October 17, 2009 / 12:08 PM / 10 years ago

Wal-Mart attacks new markets with big price cuts

SAN FRANCISCO (Reuters) - Wal-Mart Stores Inc is taking its ferocious price cutting into new markets as the economy shows hints of recovery.

In the past year, the discount behemoth has been more focused on markdowns for necessities such as food that drove sales in the downturn. But now its aggressive strategy is spreading rapidly to other goods being sold online as well as in the company’s stores.

In the past month, Wal-Mart has started selling more than 100 toys for $10 each and rolled out nationally a wireless service priced well below competitors.

This Thursday, Walmart.com cut prices on 10 yet-to-be- released hardcover books to $10 each, igniting a price war with online giant Amazon.com.

After both online retailers then cut their prices on those highly anticipated books to $9 each, late on Friday Walmart.com shaved a penny off that price and was selling titles such as Sarah Palin’s “Going Rogue: An American Life” for $8.99 each — discounts of nearly 60 percent or more off the cover price.

Prices could fall further. Walmart.com said it would adjust its pricing as needed to ensure it offered the lowest prices on its top 10 pre-selling books.

The moves show Wal-Mart is seeking new areas to dominate after more than a year during which the world’s largest retailer benefited from selling low-priced food and medicine.

“Clearly they are more aggressive and they will cede no ground to the competition, whether it’s the Best Buy’s of the world, or Toys “R” Us or ... Amazon,” said Craig Johnson, president of Customer Growth Partners. “Any competitor that underestimates Wal-Mart, does so at its own peril.”

While Wal-Mart is testing the mettle of its competitors, it also faces a test of its own — showing the upgrades it is making to its U.S. business can help it retain newly won market share even after the economy improves.

Wal-Mart is holding an analyst meeting October 21 and 22 and Wall Street wants to hear how its sales performed in August and September, when many retailers noted improving trends.

“Given sequential up-ticks in traffic at peers Costco and Target as well as department store retailer Kohl’s during August/September, the question looms whether Wal-Mart saw similar gains or donated share,” wrote JP Morgan analyst Charles Grom in a research note.


The longest recession since the Great Depression has been a boon for Wal-Mart as shoppers trade down and look for deals.

While many retailers have seen sales slide and others, such as Circuit City, filed for bankruptcy, Wal-Mart has lured shoppers with discounted food, medicine and consumer electronics.

Johnson estimates that, since January, Wal-Mart’s share of the U.S. retail market has risen 0.85 percentage points to 11.3 percent — a “huge increase ... given the glacial changes that occur at the macro level.”

Wal-Mart is known for being ferociously competitive. While Johnson said Wal-Mart is the No 1 U.S. toy and food retailer, he said it won those spots by wrecking havoc in those sectors.

For instance, price wars among toy sellers in the mid-2000s led to bankruptcy for FAO Inc, parent of the upscale FAO Schwarz toy stores, and KB Toys. Most recently, food retailers like Safeway Inc and Target Corp are working to convince shoppers their prices are as low Wal-Mart’s.

Wal-Mart is flexing its muscles online in particular. At the end of August, Walmart.com said it would allow select retailers to sell goods on its site — a tactic used by Amazon.com Inc. This week, it also announced home delivery of health and beauty items.

Walmart.com CEO Raul Vazquez told Reuters on Tuesday its aim is to be the biggest and most valued online retail site.

“In a few months, whenever someone thinks about buying diapers — in the same way they think about going to a Wal-Mart in the physical world — they will think about going to Walmart.com,” he said.

“Eventually, we’ll be the biggest in sales and the biggest in mind-share and all of those other things that we’ve established in the offline world.”

Sucharita Mulpuru, an analyst with Forrester Research, downplayed the importance of book price wars, saying they represent a small slice of the merchandise that Amazon sells.

But she said Amazon would not back down if Walmart.com continues to try to steal its market share.

“If they see anybody encroaching ... they become extremely aggressive to try to protect their turf,” she added.

Amazon.com did not respond to a request for comment.


Meanwhile, Wal-Mart said this week it would expand to more than 3,200 stores a mobile service plan, developed with TracFone Wireless Inc, the U.S. unit of Mexican cellphone giant America Movil.

The TracFone offering includes a $30 prepaid plan for 1,000 minutes — a price that analysts said threatened to hurt profit margins across the U.S. wireless sector.

The move comes as Wal-Mart has infused its merchandise selection with brand name or exclusive products, such as Apple Inc’s iPod and a Miley Cyrus clothing line. It said the new products are building loyalty among its core lower- income shoppers and the higher-income ones that are trying shopping in its stores for the first time.

Sarah Henry, a retail analyst at MFC Global Investment Management said Wall Street remains divided over which class of consumer is driving Wal-Mart’s market share gains.

Either way, with economists forecasting the U.S. recession may have ended in the third quarter, Henry said Wal-Mart needs to show that, as shoppers once again buy discretionary products, they will choose to do so in its stores.

If they can “hang on to that new traffic that’s come in to their stores and that leaks over to the their higher-margin sales, that will be huge for them in terms of beating expectations, raising guidance,” she added.

Reporting by Nicole Maestri; editing by Andre Grenon

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