Walmart Tries a Contrarian Approach

The basic idea is that you cut pricing during a recession in order to gain market share, and then you raise prices in the recovery to reap the profits from the share gains. Right?

Wrong, says Walmart.

Walmart’s share gains during the recession have not been, for the most part, the result of price cuts. According to this Wall Street Journal article, Walmart has cut its grocery pricing only 2.6%, compared to 14.4% cuts at Kroger and 9.7% at Safeway (nonetheless Walmart remains substantially lower). The result has been that Walmart’s gross margins have been improving.

However, now that recovery seems to be on the horizon, we get the word from Bentonville that margins will cease to rise.

But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.

That could put Wal-Mart's smaller rivals further on the defensive.

Sure could. Many rival chains, in grocery and other channels, have been scraping by through the recession, cutting margins to the bone and looking forward to better times. But if Walmart is going to cut prices in the recovery, then there will be no easing of margin pressure for Walmart’s competitors.

Yet another argument for optimization tools.

In other Walmart news, the movie studios got a peek at ‘Project Impact’ and probably didn’t like what they saw (we commented on Project Impact a couple weeks ago).

In another WSJ item, we read that:

A recent shift in merchandising strategy by the world's largest retailer spells more trouble for DVD sales and the entertainment industry that depends on them for profits. As part of a larger effort to clean up its aisles and appeal to higher-end shoppers, Wal-Mart Stores Inc. is doing away with display cases to promote the latest hot movie titles.

The move comes as major film studios are reeling from declines in revenue from DVD sales as cash-strapped consumers turn to low-cost rental services and digital downloads for home movies. "We think the new strategy implies Wal-Mart no longer sees DVDs and Blu-ray discs as traffic drivers," J.P. Morgan analyst Imran Khan said.

The move fits in with two inter-related points of Project Impact: improving the look of the stores – which requires cutting out some displays and cutting back on the number of products carried – and concentrating on profitable and high-volume items in the reduced space.

This is a considerable blow to DVD suppliers, for whom Walmart represents one-third of their volume, and they’re already down double-digits this year as a result of video-on-demand and low-cost rentals from Redbox and Netflix.

The combination of these two items gives us some idea of what next year is going to look like for Walmart’s competitors: continued low margins; and their suppliers: pressure on shelf space and reductions in displays – which will presumably lead to higher costs for the displays and other in-store promotions that Walmart permits.