Wal-Mart's Promotional Strategy May Decrease Investor Value.

Implications: Investors watch as Wal-Mart chops prices in hopes of driving top line sales in spite of the fact that the same strategy was only marginally successful in December.  Here's why their strategy may be short lived.

Analysis:  I have been very critical of what I have called Wal-Mart’s everyday high price strategy.  That is marking it up to mark it down.  Now the company illustrates just how over priced they are when they announce 10% to 30% discounts groceries, electronics, and home products, at least that is what consumers should be thinking.    Consumers like consistency in pricing.  That isn’t to say they don’t appreciate sales and good item values too.  But when stores consistently mark down large parts of their inventory only to raise prices again, savvy consumers wonder just how good the sales prices really are.  

Historically, Wal-Mart built its business around an every day low price strategy.  Customers learned to trust the company’s pricing.  When they bought something from Wal-Mart, they new two things, first, the price they paid would likely be the price they would pay tomorrow.   Second, it was the best price or very near the best price in their trade area.  That mind set benefited Wal-Mart as million of consumers headed to Wal-Mart first, day end and day out; trusting their price was “always low”.  But no longer.  

Today, many of the company’s former consumers have much less loyalty to Wal-Mart.  They shop a variety of retailers often with low price top of mind, especially for branded products.  That benefited Wal-Mart over Christmas, in part because shoppers traded down as they spent less than in 2006. That shopping trend propelled the company’s comparable store sales to a seasonal high relative to its competition.  However, it’s now clear the high-low pricing strategy didn’t work as well in hard lines such as home products, toys, and electronics as it did in groceries and perishable.   

According to Wal-Mart, sales performance was especially strong in food goods which most of its competition didn’t carry in depth.  While category numbers by trade name aren’t available, it’s probable; Wal-Mart’s non-food product categories performed no better than and possibly worse than Target, Kohl’s, JC Penney…etc. With food prices the highest in US history, Wal-Mart’s grocery business will continue to grow, especially if they ‘really’ lower prices.  But with food margins already low and producer costs increasing, it’s problematic whether the growth will be sufficiently profitable to overcome the change in relative mix of goods sold and resultant decline in margin.  

Wal-Mart’s recent pricing announcement suggests the company hasn’t learned much from its December experience.  For instance, Toys R Us substantially beat Wal-Mart’s sale prices on branded and non-branded toys.  That paid off for Toy’s R Us to the detriment of Wal-Mart sales growth.  Likewise, other retailers consistently beat Wal-Mart’s prices on apparel lines and home products which mean the company is paying too much, has the wrong quality-price range, or is just over priced.    However, to its credit, the company recently announced that it was reorganizing apparel buying organization because of poor performance. 

This is the third time in three years that the company has tried to shift directions in this key category with limited success to date.  Whether, this latest attempt represents a reshuffling the chairs on the deck of a sinking ship or a process that will lead to real change in the company’s apparel business remains to be seen.  

In any event, investors may be making too much of Wal-Mart’s December performance if they assume it the slightly better numbers mean the company has perfected a sustainable, high-low pricing paradigm the long term.