five years and estimates that the overall price of soda is down about 20 percent from a year ago.
Linda Blakley, a Wal-Mart spokeswoman, declined to comment on sales and said it has the lower-price 24-packs only where it faces "regional competitors."
PepsiCo declined to comment, and officials at Kroger Co., Safeway Inc., and Coca-Cola Co. didn't immediately return calls.
Though it sells all kinds of items, groceries are what keep customers coming back, and hits hard on the theme of splashy low prices in recent TV commercials. One shows a friendly associate walking down the store aisle placing the discounted items, from Heinz ketchup to Breyers ice cream. The ads put the splashy low prices, such as the $1 deal for a big, 40-ounce ketchup bottle, at center stage. The original price was $2.42.
Wal-Mart has returned to advertising some of its deals in newspapers, the first time since June 2006, according to Michael Exstein, an analyst at CreditSuisse. In addition to its store circulars, Wal-Mart advertises in newspaper inserts like Parade, which have lower costs and require a longer lead time, Exstein said.
"We are working hard to bring our customers the best prices on items they need right now; and to share the news of these price cuts aggressively," Blakley said.