Wal-Mart Pricing Report: Round II

In Salt Lake City Wal-Mart Gets A Run For Its Money

In our May 2002 issue, Produce Business inaugurated a continuing series in which we analyze how supermarkets are competing with their local Wal-Mart Supercenter

The program was launched at the Wal-Mart Supercenter in North Windham, CT, and we found that when it comes to produce pricing, local competitors Big Y, Shaw’s and Super Stop & Shop were getting creamed. In fact, the value proposition Wal-Mart offered was so extreme — with Big Y pricing out at 36 percent over Wal-Mart, Shaw’s at 34 percent over Wal-Mart and Super Stop & Shop at 23 percent over Wal-Mart — it led us to question the long-term viability of supermarkets as a mass market medium.

In the month of July this year, with the assistance of Moss Landing, a CA-based market research firm, U.S. Marketing Services, we traveled closer to Wal-Mart’s home base, going to Salt Lake City, where we compared a Super Wal-Mart with an Albertson’s, a Harmon’s and a Smith’s.

Salt Lake City Advertised Specials

Wal-Mart vs. Albertson’s

Wal-Mart vs. Harmon’s

Wal-Mart vs. Smith’s

The comeuppance of this recent study is that in Salt Lake City, at least, its supermarket competitors are not allowing Wal-Mart the same advantage in pricing that the Connecticut supermarkets allowed. Supermarkets seem to be taking Wal-Mart much more seriously. The study of a large representative market basket indicates that Albertson’s came in at a pricing level 12 percent over Wal-Mart, Smith’s came in at 6 percent over Wal-Mart, and Harmon’s managed to pull nearly even with Wal-Mart, pricing at only 2 percent over Wal-Mart’s pricing level.

These numbers have great significance. The large-store format of a Wal-Mart Supercenter precludes having as many locations as a smaller conventional supermarket or Food and Drug combo store. Therefore Wal-Mart’s concept depends on drawing consumers from a larger radius. In Connecticut, with prices over Wal-Mart ranging from 23 percent to 36 percent, it was possible to imagine that the price draw of the local Wal-Mart Supercenter was sufficient to keep the customers coming.

In Salt Lake City, however, where the difference with, say, Harmon’s, is only 2 percent, it seems unlikely that price will be an effective draw. It should be noted that our survey was confined only to the value proposition that produce was offering. It is, of course, entirely possible that a Wal-Mart Supercenter could offer superior value in meat, grocery, general merchandise, pharmacy or other areas and still win out on price overall. If this is true, the Wal-Mart Supercenter could become the preferred shopping venue, but not because of its produce pricing.

It is impossible to determine whether lower prices in the region are due at all to chains being concerned about Wal-Mart

Another important note is that it is impossible to determine whether lower prices in the region are due at all to chains being concerned about Wal-Mart. It is entirely possible that only one chain feels obliged to compete with Wal-Mart on price, but the other supermarkets in the area may feel it important to compete with that one supermarket chain.

Beaten At Its Own Game?

Perhaps even more important than the general price level is that, for the first time in our study, we find that a store has actually beaten Wal-Mart prices on advertised items.

Going into Connecticut, we hypothesized that although supermarket prices might be higher overall — as many supermarkets use a High/Low pricing formula, and Wal-Mart is famous for its Every Day Low Price (EDLP) structure — we could expect supermarkets to under-price Wal-Mart on advertised specials.

Because of the rapidly changing nature of produce quality, variety and price, we thought a clever operator might be able to offer cheap specials that would confuse consumers, make them remember items on which Wal-Mart is higher priced and ultimately make it difficult for Wal-Mart to firmly establish in the minds of consumers that its produce operations also follow its slogan: “Always the lowest prices. Always.”

Wal-Mart Supercenter vs 3 Chains
Price Comparison — Salt Lake City

October 2002 – Prices Available To The General Public

To the contrary, in Salt Lake City we find that on advertised products, Wal-Mart is letting its competitors beat its pricing.

Although Wal-Mart beat out Albertson’s on its advertised specials, with a nine-item market basket of Albertson’s advertised items coming in at $12.66 for Albertson’s and only $11.22 at Wal-Mart, both Smith’s and Harmon’s provided better pricing for the consumer on their advertised specials. A market basket of the 14 advertised items carried at Smith’s came in at $11.96, whereas the same items cost $15.41 at Wal-Mart, a difference of 22 percent. Harmon’s market basket of 11 advertised items beat out Wal-Mart by 43 percent, with the Harmon’s specials selling for $4.37 at Harmon’s and $7.68 at Wal-Mart.

Playing ‘Possum?

The word in the trade about Wal-Mart — and, indeed an image the company may have tried to cultivate — is that Wal-Mart will never start a price war but will never lose one either. But here in Salt Lake City, Wal-Mart is willing to be beaten on advertised specials.

What is going on? Is it an errant regional manager who just isn’t fighting as hard as the home office would like? Is it a corporate decision to allow Wal-Mart’s prices to be undercut on advertised items? Or is it a decision to fight for price on certain high-profile items? Afterall, Wal-Mart has been least expensive on bananas in every city we’ve visited.

Does produce reveal an Achilles heel in the Wal-Mart system? Putting items on special often means selling a lot more of the item. Wal-Mart’s competitors know what they are putting on special, so they order extra. If Wal-Mart waits until the paper hits the street to find out its competitors’ ad items and then adjusts its prices and always beats them, the consequence might be an unacceptably high level of out-of-stocks.

Still, it must rankle Wal-Mart. How will the chain bring its reputation for low prices into the produce arena if the consumer, who happens to visit both a supermarket and a Wal-Mart Supercenter in the same week, sees the prominently promoted items in the supermarket are cheaper than at Wal-Mart?

We’re not talking about insignificant amounts on these advertised specials. In July, Wal-Mart was selling, for example, a medium-size Mission brand avocado at $1.12 each, while both Harmon’s and Smith’s both had medium-size avocados on special, with Harmon’s selling Calavo for 50 cents each, and Smith’s selling Mission avocados for 50 cents each. A core customer for Wal-Mart, such as an Hispanic family that loves to make guacamole, will not forget that Wal-Mart was the pricey one.

Here are some other advertised specials:

• Corn, a favorite of barbecuers and a perfect item for Wal-Mart, as they can sell families all that general merchandise for summer camping trips and outings, was priced 20 percent cheaper, on ad, at both Harmon’s and Smith’s.

• Honeydew melons are another summer favorite and, once again, on ad, both Harmon’s and Smith’s are selling honeydew 27 percent cheaper than Wal-Mart.

• A favorite drink accompaniment, as well as an essential Mexican food ingredient, is limes, and the Harmon’s ad comes out at almost 40 percent less expensive than Wal-Mart.

• Smith’s kills Wal-Mart with an advertised special on strawberries almost 50 percent less than Wal-Mart.

• Watermelon, that favorite of big-buying picnickers, can be bought at Smith’s for nearly 38 percent less than at Wal-Mart.

Now, these were all advertised specials, and overall, Wal-Mart did come in as the lowest priced in the market. But 2 percent over Harmon’s is pretty thin gruel if you are planning on using price to attract customers.

Salt Lake City is showing us a very different picture of the competitive situation vis-a-vis the Wal-Mart Supercenter than what we saw in Connecticut. Perhaps the next stop on our tour will give us more insight.

Of Brands and Prices

One interesting pricing practice is the treatment of jarred and semi-perishable branded items. We can use as an example Del Monte brand jarred fruit. Logic would make us expect that supermarkets would be highly competitive on an item like this. After all, it is impossible for a consumer to know the exact quality specifications of a selection of produce without personally inspecting it. And even then, not all shoppers have faith in their own ability to ascertain quality distinctions on fresh produce.

So, even if a shopper knows some other store is less expensive on peaches, the shopper will not necessarily assume he or she is being ripped off. If the consumer believes in a store, then the consumer might just assume that the favored store buys better stuff. So, at least theoretically, we can see that stores might be willing to accept being higher priced on certain bulk items and confident that the consumer will not consider the store high priced, just high quality. But an item like Del Monte jarred fruit would seem to demand a different thought process. As a highly consistent, jarred, branded product, consumers can be expected to assume that all Del Monte jarred fruit is created equal, just like all Campbell’s Soup or Heinz Baked Beans are created equal.

Yet, other than when the item is on sale, as it was at Smith’s in Salt Lake City during our study, every single supermarket has allowed Wal-Mart to consistently portray itself on a parity product as a bargain. Indeed the more competitive a store is with Wal-Mart pricewise, the more out of whack pricing seems to be on an item like this. For example, Harmon’s, which overall comes down to within 2 percent of Wal-Mart’s pricing level in our study, is content to sell Del Monte jarred fruit at $4.29 each, whereas Super Wal Mart finds $2.98 very acceptable.

What accounts for this anomaly? The answer seems to be a search by supermarkets for margin enhancers. These products seem to be viewed as expendable and only valuable if they produce a chance to increase the department’s average percentage profit.

Would profit dollars increase at a lower price point? Perhaps. But certainly if one were in a battle with a Wal-Mart Supercenter, one would be wary of the message this obtuse price sends to consumers. It seems to say that if we can grab a bit, we will.

Of course, Wal-Mart has its own problems with certain kinds of items. Wal-Mart Supercenters do have a more limited range of offerings than the largest supermarkets, but they try to have a broad range. This may get them into trouble sometimes. For example, at the Wal-Mart Supercenter we studied in Salt Lake City, Wal-Mart carried Melissa’s brand jicama. In fact it was the only one of the stores studied to carry a branded jicama at all. But it is also an item where Wal-Mart got creamed on price. Albertson’s, Smith’s and Harmon’s all undersold Wal-Mart on jicama, with prices ranging from 22 percent lower at Albertson’s and 46 percent lower at Harmon’s. Perhaps Wal-Mart just doesn’t care about this comparatively small item or, perhaps, to have some specialty items, Wal-Mart just turns this over to a branded source without worrying about being cheaper. But, still, jicama is eaten both by yuppies doing salads and dips and by Hispanics. Maybe Wal-Mart also is sending a message it hasn’t intended to send.