Wal-Mart Boxed In By Price Positioning
Has Wal-Mart become a victim of its own success by promoting itself as the
place consumers go to save big on everyday needs and other items? Has it, in
effect, made raising prices and protecting margins to difficult?
Recently, the company announced  it was rolling back prices on thousands of
items in an effort to rejuvenate a business that has reported disappointing
results in recent quarters.
Linda Blakley, a spokesperson for Wal-Mart, told
the New York Post, "We’ve
stepped it up where our customers need us to — with the basics of consumables
and food."
Some analysts have suggested the move was not likely to scare Wal-Mart’s competitors
as the decreases were mostly tweaks. In fact, research by JPMorgan Securities
suggests Wal-Mart’s rollbacks might be little more than the company lowering
prices on items that had recently increased.
According to the JPMorgan, Wal-Mart
has increased prices in its stores by an average of 2.3 percent since February.
Of course, the same research pointed out that Wal-Mart’s prices were still
roughly 12 percent lower than the typical supermarket. Target, on the other
hand, was within one percent of Wal-Mart’s prices.
In a RetailWire poll last month, 86 percent of respondents said Wal-Mart
was "much more" or "somewhat more at risk" to competition
than it had been in the past. The study was tied to a story on research by
Kantar Retail’s Management Ventures, which found Target had lower prices than
Wal-Mart on 40 market basket items in two or three surveys taken over an 18-month
period.
Discussion Questions: Does Wal-Mart’s price positioning make it more
difficult for the chain to raise prices on items than many (most) of its retail
competitors? How can Wal-Mart protect overall margins when more of its business
is in lower-margin grocery categories?
We need to separate reality from perception here. If the perception is that Wal-Mart is less expensive, then they can raise prices all they want as long as they maintain that perception and do remain less expensive than other retailers.
There are categories in which they are only marginally less expensive (and more expensive than Target) and categories where they may be much less expensive. The trick for them may be to narrow the gaps, but keep prices lower on a category by category basis.
How ironic! Walmart is being bit by the very same bug it unleashed on the entire retail industry. Competing purely on price is a losing game, and has been for at least 5 years, since other retailers recognized that shoppers would spend an extra penny or two in exchange for customer service and more innovative products.
We live in an era of complete price transparency. Customers quite logically ask themselves: “Wait a minute…I thought this was the low cost provider. It’s not.”
So now, Walmart will have to raise the bar on customer service and more innovative products to catch up with its competitors. And it must continue to reinvent itself.
Even Walmart executives acknowledge the brand reputation is damaged. Lowering prices is just the barest tip of the iceberg lettuce.
When your point(s) of differentiation rests heavy on price you are vulnerable because price is the easiest aspect of positioning to match. Other can price shop you and adjust their prices accordingly–i.e. Wal-Mart plus X%.
Further, once you establish yourself as a/the price leader, then you are “stuck” with the positioning. To not be could mean consumers’ perception would shift and while the economy seems to be in a recovery mode, consumers are still looking for value and value for many still means the lowest price.
To recoup margin will mean Wal-Mart will have to lower its total cost of acquisition (something it is relentless about all the time) or shift its product mix to the areas it can squeeze out a higher margin and still be a/the price leader.
Wal-Mart is just like every other retailer. They brag about lowering prices on 10,000 items but they don’t say a word about the other 50,000 they are raising to make up for the lost margin. Wal-Mart can raise prices all day long so long as the consumer thinks they are lower prices. Perception is more important than reality.
I’m finding in groceries they are about 10-15% lower than conventional stores but the consumer thinks it’s more like 15-20%. It’s really hard for Wal-Mart’s competitors to gain an advantage when their saying they are within 10-15% of Wal-Mart so therefore they are low priced too. The consumer doesn’t buy into that.
Walmart has for many years staked out a brand position as the price leader. Recently their marketing has taken a more aspirational approach (“Save Money, Live Better”) but it would be foolish for Walmart to abandon its core principles.
Like many other retailers, Walmart is finding its way through the recession and the recovery; its comp sales may look less robust than the competition, but it didn’t suffer as much a year ago. (In fact, Target’s comps look better but they lost market share a year ago when they were perceived as being too high-priced.) So it’s premature to conclude that Walmart is in any way “boxed in” by the strategy that made it the world’s largest retailer.
Is it possible that this is the first crack in the long stated price position of Wal-Mart? Project Impact is supposed to stabilize pricing and reduce the discounting or rollbacks, but it appears that less selection and heavy emphasis on Great Value marketing and awareness is not having the desired results. Once your position as price leader is established, it is very difficult to maintain and can be very costly! Will an improving economy also have a negative impact on the price leader?
Because Walmart is seen as the low cost provider by consumers (perception) it should be easier for them to raise prices (slightly). I was at HEB a few months ago and they index even with Walmart on almost every item. In fact, they are less on many.
As the economy improves, price should mean less to consumers and other retailers including Target should benefit. One interesting trend to follow is the perception of Private Brands. At Walmart, the Private Brand is still seen as the low-cost option with little focus on other attributes (Private Label). Other retailers are putting a lot more energy behind their Private Brands and showing consumers they can provide an item that can compete not only on price, but also on image, quality, and uniqueness. This should help differentiate retailers from Walmart moving forward and help them focus consumers on attributes other than only price.
Wal-Mart has established itself as the low price retailer, “Live Better, Save Money.” That duplicates the abdicated slogan that Kroger used for decades, “Live Better For Less.” That indicates W-M has a traditional thread in its fabric.
Wal-Mart is a lot like most food retailers. They continually move into “opportunity” areas, raising prices as subtly as possible whenever they can, and promoting major price cuts and “rollbacks” when customers and sales slacken off.
But as W-M reports improved profits on slowing sales, it is obvious that they find ways to maintain margins through pricing methodologies even as they promoted on TV all the things they are doing to cut their costs so they can reduce their prices. Yes, there is something traditional about W-M.
Why is lowering prices always portrayed as a desperation move? With Target waking up and smelling the grocery opportunity and everyone from Dollar Stores to Duane Reade ramping up food offerings, Walmart needs to protect market share more than margins. Smart move that will be difficult for others to counteract with the same impact.
Walmart can change prices in either direction far easier and faster than other retailers. No one can keep track of how long a price is rolled-back….
Walmart is no more or less constrained on pricing than any other major mass-merchant; nobody has any pricing power. They, like everybody else, must continue to push prices lower in an effort to retain, and steal, market share. Their entire business model is built on volume, scalability and efficiencies, like every other mass-merchant. Their ability to improve margins resides strictly on the cost side.
Great for Walmart’s customers, not so great for their suppliers. But this is the way it’s been in mass-market retailing for almost three decades now. The pressure on prices and costs never subsides, it only intensifies.
I guess the jig is up and they’ll have to compete based on service and ambiance from now on đŸ™‚
Seriously though, the question is almost a riddle: can they raise prices easily because they’re much lower than everybody else, or more importantly, it’s perceived that they are, or is raising prices difficult/impossible because that’s the only reason people go there, and their customers are uber price-sensitive? I guess they won’t know until they try…oh, that’s right…they did try and it didn’t work; so I guess the answer is: whether easier or harder, there are still limits.
Owning the price position is an enviable place to be. It permits more flexibility on pricing because you don’t have to consistently prove you’re the low cost leader. Beliefs/perceptions trump reality.
Pricing is not a flat line exercise. Walmart merchants know which products are price sensitive and which are not. The best merchants can raise their overall margins while demonstrating better values; customers will remember the wow rather than the woe.
Call me if you’d like to know how you can do the same.
Walmart supports its price driven strategy by supply chain management and is notorious for being a tough negotiator with suppliers.
If there is price pressure on the supplier side that, for some reason, unexplained Walmart cannot suppress, then their low price strategy might be at some risk.
There can only be one price leader in an industry segment and Walmart is it in their category. Target has an edge in shopping experience and, if they can chip away at the perception of price difference, consumers may opt for Target over Walmart.
I’d like to know if the supply chain management strategy has run its course for some reason we did not anticipate.
No business can continue to lower prices and prosper! It is just plain common sense! Wal-Mart’s predicament shows “nothing lasts for ever.”