Wal-Mart 'lacing up gloves' in price battle

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Wal-Mart Stores, Inc., will accelerate price cuts as it battles major grocery chains for food business, a skirmish that’s sure to reverberate with retailer’s meat, dairy and fresh produce suppliers, analysts say.

There is a “renewed focus” on rollbacks, or permanent price reductions, at Wal-Mart, the company’s chief operating officer, Bill Simon, said in a March 10 investor conference sponsored by Bank of America Merrill Lynch.

“The higher the rollbacks go in our store, the better (comparison) sales are. So, we are pressing that forward,” Simon said. “We’re always about price. We have to deliver price, and we do.”

With Wal-Mart’s more aggressive rollback plans, the retailer is going after Kroger Co. and other big grocery chains that lured away consumers in recent years, Citigroup Inc. analyst Deborah Weinswig said.

Wal-Mart “is lacing up the gloves as it prepares to step back into the ring and win the modern day price war in food retail,” Weinswig said in a March 14 report.

For years, Bentonville, Ark.-based Wal-Mart, the world’s biggest retailer, used its size and scale to squeeze lower prices from suppliers and charge less than competitors for products on its shelves. Wal-Mart’s food vendors probably should expect further pressure to reduce prices as the retailer tries to regain lost ground in food sales.

“If they’re going to deliver lower prices to consumers, they’re certainly going to look to suppliers to help them do that,” said Neil Stern, principal with McMillan Doolittle, a Chicago-based retail industry consultant.

“I suspect anyone who works with them will feel pressure to help them grow more,” Stern said of Wal-Mart. The retailer’s position essentially is “If we drive more volume, what can you do to help us reduce costs?” Stern said.

Simon, during the March 10 presentation, said rollbacks would be applied “all across the box,” with a focus on “known value items and food and consumables.” He didn’t list any specific food categories. A Wal-Mart spokesman declined to comment.

Wal-Mart’s plans to step up rollbacks follow a 1.6 percent decline in U.S. same-store sales, including Sam’s Club, during the company’s most-recent quarter.

Recent sales erosion was “a wake-up call” for Wal-Mart’s management, driving a renewed commitment to rollbacks, Weinswig, the Citigroup analyst, said in the March 14 report.

While Wal-Mart used price savings to win customers away from supermarkets during the recession, price gaps between Wal-Mart and grocery stores have narrowed during the past two years, Weinswig said.

Wal-Mart did fewer rollbacks last year, Weinswig said. As the economy improves, Wal-Mart “is seeing the customers it gained during the recession go back to the supermarkets,” she said.

Many shoppers no longer consider the price savings offered by Wal-Mart to outweigh the experience and convenience of shopping the supermarkets, Weinswig said.

Wal-Mart “realizes that it must act now to keep the customer, and we expect (Wal-Mart) to invest aggressively in price to show consumers the significant savings that they can realize by shopping its stores,” Weinswig said.

Citing Wal-Mart’s more aggressive rollback plans, Weinswig raised her rating on the retailer’s shares to “buy/medium risk” from “hold/medium risk,” according to the March 14 report.

As Wal-Mart’s price cuts boost store traffic, the company’s share of the $816 billion U.S. retail food business will increase to 21.6 percent in 2010 and to a third over the long-term, Weinswig estimated. Wal-Mart had a 20.5 percent share of the retail food industry in 2009.

Weinswig also raised her estimate for Wal-Mart’s fiscal 2011 earnings by 4 cents, to $4.04 a share, and hiked her forecast for the company’s share price over the next 12 months, to $65 from $54. Wal-Mart earned $3.66 a share in its fiscal 2010, which ended Jan. 31.

In afternoon trading, Wal-Mart shares rose $1.47, or 2.7 percent, to $55.37. A close at that price would be the highest since January 2009. The stock is up 3.6 percent this year.

 



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