Walmart's pricing strategy: Further evidence revisited
Feb. 16, 2011
Conflicting stories spawned further research. Did it change my message?
A December 2010 Bloomberg Businessweek article cited in my "Further Evidence" article was challenged in a comment from Walmart’s PR department. I’ve spent the last few weeks doing a little research. Here’s what I’ve discovered.
Bloomberg’s article reported that "Walmart managers in the U.S. received instructions to markup an average of 1,800 types of toys per store." Walmart’s PR group contacted me by email stating that the Bloomberg article "was inaccurate and misleading." The Walmart representative went on to say "We’re (Walmart) committed to being the low-price leader and offering our customers the best values throughout the year."
While I don’t have the wherewithal to verify the Bloomberg report, it doesn’t really matter whether the article is accurate or not — at least not in light of the points I was making about pricing strategies and branding.
In the original article I stated that I believe that Walmart is "going to continue to see sales declines in the U.S." I went on to say that "Walmart’s future is going to depend on its ability to craft a new promise to its customers." In essence, Walmart will need to create a new brand for itself.
I was able to verify Walmart’s PR department’s claim that they are committed to being "the low-price leader." I reviewed several analyst reports from a number of sources and found similar findings to those reported by Value Line. The Value Line analyst said Walmart was "... focusing on leading the market in everyday low prices."
The analyst went on to say that "Domestic same stores sales declined by 1.3 percent on less traffic and lower average transaction amount. After failed attempts to attract wealthier clientele over the past year and a half, Walmart is restoring its focus..." That focus is households with annual incomes below $70,000. Do these facts alter my original position?
Not even a little bit. Walmart has experienced six consecutive quarters of declining domestic sales in the worst economy in 7 decades. Indeed, I believe that the same-store sales would have declined even more if had not been for the recent economy.
By recommitting itself to its low-price strategy and its ideal customer base, those households with less than $70,000 in annual income, Walmart is returning to a market that it has virtually saturated. Sales growth will be nigh on impossible without price increases, which is contrary to Walmart’s commitment to its customers.
Indeed, I believe that Walmart is going to experience similar same-store sales declines around the world as those markets become saturated. Can they really expect to continue to lower prices to a market where household incomes rarely, and then only modestly, increase over time and expect sales to increase? I don’t see how.
My goal with these observations is not to denigrate Walmart. Rather it’s to share with you the inevitable pitfall of a low-price strategy. Even the most successful at employing a low-price strategy, and Walmart is certainly one of them, inevitably face declining sales. The only way to stem the tide is to raise prices. Doing so alienates the existing customer base, destroys the low-price brand image and requires a significant amount of time to develop a new, value-based brand.
My question to you in the original post remains. "Given the difficulty of building a business, do you really want to set yourself up to build two?"
Supermarkets & Grocery Stores
Dale Furtwengler is a professional speaker, author and business consultant. His latest book, "Pricing for Profit," is dedicated to helping organizations break the bonds of industry pricing.