Can Wal-Mart Price Its Way Back to the Top?

Wal-Mart built its brand on being the low-price leader, the cheapest place to buy pretty much anything.

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In recent years, however, that pricing advantage has diminished, if not disappeared, as Amazon , as well as other digital and physical retailers, have grown in scale. That has left the company without a key piece of its identity and this has helpd hurt its sales. Just a few years ago, Wal-Mart did not need to be the hippest big retailer (Target takes that crown), nor did it need to be the most tech-forward (Amazon wins that prize) because it was always the cheapest.

Now that's not the case, according to Wolfe Research

"Our research over a multi-year period points to Wal-Mart's significantly diminished price advantage in the U.S., particularly in consumables, but also in other categories such as electronics," wrote Scott Mushkin

Pricing has always been a key part of the Wal-Mart strategy. Image source: Wal-Mart.

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What is Wal-Mart facing?

The challenge for Wal-Mart is that it's facing a battle on numerous fronts. It's not only fighting with Amazon on pricing, it's also contending with Kroger on merchandising and perishables, Dollar General on convenience, Target in categories like style and baby, Aldi in private label, and Amazon (again) on e-commerce, Wolfe Research wrote.

"This, plus rising labor costs, is putting significant pressure on the organization, bringing into question whether Wal-Mart could actually move boldly on prices without further reducing its earnings outlook," according to the researchers.

Wal-Mart is investing in lower prices

Wal-Mart executives have made it clear that lowering prices remains a critical part of the company's plans.

"Better expense management in the quarter gave us increased confidence to initiate our next phase of U.S. price investment earlier than planned," said CEODoug McMillon during the retailer's Q1 2017 earnings call, which was transcribed by Seeking Alpha

The problem is that Wolfe Research estimated that if Wal-Mart wants "to strongly reestablish its historical competitive advantage as the low price leader," it would have to make a $5 billion investment and it's not guaranteed that it would work.

"It remains unclear if price investments will work, but it is hard to argue with management trying to get back its competitive standing," the researchers wrote. "Wal-Mart's competitors are unlikely to stand still and are more likely to follow any price moves by Wal-Mart. We fear a war of attrition will be inevitable if WMT moves aggressively to lower prices, causing severe pain across the industry."

Wal-Mart needs appearance and reality

For Wal-Mart, pricing has become a bit of a tightrope. The company needs consumers to think it's the pricing leader or at least generally a good value while avoiding the all-out pricing war mentioned above. None of these chains or online retailers benefits from a game of chicken where every players tries to outdo the others.

This may be why, despite all the talk of lower prices, Wolfe Research has not seen significant changes.

"While the company has made a lot of noise around price investment, indicating it will pull-forward the investment this year, we have seen no noticeable change in pricing in the markets we visit regularly suggesting a more material price investment has not yet happened," the researchers wrote.

Wal-Mart does intend to lower prices, but it seems more likely the chain will look for strategic advantages rather than mounting a full-scale campaign to turn the clock back to the days when it was the unquestioned low-cost leader. That's a smart strategy -- one where consumers are courted and placated -- but the margins and bottom line are generally protected.

It's a different retail climate than it was just a few years ago, so pricing can be part of the Wal-Mart mix alongside convenience, technology, and service, but the chain can't solely price its way back to the top.

The article Can Wal-Mart Price Its Way Back to the Top?

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