Is the recovery hurting Wal-Mart?

The current price cuts are part of an effort to lure back consumers whose tastes are getting pricier once more.

By InvestorPlace Apr 9, 2010 2:58PM

The world's largest retailer, Wal-Mart Stores (WMT), will cut prices on as many as 10,000 food and general merchandise items in an effort to reverse its slowing U.S. sales growth. The new pricing has already begun in the company's 3,700 U.S. stores.

Wal-Mart was generally believed to be the company that benefited most from the economic downturn, attracting new customers from a suddenly less-wealthy middle class. The recovering economy has boosted sales at most other retailers. Direct WMT competitors Target (TGT) and Costco (COST) both reported a 10% jump in same-store sales in March.

Wal-Mart no longer issues monthly sales figures, but it's no secret that U.S. sales are slowing down and part of the reason is that those recently won-over middle-class customers are returning to their previous favorites.

Wal-Mart denies that it is losing these new customers, citing instead lower prices for food and electronics, two of the company's largest revenue drivers. Company officials say the trend is reversing, which is a bit odd because Wal-Mart is the primary reason the trend started in the first place.

The company emphasized electronics during the past holiday season and moved a lot of merchandise by keeping prices down. If Wal-Mart is seeing prices for electronics rise, perhaps the conclusion it should reach is that if there's no difference in price, maybe customers prefer to shop elsewhere.

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By lowering prices on thousands of items, Walmart hopes to hold on to some of its newfound customers. To get to the new price points, Wal-Mart appears to be doing what it always does -- beating up on its suppliers. Well, perhaps that's a bit of an exaggeration. But the company does admit that it is asking suppliers to lower prices in exchange for prime store locations. As Wal-Mart's chief marketing officer said of the store's suppliers in The Wall Street Journal, "(T)hey are competing with each other to get space and visibility at Wal-Mart."

That's how Wal-Mart has been able to remain profitable even as revenues soften. Margins and profits grow at the expense of suppliers, who have no other choice but to take the lion's share of the pain.

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