Wal-Mart’s mantra — “Save money. Live better.” — may not apply to its suppliers as reports of the retailer’s plans to cut food prices have analysts wondering how much more squeeze fresh produce suppliers can withstand.
Reports about the plans hit the financial trade media in early March, but Wal-Mart had not officially announced food price cuts as of March 15. Officials with the Bentonville, Ark.-based retail chain did not respond to requests for information.
However, in a February conference call, Bill Simon, president and chief executive officer of Wal-Mart U.S., referenced the rising cost of food as a continuing issue for Wal-Mart customers.
“A challenging economy and rising gas prices will continue to drive customers to seek value,” Simon said. “We’ll continue to help consumers adapt to such trends.”
Dick Spezzano, owner of Spezzano Consulting Services, Monrovia, Calif., said there is no doubt costs are increasing for produce growers, shippers and distributors.
He cited diesel prices as an example of a production cost that can’t be controlled. Such variables coupled with relatively high supplies right now are working against growers in particular.
“We had such a wonderful winter,” Spezzano said. “Supplies are up, which means prices are down … This is a time when Wal-Mart can take advantage of spot markets and make deals.”
The Producer Price Index for fresh vegetables, for example, was down 7% in February compared to January and down 51% compared to February 2011, said Brian Todd, president of the Food Institute, Upper Saddle River, N.J.
Fresh fruit is in a slightly better position with a PPI decrease of 1.3% for February compared to January. Compared to a year ago, the fresh fruit PPI is actually up 1%, Todd said.
All other food categories are enjoying increases in their Producer Price Index numbers compared to 2011, which Spezzano said shows producers supplying other departments of Wal-Mart’s grocery operation can more easily handle pricing pressure than the fresh produce industry.
One question analysts are asking is whether Wal-Mart will be able to buy significant quantities at a cost much lower than they are paying now.
Although traffic has increased recently, analysts point to Wal-Mart’s six consecutive quarters of declining traffic as one likely reason behind the plans to drop food prices. They also say even though Wal-Mart’s sales have increased in the past two quarters, the previous nine straight quarters of declining sales hit the chain hard.
Spezzano said the chain’s switch from vendor/distribution center category management to regional buying offices, such as the office in Wenatchee, Wash., which handles onion and apple purchases for Wal-Mart, has allowed the retailer to cut some costs.
Todd and Spezzano both pointed to Wal-Mart’s decision to back off private brands and return its focus to national brands at low prices as another factor contributing to consumers returning to the chain’s 4,000 U.S. stores.