Walmart Pinched by Low Prices

Retail Behemoth Is Squeezing Suppliers for Rock-Bottom Costs, But Doesn't Seem to Be Making It Up in Volume

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Walmart returned to same-store sales growth in 2012 by renewing its commitment to low prices, broad assortments and steely-eyed efficiency -- reversing much of what it did years earlier under the now-discredited Project Impact.

But amid disappointing sales last quarter, projections for a flat current quarter and questions about why the same economic conditions that hurt Walmart lately don't seem to have slowed Target and Costco, some suppliers and observers say Walmart's solutions may be causing new problems.

While Walmart never exactly went soft on pricing at any time in the past 50 years, from 2000 to 2012 it lacked detailed, competitive pricing data after withdrawing from data-sharing pacts. Since it rejoined the world of syndicated sales-data sharing last year via Nielsen and regained full visibility into competitors' prices, it's gotten more aggressive, suppliers say.

Walmart has been particularly focused on the lowest rungs of the price ladder and in grocery as dollar stores grow faster than it does and expand their food selections, said Leon Nicholas, senior VP of WPP's Kantar Retail. But while prices may be lower and Walmart's share higher, volume hasn't always made up for dollars taken out of the business, say some suppliers.

For example, Michelina's frozen entrees, once priced at $1, are now 88¢: Take that, dollar stores. Yet suppliers say category sales have declined. Walmart spokesman David Tovar declined to disclose precise numbers, but said Walmart is pleased with its frozen-food sales and has been gaining share there for the past year and quarter.

While focused mainly on low-end prices, the retailer also has sought to win more higher-income consumers in the freezer aisle by pressuring Unilever's Ben & Jerry's and Nestlé's Haagen Dazs to cut shelf prices as much as 10% -- to $3.48 a pint from $3.68 to $3.88 a pint, according to people familiar with the matter.

As part of the plan, these people say Walmart approached regional ice-cream brands, in some cases unsolicited, to bring superpremium pints into stores priced at $2.98. It was, as one said, "barely above cost," but with enough volume to seal the deal.

In response, Ben & Jerry's pints are now priced at $3.48, more than a dollar under what some supermarkets charge, though Nestlé hasn't followed suit. Both companies declined to comment.

At a supplier summit last month, Walmart framed the turn toward regional brands as hyper-local merchandising. "It's really about assortment," Mr. Tovar said. "Ice cream is a category where there's a whole host of ice-cream makers really relevant in a number of geographies."

But the move came after Walmart's ice-cream buyer had been working on the big players to cut prices for more than a year, said one person familiar with the matter. And in a sign it wasn't always about local preferences, Cincinnati stores brought in pints from Iowa-based Second Street Creamery.

The ice-cream case is an extreme example, but suppliers say Walmart has gotten tougher in general, particularly when Nielsen data show competitors beating it, said Mr. Nicholas.

Dollar stores are the biggest target, he said, but one where Walmart may have trouble winning without hurting its own sales. Chains like Dollar General beat Walmart in prices on smaller packs, even if Walmart's per-ounce price is better. "When you've only got $5 in your pocket and you have a list, the lowest price matters regardless of the size," Kantar's Mr. Nicholas said. To match them, Walmart either has to adopt smaller packs itself or sell bigger packs for less -- either of which can take dollars out of categories.

Mr. Nicholas also said he believes another aspect of Walmart's recent turnaround plan -- broadening product assortments after years of paring them -- added to out-of-stocks. But Walmart flatly denies recent media reports of growing problems. "Our in-stock levels have actually increased in recent months, despite what you might read," Mr. Tovar said, adding that 97% of stores have in-stock levels above 90%, "which is something we think is the right number."

Media reports have pinned blame for empty shelves on declining employees per Walmart store. But some suppliers see an automated replenishment system, rolled into around half of grocery categories since last year in the U.S., causing problems. In looking at a set of 6,000 item-store combinations, one supplier found less than a case was on hand 75% of the time, which can disappear fast on a weekend.

Mr. Tovar said the replenishment system, already deployed and tested in six countries, is about improving forecasting, is working fine and has no direct bearing on shelf stocking.

Another sign of what some see as kinks in the supply chain: Apparently isolated cases of Walmart buyers telling suppliers they'll need to provide direct-store delivery in previously warehouse-delivered categories to get new products on shelves. That's a departure from recent years, when Walmart pushed to take over deliveries from suppliers to its warehouses.

There's no broad effort to increase direct-store deliveries, Mr. Tovar said. "It really is based on the most efficient way to move inventory," he said. "If in that particular category and that particular product it made more sense to do direct-store-delivery, that could have been the conversation."

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