November 9, 2006
Don’t Follow Wal-Mart, Say Analysts
It is going to take more than simply low prices to make this a happy holiday selling season for retailers.
Industry experts speaking to CNNMoney.com said that Wal-Mart’s disappointing sales results in October and previous months means the retailer is going to come out firing with price rollbacks designed to drive consumers into the store.
While Wal-Mart is doing its thing, it doesn’t necessarily mean that all others should respond in kind with deep discounting of their own.
Stephen Hoch, marketing professor and director of the Wharton School’s Jay H. Baker Retailing Initiative, said, “Retailers know that it’s impossible to win the price war with Wal-Mart. If they do, they get their brains kicked in. Going head-to-head with Wal-Mart on prices will hurt them more in the long run than it will Wal-Mart.”
Among those who should not feel rushed to meet Wal-Mart on its own turf are consumer electronics chains, such as Best Buy and Circuit City.
Goldman Sachs analyst Matthew Fassler said, “Mass merchants do not yet carry the assortments or offer the services to pose a serious threat to Best Buy and Circuit City in key product categories, most notably [high-definition] televisions.”
Britt Beemer, retail analyst and chairman of America’s Research Group, admires Wal-Mart’s preemptive approach to the holidays with price cuts in categories such as toys and electronics. He doesn’t, however, advise others to go rushing in after Wal-Mart.
“I think retailers will focus on the big sales item and not blanket discounts. In other words, they’ll take some big items and feature blow-out sales on those,” he said.
Burt Flickinger with the Strategic Resources Group, said Wal-Mart’s approach is looking to bandage over some real issues affecting the company.
“In the next 50 days, its price cuts will give Wal-Mart a short-term volume boost but perhaps a long-term profit problem. But when its new fiscal year starts in February, it’ll be tough for the company to once again fight through its old problems,” he said.
Discussion Questions: Do you agree with the premise that Wal-Mart is looking to “ignite a fierce price war this holiday season?” Is the environment right
this year for retailers to forego much of the discounting of past years?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Smart retailers offer differentiated goods. Going head-to-head with Wal-Mart on football items is, in most cases, stupid. Yes, sometimes you have to make a price statement, but Target is doing very well with low but not Wal-Mart low prices, because it has attractive merchandise Wal-Mart cannot have.
People are buying fewer, but more personal, items at Christmas. Selling quality, attractive, and individual products at reasonable prices is a more effective strategy than blowing out the doors on cheap toys.
It reminds me of the hoary retail joke that “we sell everything at a loss, but we make it up on volume.”
I think Wal-Mart would love for its competitors to listen to all the analysts. We know Wal-Mart certainly isn’t. All the hype about Wal-Mart lowering prices is the best free advertising money can buy. To me this appears to be a short term investment by Wal-Mart that will inflict long term damage on its competitors. Isn’t this what the anti-Wal-Mart extremists have been warning us about? Wal-Mart will undercut the competitors, run them out, and then raise prices? Sounds to me like plain old fashioned capitalism at work.
There are many potential answers to this, all rooted in the type of shopper that you ask.
The segment that is all about price will use the internet and the Sunday circular to find the lowest options and shop there. Those of convenience will find the retail store closest to them to shop. And those (like me) that are more about the store experience will shop with the retailer that makes me happy and deserves my hard earned dollars.
Wal-Mart’s new store appeals to me…and I’m very likely to shop there this season for the first time in many, many years. It’s a potential negative to others. But maybe my “newly reacquired” dollars–with little concern to the lowest price–will outweigh the old customer that’s searching for the bargain basement deal?
It’s back to the Angel/Devil customer approach. Regardless, I’m fairly confident that Wal-Mart’s new teams are watching the consumer, crunching the numbers and planning their strategy carefully.
The traffic difficulties at several mass merchants (Costo, Wal-Mart, Target) could be solved by margin reductions, but the profit problems would be the same or worse.
Price wars help no retailers. Well-run retailers guard their margins carefully. Wal-Mart says they’re going to be extra sharp, price wise, every Christmas season. Would you expect Wal-Mart to announce higher prices?
Any retailer that thinks they’re going to be able to match pricing with Wal-Mart is crazy. The way to beat them is with product differentiation and availability. The key is going to be for retailers to not panic too early in the season and start over-discounting. Shopping trends each year get moved closer and closer to Dec. 25, and it seems like retailers themselves are the last ones to realize this.
Wal-Mart needs to drive volume. The analysts seem forever poised like vultures at the edge of the cliff waiting for Wal-Mart to stumble. My bet is that they will do whatever they have to do to preserve or expand volume. That said, I don’t think they are willing to throw profits out the window if they don’t have to.
Prominently displayed on the front of each Wal-Mart is “We Sell for Less.”
Wal-Mart has always been about gaining market share through operating more cheaply than anyone else and thereby offering the lowest possible price every day.
Lowering prices and hammering competition, especially during key seasonal timeframes is nothing new. While this model has met with some challenges over the past several years it remains a key part of their business strategy.
I agree with Mark Hunter in the sense that competition must differentiate their offer (some have done it very effectively) but it will be very difficult for any retailer to not match price cuts on key commodity and branded products.
Ryan Matthews is also quite correct, analysts seem to be find something tactically wrong in anything that Wal-Mart does and seem to delight in reporting on their prognostications.
I agree with you Ryan, Wal-Mart is not willing to let go of their market share and will do whatever it takes to drive volume but not in total disregard of their profitability and shareholder value.
This year, Wal-Mart has made headlines by changing its product mix; adding more high end and/or fashion items. If their sales are down, one question to ask is whether or not Wal-Mart continues to have the mix of products that the consumers coming to Wal-Mart are familiar with or looking for. That’s not a price issue. As other retailers streamline their supply chains and get a better understanding of their consumers they can become more efficient and offer what their consumers want at a reasonable price. If Wal-Mart’s sales are off, are they still offering the mix of products their consumers want at a price they are willing to pay? It’s not just a price issue.
Wal-Mart remains growth-addicted, as the stock market values its shares in part based on the expectation of continued expansion. Adding 6% to the top line annually requires building or acquiring the equivalent of an entire chain’s physical plant. A huge burden, and one which forces Wal-Mart to accept some sub-optimal circumstances (lower-than planned store density in California comes to mind). Price cuts can add sales volume and help keep the top-line numbers rising, but at an obvious cost.
Competing retailers need not match Wal-Mart’s price point for price point to remain successful. Better to promote alternative SKUs and offer variety and service points that the Great Wal cannot. Target understands that its “cheap chic” image sets it apart from its larger rival. Best Buy does better with serviced selling and product variety. Bottom line – Wal-Mart is hard pressed to find drivers of growth within existing stores. It may gain a bit of ground with short-term pricing tactics, but its rivals have sound countermeasures available.
Free advertising is great, even better when it is right on your message: low price. The “leak” of Wal-Mart’s low price for a laptop for black Friday received wide internet and public press. Just in time for the Holidays, (Christmas, Chanukah, and Kwanzaa), the consumer hears with their daily news that Wal-Mart, the low price leader, is going to have even better discounts for the holidays. Brilliant! As Charles and others pointed out Wal-Mart operates for a profit and will be able to come out on top in any pricing war, especially a war they start.
Visiting retailers around the country last month the number one complaint I heard while in stores was from customers complaining of increasing out of stocks at Wal-Mart. To me, their in-stock position has been one of their major historical strengths. In-stock has become progressively more important to the “I can’t cook my Thanksgiving turkey” time stressed consumer recently recognized by the panel. To improve comp store increases, Wal-Mart needs to revisit the by store execution of Lee Scott’s announced inventory reduction earlier this year. My local store had Sunday stock-outs in almost every 4 foot section.
On a historical note, I was at the Wal-Mart store manager’s meeting when Wal-Mart hit $1 billion in sales for the year. The topic in retail journals and even at the meeting was, can Wal-Mart manage and succeed, being such a big company. Twenty or so years later we are still talking about size. When I visit Target, Sears, Kmart and Wal-Mart on the same day; almost without exception I still find more cars in the Wal-Mart lot. If anyone can and will adjust to changes and come out on top, it is Bentonville.
Who are we kidding? Wal-Mart will reduce prices where they can and their competitors will follow-suit. This is how the competitive landscape in retailing is. Every major player checks the competitive pricing of their major competitors. This is a standard in the industry. Asking retailers to ignore the largest and most successful retailer and not consider their competitive position in the retail landscape is not reasonable. Frankly, this type of consideration is collusionary and antiquated in its view. It would be unbelievable that any modern retailer would consider this.
Wal-Mart knows exactly what they are doing, enhancing their dominance as the lowest cost provider. This is how they grew to be a powerhouse among retailers and a significant force in the world today. The portion of the consumer market which they lacked was addressed and attacked. Once they acquire this new consumer market they will move on to other consumer categories attracting additional shoppers.
Lower prices at Wal-Mart? What a shock! Wal-Mart would love for there to be a price war because no one has the leverage or can significantly compete with them. Same old story; you have to compete with Wal-Mart using service, availability (selection), differentiation and staying within your margins. Don’t be concerned for Wal-Mart, as this machine will keep going forward – they didn’t get to the top making poor decisions.
Walsh is on point.
The folks at Wal-Mart can certainly run a calculator and plan a promotion in a manner that executes the numbers on the business plan. And they will continue to do so.
Why wouldn’t they actively pre-promote that they’re going to have unbeatable low prices this year and focus attention on key categories of highest demand for the season?
What’s different about the base message this year, other than the items promoted and the creative used in the campaign?
They will not be beat on price, and will be especially sharp on high visibility items. That’s how its done.
To Laura’s point and others, the way to compete is with the shopping experience and alternative assortments; reducing the pure price point equation. It comes down to a fast food versus finer dining analogy and earning the business on your own terms.
You can’t discount gift cards and that is where Christmas presents are going. Retailers should push the plastic. People are less concerned about saving money when someone else is picking up the tab.
Okay, so what’s really new here? Wal-Mart is all about price this season and every other season – period. A war? It’s not likely. Retailers may go to the brink, but they won’t fire the first shot. They are getting smarter than that.
To follow Wal-Mart is simply nuts (okay, roasted chestnuts?). It’s just a plain poor business decision.
Make your own way of differentiation and experience. Your offering, if right, will get its due reward.
Low prices are always nice, but to consider that as the only issue would mean that players like Target and Best Buy would not be enjoying the growth they are experiencing relative to Wal-Mart.
The long term relationship with the consumer needs to include assortment, service and ambiance. All are issues that will not go away with just low prices and all are issues that Wal-Mart needs to continue to address.
More Discussions
Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?Should IKEA Be Flattening Management?
Should IKEA be trimming down its management headcount?Is Legislation the Answer on Visa, Mastercard Swipe Fees as ~$200 Billion Record Is Set?
Is lawmaking the way forward on swipe fees?
Smart retailers offer differentiated goods. Going head-to-head with Wal-Mart on football items is, in most cases, stupid. Yes, sometimes you have to make a price statement, but Target is doing very well with low but not Wal-Mart low prices, because it has attractive merchandise Wal-Mart cannot have.
People are buying fewer, but more personal, items at Christmas. Selling quality, attractive, and individual products at reasonable prices is a more effective strategy than blowing out the doors on cheap toys.
It reminds me of the hoary retail joke that “we sell everything at a loss, but we make it up on volume.”
I think Wal-Mart would love for its competitors to listen to all the analysts. We know Wal-Mart certainly isn’t. All the hype about Wal-Mart lowering prices is the best free advertising money can buy. To me this appears to be a short term investment by Wal-Mart that will inflict long term damage on its competitors. Isn’t this what the anti-Wal-Mart extremists have been warning us about? Wal-Mart will undercut the competitors, run them out, and then raise prices? Sounds to me like plain old fashioned capitalism at work.
There are many potential answers to this, all rooted in the type of shopper that you ask.
The segment that is all about price will use the internet and the Sunday circular to find the lowest options and shop there. Those of convenience will find the retail store closest to them to shop. And those (like me) that are more about the store experience will shop with the retailer that makes me happy and deserves my hard earned dollars.
Wal-Mart’s new store appeals to me…and I’m very likely to shop there this season for the first time in many, many years. It’s a potential negative to others. But maybe my “newly reacquired” dollars–with little concern to the lowest price–will outweigh the old customer that’s searching for the bargain basement deal?
It’s back to the Angel/Devil customer approach. Regardless, I’m fairly confident that Wal-Mart’s new teams are watching the consumer, crunching the numbers and planning their strategy carefully.
The traffic difficulties at several mass merchants (Costo, Wal-Mart, Target) could be solved by margin reductions, but the profit problems would be the same or worse.
Price wars help no retailers. Well-run retailers guard their margins carefully. Wal-Mart says they’re going to be extra sharp, price wise, every Christmas season. Would you expect Wal-Mart to announce higher prices?
Any retailer that thinks they’re going to be able to match pricing with Wal-Mart is crazy. The way to beat them is with product differentiation and availability. The key is going to be for retailers to not panic too early in the season and start over-discounting. Shopping trends each year get moved closer and closer to Dec. 25, and it seems like retailers themselves are the last ones to realize this.
Wal-Mart needs to drive volume. The analysts seem forever poised like vultures at the edge of the cliff waiting for Wal-Mart to stumble. My bet is that they will do whatever they have to do to preserve or expand volume. That said, I don’t think they are willing to throw profits out the window if they don’t have to.
Prominently displayed on the front of each Wal-Mart is “We Sell for Less.”
Wal-Mart has always been about gaining market share through operating more cheaply than anyone else and thereby offering the lowest possible price every day.
Lowering prices and hammering competition, especially during key seasonal timeframes is nothing new. While this model has met with some challenges over the past several years it remains a key part of their business strategy.
I agree with Mark Hunter in the sense that competition must differentiate their offer (some have done it very effectively) but it will be very difficult for any retailer to not match price cuts on key commodity and branded products.
Ryan Matthews is also quite correct, analysts seem to be find something tactically wrong in anything that Wal-Mart does and seem to delight in reporting on their prognostications.
I agree with you Ryan, Wal-Mart is not willing to let go of their market share and will do whatever it takes to drive volume but not in total disregard of their profitability and shareholder value.
This year, Wal-Mart has made headlines by changing its product mix; adding more high end and/or fashion items. If their sales are down, one question to ask is whether or not Wal-Mart continues to have the mix of products that the consumers coming to Wal-Mart are familiar with or looking for. That’s not a price issue. As other retailers streamline their supply chains and get a better understanding of their consumers they can become more efficient and offer what their consumers want at a reasonable price. If Wal-Mart’s sales are off, are they still offering the mix of products their consumers want at a price they are willing to pay? It’s not just a price issue.
Wal-Mart remains growth-addicted, as the stock market values its shares in part based on the expectation of continued expansion. Adding 6% to the top line annually requires building or acquiring the equivalent of an entire chain’s physical plant. A huge burden, and one which forces Wal-Mart to accept some sub-optimal circumstances (lower-than planned store density in California comes to mind). Price cuts can add sales volume and help keep the top-line numbers rising, but at an obvious cost.
Competing retailers need not match Wal-Mart’s price point for price point to remain successful. Better to promote alternative SKUs and offer variety and service points that the Great Wal cannot. Target understands that its “cheap chic” image sets it apart from its larger rival. Best Buy does better with serviced selling and product variety. Bottom line – Wal-Mart is hard pressed to find drivers of growth within existing stores. It may gain a bit of ground with short-term pricing tactics, but its rivals have sound countermeasures available.
Free advertising is great, even better when it is right on your message: low price. The “leak” of Wal-Mart’s low price for a laptop for black Friday received wide internet and public press. Just in time for the Holidays, (Christmas, Chanukah, and Kwanzaa), the consumer hears with their daily news that Wal-Mart, the low price leader, is going to have even better discounts for the holidays. Brilliant! As Charles and others pointed out Wal-Mart operates for a profit and will be able to come out on top in any pricing war, especially a war they start.
Visiting retailers around the country last month the number one complaint I heard while in stores was from customers complaining of increasing out of stocks at Wal-Mart. To me, their in-stock position has been one of their major historical strengths. In-stock has become progressively more important to the “I can’t cook my Thanksgiving turkey” time stressed consumer recently recognized by the panel. To improve comp store increases, Wal-Mart needs to revisit the by store execution of Lee Scott’s announced inventory reduction earlier this year. My local store had Sunday stock-outs in almost every 4 foot section.
On a historical note, I was at the Wal-Mart store manager’s meeting when Wal-Mart hit $1 billion in sales for the year. The topic in retail journals and even at the meeting was, can Wal-Mart manage and succeed, being such a big company. Twenty or so years later we are still talking about size. When I visit Target, Sears, Kmart and Wal-Mart on the same day; almost without exception I still find more cars in the Wal-Mart lot. If anyone can and will adjust to changes and come out on top, it is Bentonville.
Who are we kidding? Wal-Mart will reduce prices where they can and their competitors will follow-suit. This is how the competitive landscape in retailing is. Every major player checks the competitive pricing of their major competitors. This is a standard in the industry. Asking retailers to ignore the largest and most successful retailer and not consider their competitive position in the retail landscape is not reasonable. Frankly, this type of consideration is collusionary and antiquated in its view. It would be unbelievable that any modern retailer would consider this.
Wal-Mart knows exactly what they are doing, enhancing their dominance as the lowest cost provider. This is how they grew to be a powerhouse among retailers and a significant force in the world today. The portion of the consumer market which they lacked was addressed and attacked. Once they acquire this new consumer market they will move on to other consumer categories attracting additional shoppers.
Lower prices at Wal-Mart? What a shock! Wal-Mart would love for there to be a price war because no one has the leverage or can significantly compete with them. Same old story; you have to compete with Wal-Mart using service, availability (selection), differentiation and staying within your margins. Don’t be concerned for Wal-Mart, as this machine will keep going forward – they didn’t get to the top making poor decisions.
Walsh is on point.
The folks at Wal-Mart can certainly run a calculator and plan a promotion in a manner that executes the numbers on the business plan. And they will continue to do so.
Why wouldn’t they actively pre-promote that they’re going to have unbeatable low prices this year and focus attention on key categories of highest demand for the season?
What’s different about the base message this year, other than the items promoted and the creative used in the campaign?
They will not be beat on price, and will be especially sharp on high visibility items. That’s how its done.
To Laura’s point and others, the way to compete is with the shopping experience and alternative assortments; reducing the pure price point equation. It comes down to a fast food versus finer dining analogy and earning the business on your own terms.
You can’t discount gift cards and that is where Christmas presents are going. Retailers should push the plastic. People are less concerned about saving money when someone else is picking up the tab.
Okay, so what’s really new here? Wal-Mart is all about price this season and every other season – period. A war? It’s not likely. Retailers may go to the brink, but they won’t fire the first shot. They are getting smarter than that.
To follow Wal-Mart is simply nuts (okay, roasted chestnuts?). It’s just a plain poor business decision.
Make your own way of differentiation and experience. Your offering, if right, will get its due reward.
Low prices are always nice, but to consider that as the only issue would mean that players like Target and Best Buy would not be enjoying the growth they are experiencing relative to Wal-Mart.
The long term relationship with the consumer needs to include assortment, service and ambiance. All are issues that will not go away with just low prices and all are issues that Wal-Mart needs to continue to address.