Supermarket Wars

Stephen DeAngelis

April 19, 2010

In a post entitled Walmart and the Food Supply Chain, I discussed how Walmart had triggered a price war between supermarket chains as competitors try to keep customers walking through their doors. In that post, I wrote: “Why do stores participate in price wars and end up losing money? According to David B. Dillon, Kroger’s chairman and chief executive officer, the answer is that they are trying to foster customer loyalty. What started the price wars? Most analysts attribute them to Walmart’s growing share of the food market. When it comes to getting products from suppliers to consumers, Walmart remains the 600-pound gorilla.” Walmart, in magnitude of sales, is the largest retailer of groceries in the U.S.

 

If Walmart’s competitors were hoping that the price wars would end, their hopes, according the Supply Chain Digest, are misplaced [“Walmart to Lead New Round of Grocery Price Wars – but it May be a Sign the Economy is Recovering,” 24 March 2010]. The article reports:

“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 … 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 … another round of ‘price rollbacks’ on some 10,000 SKUs, mostly on the grocery side of its superstores. … The program will be supported by in-store signage and radio and TV advertising.”

As I noted in the post mentioned earlier, price wars have resulted in significant earnings losses for Walmart’s competitors. The new round of Walmart price reductions is predicted to increase the bleeding. The article reports that grocers will likely seek some relief from suppliers.

“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.”

The article goes on to assert that as the economy recovers consumers will likely place increased value in their overall shopping experience and in the convenience of shopping closer to home — meaning they might not travel as far looking for slightly better prices. Apparently Walmart (whose store sales saw 2 percent decrease in Q4 2009) believes that assertion to be true, which is why it is again reducing prices. Walmart hopes, the article reports, that customers will “continue to chase value.” It’s a big bet, but some analysts believe it’s a sound one. The article continues:

“Dr. Romesh Wadhwani, chairman of the newly renamed SymphonyIRI Group, … 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. … 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.”

Before turning to the subject of supply chain efficiency, I should point out that Walmart’s price wars are not just taking place in the United States. Walmart has also targeted the Brazilian market [“The Three-Way Fight for Brazilian Shoppers,” by Ladka Bauerova, Chris Burritt, and Joao Oliveira, BusinessWeek, 25 March 2010]. Bauerova, Burritt, and Oliveira report that in Brazil value is also more important to shoppers than convenience.

“Maria do Socorro Brito Lyra never leaves her São Paulo home to go shopping without her supermarket circulars. Each of the nation’s three biggest grocers promises to match the lowest price offered by a competitor if shoppers come armed with a rival’s flyer. ‘I always pay the lowest price,” declares the 34-year-old teacher, waving a fistful of flyers as she stands at a Wal-Mart Stores checkout. In this most open of the large emerging economies, the world’s two biggest supermarket chains and a homegrown competitor are battling for dominance. Leading the field is Companhia Brasileira de Distribuicão Grupo Pão de Açúcar, with revenues of $13 billion in 2009. Close behind is France’s Carrefour, with sales last year of $12.6 billion. In third place, but making a big push, is the world’s No. 1 retailer, Wal-Mart Stores, which operates under several names in Brazil. It racked up $9.5 billion in sales in Brazil last year. All three plan to invest big in Brazil in coming years.”

Brazil is becoming a battleground to test entry strategies into other emerging market countries with growing numbers of middle class consumers. Bauerova, Burritt, and Oliveira explain:

“As [Brazil’s] middle class expands, annual spending on food is expected to rise 50% over the next five years, to $406 billion, says Carlos Hernandez, a Madrid-based analyst at consultant Planet Retail. Among the emerging nations known as the BRICs, Brazil offers fewer barriers to business than Russia, India, and China. India bans foreign stores that sell multiple brands, and Russia limits expansion by retailers. China is attractive because of its rapid economic growth, expected to be 8% in 2010, vs. 5.8% in Brazil. However, ‘Brazil is more developed in terms of infrastructure and wealth creation,’ says Justin Scarborough, a retail analyst at Royal Bank of Scotland in London. ‘Consumers are used to shopping in hypermarkets, whereas retail in China is more traditional.’ Already No. 1 in Mexico, Wal-Mart aims to overtake Carrefour to become No. 2 or No. 1 in Latin America’s largest market. The Bentonville (Ark.) retailer plans to spend $1.2 billion this year to open 110 new stores in Brazil, on top of the 436 it now operates. It may also scout out an acquisition, says Héctor Núñez, president of Wal-Mart Brazil. ‘We have a very, very clear plan to win here in Brazil,’ he says. ‘We are investing heavily to start having a much more solid and persuasive presence.’ … Predicts James Monro, an analyst at Standard & Poor’s in London: If Wal-Mart stays on track, it ‘will inevitably take over the region and become No. 1.'”

As I noted in the post mentioned at the beginning of this blog, “Direct purchasing from growers will help Walmart keep acquisition costs lower and it should help the company improve the quality and the security of the food it provides its customers.” Competitors will have to find ways to match Walmart’s supply chain expertise to keep up. Of course, one way to reduce supply chain costs is to increase supply chain efficiency. As discussed in a recent post entitled Resilient Supply Chains, however, efficient supply chains risk becoming brittle supply chains that can increase risks for both suppliers and retailers. Nevertheless, the search for supply chain efficiencies continues. The Supply Chain Digest article reports:

“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 [in March 2010] 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.”

As noted earlier in the article, “new levels of performance integration of planning and execution” are required to get products to “the right store at the right time.” How one does that remains part of the “supply chain black hole” discussed by Lora Cecere (see my post entitled Filling the Supply Chain Black Hole). One thing I do know, more and better information sharing is the key to success. As Michael Hugos writes, “The more information about product supply, customer demand, market forecasts, and production schedules that companies share with each other, the more responsive everyone can be.” [Essentials of Supply Chain Management, second edition (New Jersey: John Wiley & Sons, 2006)]