Wal-Mart Stores Inc. will accelerate price cuts as it battles major grocery chains for food business, a skirmish thatâs sure to reverberate with retailersâ fresh produce suppliers, analysts say.
There is a ârenewed focusâ on rollbacks, or permanent price reductions, at Wal-Mart, the companyâs chief operating officer Bill Simon said in a March 10 investor conference sponsored by Bank of America Merrill Lynch.
âThe higher the rollbacks go in our store, the better (comparison) sales are. So, we are pressing that forward,â Simon said. âWeâre always about price. We have to deliver price, and we do.â
With Wal-Martâs more aggressive rollback plans, the Bentonville, Ark.-based retailer is going after Kroger Co. and other big grocery chains that lured away consumers in recent years, Citigroup Inc. analyst Deborah Weinswig said.
Wal-Mart âis lacing up the gloves as it prepares to step back into the ring and win the modern day price war in food retail,â Weinswig said in a March 14 report.
For years, Wal-Mart, the worldâs biggest retailer, used its size and scale to squeeze lower prices from suppliers and charge less than competitors for the products on its shelves. Wal-Martâs food vendors probably should expect further pressure to reduce prices as the retailer tries to regain lost ground.
âIf theyâre going to deliver lower prices to consumers, theyâre certainly going to look to suppliers to help them do that,â said Neil Stern, principal with McMillan Doolittle, a Chicago-based retail industry consultant.
âI suspect anyone who works with them will feel pressure to help them grow more,â Stern said of Wal-Mart. The retailerâs position essentially is âIf we drive more volume, what can you do to help us reduce costs?â Stern said.
Simon, during the March 10 presentation, said rollbacks would be applied âall across the box,â with a focus on âknown value items and food and consumables.â
He didnât list any specific food categories. A Wal-Mart spokesman declined to comment.
Wal-Martâs plans to step up rollbacks follow a 1.6% decline in U.S. same-store sales, including Samâs Club, during the companyâs most recent quarter.
Recent sales erosion was âa wake-up callâ for Wal-Martâs management, driving a renewed commitment to rollbacks, Weinswig, the Citigroup analyst, said in the March 14 report.
While Wal-Mart used price savings to win customers away from supermarkets during the recession, price gaps between Wal-Mart and traditional grocery stores have narrowed during the past two years, Weinswig said.
Wal-Mart did fewer rollbacks last year, Weinswig said. As the economy improves, Wal-Mart âis seeing the customers it gained during the recession go back to the supermarkets,â she said.
Many shoppers no longer consider the price savings offered by Wal-Mart to outweigh the experience and convenience of shopping the supermarkets, Weinswig said.
Wal-Mart ârealizes that it must act now to keep the customer, and we expect (Wal-Mart) to invest aggressively in price to show consumers the significant savings that they can realize by shopping its stores,â Weinswig said.
Citing Wal-Martâs more aggressive rollback plans, Weinswig raised her rating on the retailerâs shares to âbuy/medium riskâ from âhold/medium risk,â according to the March 14 report.
As Wal-Martâs price cuts boost store traffic, the companyâs share of the $816 billion U.S. retail food business will increase to 21.6% in 2010 and to a third over the long term, Weinswig estimated. Wal-Mart had a 20.5% share of the retail food industry in 2009.
Weinswig also raised her estimate for Wal-Martâs fiscal 2011 earnings by 4 cents, to $4.04 a share, and hiked her forecast for the companyâs share price over the next 12 months, to $65 from $54. Wal-Mart earned $3.66 a share in its fiscal 2010, which ended Jan. 31.
At the close of trading today, Wal-Mart shares rose $1.51, or 2.8%, to $55.42, the highest since January 2009. The stock is up about 3.7% this year.