Walmart to Lead New Round of Grocery Price Wars – but it May be a Sign the Economy is Recovering

As the quiet battle between grocery retailers and consumer packaged goods manufacturers continues over retail shelf prices, Walmart announced it was going to adopt a broad strategy of lowering food prices to keep or maintain its share of the consumer wallet amidst a generally weak pricing environment for grocery manufacturers.

A Morgan Stanley analyst wrote last week that amidst increasing signs that the recession is ebbing, Walmart is concerned that shoppers will start to migrate back to more traditional grocers. Walmart is generally thought to have picked up market share based on low prices during the recession.

Reports are that Walmart plans to announce April 1 another round of "price rollbacks" on some 10,000 SKUs, mostly on the grocery side of its superstores, starting April 1. The program will be supported by in-store signage and radio and TV advertising.

Walmart has confirmed the plans generally, but not said how steep the price cuts are going to be.

Financial analysts have in general warned this is likely to negatively impact other grocers, as they will likely be forced to respond with another round of price cuts themselves that will negatively impact already strained margins - just as they hoped the worst of the recession and deep discounting were finally over. At the same time, manufacturers can expect requests from Walmart and other grocers for price relief to support the pricing plans.

"While this helps address Walmart's traffic woes, we view this as a major setback for the grocery stocks, which have been rallying on hopes of a return to more rational pricing," Morgan Stanley analyst Mark Wiltamuth wrote in a note last week.

Meanwhile, a Citigroup analyst says that indeed a slowly recovering economy will put pressure on Walmart traffic and sales.

"Shoppers no longer consider the price savings offered by Wal-Mart to outweigh the experience and convenience" of shopping at their local supermarkets, Citigroup analyst Deborah Weinswig said on Monday.

Walmart's same store sales slipped 2% in Q4, but that was as much a factor of falling prices than a drop in actual unit sales. This latest pricing move may lead to similar results from a revenue perspective, even if it has a positive effect on traffic and market share.

However, Weinswig says that aggressive price cuts by Walmart rivals served to shrink the gap between Walmart's pricing and other chains, which likely also played a role in Walmart's same store sales decline. Now Walmart appears to be doubling down in the price wars.

Customers Continue to Chase Value

All that said, the "new normal" for consumer shopping patterns is likely to continue for some time, according to Dr. Romesh Wadhwani, chairman of the newly renamed SymphonyIRI Group at the company's user summit last week, according to SCDigest partner RetailWire.

Wadhwani said that shopping convenience has been overtaken by value, as the number of shopping trips taken in search of value was up by six percent in 2009. Hand he predicts a similar increase in 2010.

As further evidence of that, Dr. Wadhwani says IRI data shows the number of stores visited per month has nearly doubled in the past year, as consumers go to multiple stores to shop for the best bargains at each.

Additionally, the percentage of shoppers making lists has grown from 50 percent to 83 percent over the past year, as they attempt to control spending more effectively.

Dr. Wadhwani says the consumer goods companies need to consider that there is a new "first moment of truth" that isn't at the store shelf but rather in the home, where shopping lists are made.

He adds that these value trends are going to force manufacturers to rethink how they segment consumers and market to them. For example, it might be time to change from thinking about their "share of wallet" to "share of occasion," such as sports weekends, holidays, days of the week, etc. He also advocates strategic segmentation of consumers based on health stage, life stage, etc., according to the RetailWire report.

At the end of the day, these trends are likely to put even more pressure, if that's possible, on consumer goods manufacturers to reduce supply chain costs.

As just one example, after executing a significant supply chain network transformation over the past few years to reduce costs, consumer packaged goods giant Kimberly-Clark announced last week it planned to save an additional $400-500 million in costs over the next three years through the continued rollout of lean manufacturing and supply chain practices and from the formation of a global procurement organization.

It is likely also to put even more focus on synchronizing trade promotions with supply chain execution, as shoppers are looking harder than in decades to find the best bargains.

Demand patterns may also change, with bargain-hungry consumers loading up on deeply discounted sale items, as a variety of consumer web sites have been advocating they should do.

These market changes and supply chain challenges will require manufacturers to really step up to new levels of performance and integration of planning and execution, says Danny Halim, vice president, industry strategies, at JDA Software.

"Manufacturers that leverage consumer insights to develop a more precise assortment for the right store at the right time, as well as the correct shelf placement and quantity will differentiate their products and emphasize value in comparison to other brands," Halim told SCDigest. "Extending consumer insight from the shelf to logistics and manufacturing will help the manufacturer respond faster to changing consumer buying behavior. As a result, the company will also be able to better optimize the end-to-end supply chain to further reduce working capital and operational costs," he added.

Source: http://www.scdigest.com/