Wal-Mart Seeks To Regain Pricing Advantage

Wal-Mart Stores (NYSE:WMT) is launching a new front in the retail pricing war. The company is reportedly running a new price-comparison test in at least 1,200 U.S. stores. The tests are intended to find the right price point across a range of products to help Wal-Mart attract more customers.

Wal-Mart is trying to close a pricing gap with rivals like Kroger in the U.S. and German-based discount grocery chain Aldi. Recent analyst estimates had showed that Wal-Mart’s prices have been as much as 20 percent higher than Aldi’s prices on many grocery staples. Wal-Mart is running the price comparison test across 11 Midwest and Southeastern states.

Aldi has about 1,600 stores in the U.S. and accounts for about 1.5 percent of the U.S. grocery market. However, Aldi is quickly gaining market share in the highly competitive sector, growing about 15 percent a year. Wal-Mart currently controls about 22 percent of the U.S. grocery market.

Lidl, another Germany-based discount grocer, is planning to enter the U.S. market this year. Aldi and Lidl have successfully upended the grocery market in the United Kingdom with their business models. This is dangerous for Wal-Mart, long known as the pioneer of everyday low pricing. The grocery business accounts for 56 percent of Wal-Mart’s revenue.

The company is also launching a new effort to squeeze lower prices out of packaged goods suppliers. Last week, the retailer held meetings in Bentonville, Arkansas with food and consumer products vendors to demand they reduce the amount they charge Wal-Mart by 15 percent.
The company also told suppliers that it expects their help to beat its rivals in head to head pricing, according to sources that attended the meeting. According to the sources, Wal-Mart also said that it would absorb some of the losses to allow suppliers to adjust to the new pricing demand.

Wal-Mart also wants vendors to make logistics improvements that would increase their sales by as much as $1 billion. Those improvements included increasing their on-time percentage, trimming delivery costs, and reducing out-of-stock issues. Wal-Mart has substantially increased the number of products it sells online and has invested heavily in its ability to fulfill its online orders in recent years.

The company desperately wants to regain its competitive pricing advantage in traditional retailing. To do that, Wal-Mart needs to find ways to cut prices without damaging its bottom line any further. The company reported that net income dropped 18 percent in the latest quarter when compared to the year-ago quarter. The company attributed the decline in income to a variety of factors, including price investments.