How will Walmart’s price cutting affect Kroger and other rivals?

Discussion
Photo: Walmart
Apr 21, 2017
George Anderson

Walmart may be the largest seller of groceries in the U.S., but that doesn’t mean it doesn’t want even more of the business. The retailer, in its predictably Walmart way, has turned to cutting its prices even further. The result, according to a Wall Street Journal article, is that rivals such as Kroger are taking a hit.

Kroger, which had previously discussed the impact that food deflation was having on its numbers, reported a same-store sales decrease in the last quarter of 2016, the first such decline in 13 years. On the chain’s most recent earnings call, executives acknowledged that competitors were investing in price to gain share.

CEO Rodney McMullen said, “We’re really doubling down on the customer experience. We’re getting even more aggressive on process change and taking costs outward. It makes sense to take costs out and [improve] the competitiveness of our model.”

Mike Schlotman, Kroger CFO, said the company is relying on its 8451 data analytics unit to help craft meaningful offers for the chain’s customers.

“If you go into the store, from checking the retail price you wouldn’t see it because of offers that are made directly to customers, some via coupons. It’s all the above because different customers react different ways to different promotions, so it’s becoming increasingly personalized offers based on what that particular customer wants and desires are.”

The Journal reported on a Wolfe Research market basket study, which found prices at Walmart stores had dropped in markets across the U.S. Prices in Atlanta were down 4.9 percent while those in Philadelphia (5.8 percent) and Southern California (2.7 percent) had also dropped.

Reuters recently reported on a Walmart price test covering 1,200 stores in the Midwest and Southeast. The news service conducted its own checks and found Walmart had “consistently” lower prices than Aldi.

News of Walmart’s price cutting also comes on the heels of meetings with the company’s consumer packaged goods suppliers in which the retailer demanded price concessions. Vendors, who were not identified, told Reuters that Walmart expects them to help the chain achieve lower prices than its competitors “80 percent of the time.”

DISCUSSION QUESTIONS: Do you see a prolonged price battle affecting the grocery market in the U.S.? What will be the impact of Walmart’s price cutting have on grocery rivals large and small?

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"A prolonged price battle will be, quite simply, disastrous for all concerned."

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17 Comments on "How will Walmart’s price cutting affect Kroger and other rivals?"

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Steve Montgomery
BrainTrust

We all understand the math. Reducing prices without either a reduced cost of goods and/or reduced operating cost means reduced profitability. The food industry has never been long on net margins and a prolonged price battle means some locations and companies will not survive.

Long gone are the days when physical distance between competitors helps insulate them from the pricing actions of others. Today people are well aware of the price they are being offered by different retailers.

Kroger’s personalized pricing tailored to the individual may help them retain that customer but does not work to induce trial by new customers. It appears to be more of a way of keeping the customers that they have than a way of securing new ones.

Ken Lonyai
BrainTrust

Price wars become nothing less than commodification and commodification can only be sustained by large players, especially if they have other revenue streams. So when it’s Walmart leading the price cuts, grocery competitors have reason to be concerned.

Walmart is legendary for its ability to squeeze more product out of a dollar than anyone, so the three main ways to fight back are unique experiences, convenience and personalization. In grocery, those are harder things to achieve than in other categories. I think Kroger is on the right track and that they should really look at convenience tactics, like two-hour home delivery or cart scanning checkout, but anyone with deep pockets can match those services.

Having said all that, moving to non-commodity brands and unique products will also thwart a price competition, but it’s very risky for an established merchant to migrate shoppers to new brands and products in amounts sizeable enough to matter to their bottom line. Very risky.

Phil Masiello
BrainTrust

Walmart is not going to take losing market share or sales without a fight. And they have the efficient supply chain to provide better value to consumers. I see grocery deflation continuing as Walmart battles to gain market share while at the same time driving their e-commerce business.

The fallout from this will hurt, not only the large and small grocery retailers but the other mass retailers as well. Many of these grocery and mass chains rely so heavily on RDAs. The manufacturers, who are moving to a more direct online model, are reducing these RDAs. This leaves the chains with a tighter profit model. Since their supply chains are not as efficient, their bottom line and top line will be effected.

David Biernbaum
BrainTrust

I’m not convinced that a few lower price points at Walmart will have a major impact on Kroger and other supermarket chains. Two reasons:

  1. Comparing prices between Walmart and Kroger becomes convoluted because Walmart operates with a strict EDLP operation, but Kroger and most other supermarket chains actively promote with temporary price reductions and other price events, which means price points are not necessarily as consistent.
  2. Walmart’s price cuts are only as deep as cost reductions granted from manufacturers and vendors. Many suppliers to Walmart were unable to reduce cost to Walmart because supplier margins were very thin to begin with, and the cost of doing business has not decreased.

I strongly believe that consumers will stay fairly loyal to current favorite retailers and that there are a number of variables other than a few pennies that drive their decisions.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Agreed wholeheartedly. Consumers are increasingly thinking in terms of whole basket cost relative to other stores and shopping multiple stores with purchases based on a wider range of factors than just price. The empowered consumer is being trained that prices vary while price, as a readily measured element in consumer selection, gets too much emphasis in constructing purchase motivators.

Max Goldberg
BrainTrust

When the big boys start slugging it out on price, consumers win but retailers and suppliers lose. Smaller grocers who cannot match Walmart’s and Kroger’s systems and buying clout must create strategies that enter the price battle. As long as Walmart can drive costs out of their systems or get manufacturers to reduce prices or take over functions formerly paid for by Walmart, they will escalate the price wars, putting pressure on Kroger, Safeway, et al. to match the price of lost market share.

Paula Rosenblum
BrainTrust

Just what we need. Another race to the bottom. I think rivals have learned to live with Walmart for the most part. Those who didn’t are long gone.

A prolonged price battle will be, quite simply, disastrous for all concerned. Walmart isn’t Amazon. Its investors will not tolerate runs of losing quarters. And speaking of Amazon, that IS a company whose investors will tolerate long runs of losing quarters. And then there are dollar stores, who have been nipping at the edges of Walmart’s basket for years, and the soon-to-come Lidl and expanded Aldi. So who’s going to win? Ultimately, not Walmart.

Bad idea, old thinking.

Tom Redd
Guest

The battle will ride high for a while then reporters will head back to find Amazon stuff to ramble about. Walmart is playing the right game — get the price right. At the same time they are tuning their assortments to better match regions. The pressure is on the big guys — except their smaller regional marketplaces — like Kroger’s Fry’s division. They are a marketplace-designed store, closer to neighborhoods in Arizona with well-targeted loyalty coupons, gas points and a seniors’ day. Smart grocers like Fry’s will feel no major effect. Other price-unaware grocers will — in the Midwest the stores run by regional food distributors shock me. A five-pound bag of sugar going from $4.50 to 5.75? WOW. These are the stores that fool you — names like Mom’s Foods, Bill’s, etc. Good-sized stores — single branded in many areas and way overpriced. Walmart’s changes will not impact these stores. They are just local food distros, extra real estate. Never busy and way overpriced but local. Aldi is parking stores near them.

Let the battles continue! Let the shopper — especially ones who have less to spend — win.

Ben Ball
BrainTrust

If this continues, and I believe it will, get ready for zero growth in both units AND dollars in the grocery industry for the foreseeable future. Industry forecasts are already pretty unanimous in calling for flat unit growth and nominal dollar growth equal to pricing — roughly 2 percent to 2.5 percent.

Frank Poole
Guest
6 months 1 day ago

Forgive my cynicism (it’s Friday), but part of me thinks that Kroger might be overthinking its customer. When people get in their car after work or on a weekend, do they really embark on a “journey” hoping to find “compelling” or “engaging” experiences, with personalized coupons pinging in their pockets? Or do they just want cereal and soup for the kids?

So while nobody wants a race to the bottom, maybe we should be thanking Walmart for nudging that boring concept of “price” higher up the list of priorities.

Mohamed Amer
BrainTrust
Put simply, Walmart has to protect and hopefully increase its market share in the grocery segment where volume is a key lever in making some money or losing a lot of it. So at a macro level Walmart is battling Amazon to slow down its online grocery penetration while signaling new entrants (like Lidl) or expanding ones (like Aldi) that it will be economically difficult to justify investing in new stores and distribution networks. With projections for Amazon to be a top five grocery retailer in the U.S. in the next five years (see my comment here), coupled with consumers’ desire to make more purchases online, Walmart seeks to ensure that its size and scale (fixed costs) continue to provide the company with a clear cost advantage in the market and not become a liability. Also, once inflation returns later this year, albeit at low levels, Walmart can expect slightly more favorable store comps and a profit bump by taking market share from weaker competitors. Price battles are nothing new and will not go away as long as we do not operate in a monopoly or oligopoly. The downward pressure on prices, or slow price increases (vis-à-vis commodity price increases)… Read more »
Bill Hanifin
BrainTrust

The admired and celebrated business model of leveraging the supply chain to lower costs and deliver value to customers is core to Walmart’s success. That said, there can only be a very limited number of players per category who can successfully play this game.

Walmart can continue to lower prices and presumably much of this will be accomplished at the expense of suppliers. This business model has limitations in the long run as suppliers increasingly become begrudged captives to the big retailer while they struggle to return acceptable financial results to their own stakeholders.

Kroger is wise to be “doubling down on the customer experience.” That is a place where Kroger can carve out a clear advantage, as Walmart struggles to make its store a “great place to shop.” Cheap, yes — great experience, well.

Price competition usually ends badly for all but the category leader. The rest of the grocery market is wise to pursue alternate avenues to garner the attention of consumers.

Adrian Weidmann
BrainTrust

While price is an important variable in the shopping equation, it is certainly not the only one. Value, convenience, respect, quality and familiarity are just some of the other variables that are unique and personal to each shopper. A sustained price war will provide some customer value but will erode brand value because the lower prices will not be sustained over the long run. Wall Street will punish retailers that show lower profits.

Brian Kelly
Guest
6 months 1 day ago

I agree with Tom Redd, “let the shopper win.” Walmart’s historic strength is in smaller markets. These more rural areas remain in severe economic distress. Yesterday’s news: global farming is squeezing and Caterpillar leaves Peoria for Chicago. Economic consolidation driving wage stagnation and job loss means Walmart’s lower prices helps those fellow citizens. Plus, as the dollar and convenience stores expand in those markets, Walmart has to protect share.

For Walmart, the balance of the assortment can protect total store profit. For competition, it depends. Based upon location, some will struggle and some will innovate to protect their share.
Life goes on and retail ain’t for sissies!

Craig Sundstrom
Guest

There’s a large segment of the population who will always shop Walmart, a large segment who will never shop there and a segment who may/may not based on various criteria. Certainly, price is one of them and a “price war” certainly could break out where that middle demographic is prominent. I’m thinking suburban area of metros and small cities in the Northeast and Midwest, where (meaningful) competition still exists but the economy is marginal. The shopping cart follows the election results.

Tony Orlando
BrainTrust

I live this every day. There is a price war between Walmart and the Aldi across the street, both of which are 4 miles down the road. They have gallons of milk at $1.39, and a dozen eggs for 27 cents. Walmart wants their business back, and will discount the top sellers to next to nothing to gain back what they feel they deserve in the marketplace. Meanwhile Rome (local independents) is burning, and there are no tools to compete against this.

The insanity of retail today is especially bad for supermarkets, as margins slip into territories that in my memory have never existed before. I can only speak for our marketing area, which is rural, and very poor, which makes these wars even worse.

I will use the best weapon I have, which are the perishable deals I offer that they cannot match, and see what happens. Not a lot of fun anymore, as it has become a battlefield of scorched earth policies by the big guns. I got two of them right down the road.

Have a great weekend everyone.

Larry Negrich
BrainTrust

In the short term the shopper may save a little money on each visit. In the long run price cuts, in a sector that doesn’t have much room for a cut, means poorer service, shallow assortment and the loss of convenience of locations, as some stores will surely not survive. However, the destruction of the competition through reduced price seems to prevail.

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Braintrust
"A prolonged price battle will be, quite simply, disastrous for all concerned."

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