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Walmart: Pricing perseverance or insanity?

April 28, 2014 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

"Wal-Mart rolls out 'Black Friday-like' spring sales event to drum up sales." The St. Louis Post-Dispatch headline raises the question, does perseverance pay or is this practice the definition of insanity?

The article's author, Kavita Kumar, reports that:

• Executives expect the year to be challenged by the economy.
• Walmart made 'special buys' for this sale.
• This is the first time Walmart has had held lawn and garden sale at the beginning of the season.

Let's explore the logic of Walmart's "strategy."

Challenging economy

Brian Wesbury, chief economist at First Trust (his videos explain things in terms a lay person like me can understand) is optimistic about the economy. Here are his reasons:

• We're 3 months away from achieving employment levels we had prior to the recession.
• Federal government spending as a percent of GDP continues to decline which means that the economic growth we're experiencing is the result of the private sector.
• Innovation, particularly in technology, is driving increased productivity and job growth, both signs of a healthy economy.

Given this information, you can't help but question Walmart's executives' beliefs that this is going to be a challenging year economically. If these executives are looking at their recent history and attributing the results to the economy, which I suspect they are, they're in denial about what the real problem is.

The real problem for companies employing low-price strategies is that as the economy improves, consumers have more discretionary income. As discretionary income and confidence in the job market grow, consumers treat themselves to higher-priced alternatives. Eating out means a restaurant with wait staff instead of the drive-thru window. It's a trip to the Caribbean instead of a science museum excursion.

Special buys

For some reason the lyric "just because I love you" came to mind. Only in my rendition the word, love, was a euphemism for pain. In essence, Walmart is sharing its pain with its vendors. They're all going to "enjoy" lower sales volumes and declining profits. That kind of love I can live without.

Beginning-of-season sale

Let's see, the winter has been one of the harshest in memory. Colder than usual temperatures are expected to continue despite the arrival of spring. The arrival of warm weather will launch the peak selling season for lawn and garden goods. Yet Walmart is going to offer deals that limit their revenue and profit potential.

Of course this winter has been tough on businesses. Walmart is no different than any other retailer in experiencing lower year-to-year sales. Customers' desire to spend was simply no match for the fierce weather conditions we faced this year.

All that means is that the pent up demand is huge and when the weather opens up, so will the flood gates of consumer spending. Unfortunately Walmart's "strategy" won't allow them share in that feast as they might have. Their beginning-of-season sale is going to limit their revenue and profit potential on those sale items. It's as if Walmart doesn't realize that the goal is to capture as many consumer dollars as possible.

Perseverance or insanity?

Let's recap: Economic growth is expected to be slow, but steadily improving. Walmart's "special buys" are limiting revenue and profit potential for their vendors as well as themselves. The profit dollars that companies typically enjoy during peak selling season are being foregone by Walmart through its beginning-of-season sale.

What do you think, is this pricing perseverance or pricing insanity?

(Photo by Lordcolus.)

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