Wal-Mart lowers grocery prices
Looking to keep customers, Wal-Mart employs the strategy it knows best: lower prices.
Shares of traditional grocer Safeway (SWY), for example, trade at a mere fraction of prices reached in 2001. Unfortunately for the sector, things are not going to get any easier.
Last week, Wal-Mart confirmed a report that it would slash prices on grocery items in hopes of boosting traffic at its stores.
The king of price rollbacks is set to discount up to 10,000 items beginning April 1.
The move is dramatic, as the grocery business is well known for having low profit margins. How can Wal-Mart hope to make any money by cutting prices?
Apparently the idea is to cut prices so that customers keep coming to its stores. There is a concern that traffic volumes are dropping as the economy recovers.
Wal-Mart received a tremendous boost during the recession as strapped consumers, rich or poor, flocked to its stores for low prices. Rivals Target and Costco (COST) did not fare so well.
The move to cut prices on food items is an acknowledgement that perhaps the grip of recession is lifting. New Wal-Mart customers may be returning to higher-priced retailers.
The competition is fascinating.
Clearly, profit margins already tight in grocery will be tighter for Wal-Mart. If indeed more customers shop at its stores as a result of the discounts the company will see sales volume increase.
Compare this move to reducing beverage prices for the summer at McDonald's. With soft drinks, the cost is minimal. The bottom-line impact is less with a high-margin product.
That is not the case with groceries, making the move a bit risky for Wal-Mart. Sales of other items or more shoppers in the stores will be needed to make the risk pay off.
The likely loser in this competition will be the traditional grocers. Unlike Wal-Mart they don’t sell higher-profit-margin items. Discounting hurts across the board, but they have little choice.
No wonder the S&P 500 Food Retail Sub-Industry is lower on this news.
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