Lower Prices at Wal-Mart: Good for Shoppers, Bad for Grocers

By Heather Haddon and Sarah Nassauer Features Dow Jones Newswires

Wal-Mart Stores Inc.'s fight to defend its low-cost reputation is helping to extend the longest food-price decline in decades.

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The world's biggest retailer is investing heavily to lower prices in its U.S. stores, the company's executives say, as competition heats up against Amazon.com Inc. and European deep discounters Aldi and Lidl. Wal-Mart is spending to beat competitors' prices and test strategic price drops, mostly on food and household goods sold at Wal-Mart stores in the Southeast and the Midwest, say people familiar with the tactics.

Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Wal-Mart stores were 5.8% lower than a year ago, while those in the Atlanta and Southern California markets were 4.9% and 2.7% cheaper, respectively.

The price war, coupled with Wal-Mart's renewed focus on refurbishing stores, is hurting the nation's biggest grocers. Operating profits for U.S. supermarkets declined about 5% last year, Moody's Investors Service said.

Kroger Co., the biggest U.S. supermarket chain, recently reported its first quarterly decrease in same-store sales in 13 years. Cincinnati-based Kroger's shares fell 3% in February after Wolfe Research reported that Wal-Mart was cutting prices in the Midwest. The stock later recovered, but remains down 13% this year.

Kroger Chief Financial Officer Mike Schlotman recently said pressure from Wal-Mart, which sells more food in the U.S. than any grocer, was mounting. "We certainly have seen them do things better than they historically have," he said.

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To keep up, Kroger says it has spent more than $3.7 billion to lower prices over the last decade. Kroger gave voluntary buyouts to roughly 1,300 workers, and is reducing planned capital investments by around a fifth this year.

Target Corp., where executives are trying to turn around a struggling grocery business, is also investing $400 million in online sales and lower prices. It is also simplifying its messaging to emphasize consistently low prices instead of complicated short-term deals, a spokeswoman said.

"We know we have to be competitively priced every day on those core essentials," Target Chief Executive Brian Cornell told investors recently.

Retailers are offering more discounts as food prices continue to fall. Year-to-year food retail prices declined for the 16th month in March, the longest stretch since 1956. But some believe the trend will reverse this year as commodity prices climb out of a multiyear rout. Moody's expects prices for food consumed at home to rise 1% in 2017.

Wal-Mart, based in Bentonville, Ark., has been fighting its competitors on price since its founding in 1962. But it backed off in recent years at the same time that customers started using mobile phones in stores to compare prices on Amazon and discounters rapidly added stores.

Fighting back, Wal-Mart executives in 2015 said they would invest heavily to lower prices over three years. In a presentation to suppliers in February, Megan Crozier, Wal-Mart's senior vice president of packaged goods, said Wal-Mart wants its prices to be 15% lower than its competitors' 80% of the time, according to attendees.

"It's why we exist," she said, according to one of these people.

Wal-Mart's price cuts are eating into its own profit, forcing it to cut costs and putting pressure on its vendors. But the company is stealing market share. While profit fell 18% in the most recent quarter, Wal-Mart's sales in existing stores, a key metric of retailer health, have risen for 10 consecutive quarters.

The fight between big food retailers is good for consumers. Last year, shoppers paid 1.3% less than a year earlier for eggs, meat and other staples, federal data shows, the steepest drop since 1959. Two thirds of consumers surveyed recently by the Food Marketing Association said they chose where to buy groceries based on price.

"You have to be a smart shopper," said Lisa Ortega, a 40-year-old mother of a one-year-old in Chicago who often shops at Costco. "I'm not in a position where I can't care."

Write to Heather Haddon at heather.haddon@wsj.com and Sarah Nassauer at sarah.nassauer@wsj.com

(END) Dow Jones Newswires

April 20, 2017 08:14 ET (12:14 GMT)