Wal-Mart Stores Inc. is leading "an aggressive price war in the grocery category," writes Janney Capital Markets analyst David Strasser after a presentation last week by the world's largest store chain.
The giant chain is willing to bypass profits in order to take business from supermarket owners: "Wal-Mart is willing to sacrifice gross margin to maintain (and) gain market share," Strasser added. "The company is counting on global sourcing, expanded private label (sales), new merchandising initiatives," and traffic from other Wal-Mart customers "to lower pricing in the grocery aisles" and lure customers.
Wal-Mart isn't so much of a presence on suburban Philadephia's Main Line and other attractive markets. "I think Wal-Mart fully intends to open stores in the Philly area. The key is finding real estate and getting zoning approval," Strasser told me.
But grocery chains aren't standing around waiting to get underpriced by Wal-Mart. "In scores of cases, large supermarket chains including (Acme Markets owner) Supervalu Inc., (Genuardi's owner) Safeway Inc. and Ahold NV" have hired consultant P. Michael Saint (who says "Our goal is always to kill Wal-Mart") to block the chain from opening particular stores, writes the Wall St Journal here.
"In Pennsylvania, Saint's work roster in August 2007 listed 53 projects, almost all directed at stopping Wal-Mart on behalf of client Giant Food Stores, owned by Amsterdam-based supermarket company Ahold. Saint documents from 2007 say it had lost one battle in Pennsylvania, defeated 13 projects and delayed the remaining ones from four months to four years."
How can Wal-Mart afford to chop prices? It doesn't hurt that wholesale food prices are falling, notes Strasser's colleague Jonathan Feeney in a separate report. With its vast supply and logistics operation, Wal-Mart has lower overhead, Strasser added, and the clout to buy more cheap foreign food.
Wal-Mart's grocery focus may be helping its rivals in other retail sectors. While the chain is starting to sell 3D-TV sets and may have Apple iPads as soon as this Christmas shopping season, Strasser expects "Wal-Mart will be reluctant to be price aggressive in other categories," because it needs to keep non-grocery profits high to subsidize the grocery price war.