DECEMBER 2005 :: COVER STORY : BIG BUSINESS

The Wal-Mart Effect
Supermarkets Cut Their Prices to Compete With Discounters

By Janet Adamy
Staff Reporter of The Wall Street Journal

Wal-Mart, itself one of the largest grocery chains in America, is changing the way food is sold at other supermarkets as well.

Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart and other discounters.

An Upscale Wal-Mart? Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

How Wal-Mart Weathered the Storm: Wal-Mart Stores grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

Against the Wal: When Wal-Mart Stores became the world's biggest public company, it also became one of the world's biggest targets.

The Wal-Mart Effect: Wal-Mart, itself one of the largest grocery chains in America, is changing the way food is sold at other supermarkets as well. Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart and other discounters.

The Lucky 2% Getting into Wal-Mart is an entrepreneur's equivalent of making it to Broadway. Even a short run on the shelves there can help transform an invention from niche product to household name.

In recent months, several regional grocery chains have reduced prices on everything from Kraft macaroni and cheese to Ragu pasta sauce in an effort to lure back shoppers who have defected to discount grocers. In most cases, the stores also stopped offering weekly bargains on items like cereal or yogurt.

For decades, most traditional supermarkets have lured price-conscious shoppers with cheap weekly specials and made up the lost profit by keeping nonsale prices much higher. Now, the prevalence of shops such as Costco Wholesale, dollar stores and discounters such as Wal-Mart has conditioned consumers to expect inexpensive goods every day.

Earlier this year, California supermarket chain Raley's reduced the daily price on 7,000 items, including Sunnyside Farms butter and Wishbone salad dressing. Giant Eagle of Pennsylvania has cut the price on 4,300 items over the past year, and Fresh Brands, operator of Piggly Wiggly, cut prices on 4,000 goods last fall. Wegmans Food Markets, which serves parts of New York, New Jersey and Virginia, has cut the prices of 10,000 items. Supermarkets generally carry about 30,000 items.

A Few Hundred Saved

The price cuts are in some cases fairly steep. Giant Eagle, for example, used to sell a 15-ounce box of Cheerios for $4.39 at most stores. Last year, it cut the daily price to $3.88. In April, Giant Eagle cut the price again to $3.11. At Raley's, 10-packs of Capri Sun juice pouches sold for $3.49 and would go on sale about eight times a year at two for $3 or 4 for $7. Now, they sell for $1.98 daily and no longer go on sale regularly.

This doesn't mean supermarkets aim to compete with Wal-Mart on every item; in most stores, the cuts apply to no more than 15% of their items-typically so-called center-of-the-store goods, like toothpaste and toilet paper. Still, customers who have never loaded up on deals could save an average of 5% to 7% a shopping trip if they purchase a broad basket of goods, according to Willard Bishop Consulting, a retail-marketing consulting firm. Many families could save as much as a few hundred dollars a year in grocery bills by shopping at a store that has shifted its pricing structure.

The recent move toward everyday low prices is one of the most far-reaching attempts yet by supermarkets to beat back the discounters' encroachment. Traditional grocery stores controlled 52% of the nation's grocery sales last year, down from 81% a decade earlier, according to Willard Bishop. Nontraditional food sellers, including Wal-Mart supercenters, dollar stores and wholesale clubs, controlled 31.9% last year, up from 8.9% in 1994.

The new pricing policies at grocery chains are helping consumers cope with the rising cost of food. Food prices have been rising at progressively higher rates each year since 2002, and the increase hit 3.8% last year, according to the Bureau of Labor Statistics.

Shoppers, meanwhile, have become less patient when it comes to hunting for deals in the store aisles. Coupon use has declined each year for the past five years, according to NCH Marketing Services, which analyzes promotional trends. Some consumers are put off by the growing strings attached to the special offers. More than one of every four U.S. coupons requires multiple-item purchases.

"I don't even read the circular," says Lauren Knezovich, a 27-year-old Pittsburgh resident who shops at Giant Eagle and grew up cutting coupons. "I stopped caring about that."

Customers of Raley's had complained they were wasting time driving between markets in search of the best weekly specials and buying food they didn't end up eating, says Bill Coyne, CEO of the chain. Shoppers stockpiled so much sale food that some had to store it in their bedrooms, a shopper survey found. Nonsale items were selling slowly.

So the 138-store chain, facing the threat of Wal-Mart's fresh-grocery expansion in California, reduced prices on many items, like juice and butter, that face the stiffest competition from discounters.

Narrowing the Gap

Large supermarket operators including Safeway and Albertson's still use high-low pricing but have been narrowing the gap between everyday and promotional prices. Albertson's, the nation's second-largest supermarket chain by sales, launched a program last year called "Check the Price" that reduced the everyday tag of price-sensitive items consumers buy frequently. This year, the company more than doubled the number of items that are getting price cuts.

The supermarket industry has been slow to fight back against discount stores, which began picking off supermarket customers about a decade ago. So far, most traditional grocers have focused on setting themselves apart from lower-cost competitors by adding better-quality perishables and stocking more natural foods. Until now, many grocers have said having better service and more convenient locations would be enough to fend off price competition.

The pricing changes could have far-reaching effects on the grocery industry. Stores are driving a harder bargain with suppliers to offset the hit from the lower prices.

Supermarkets say the changes are prompting customers to shop beyond deal items. "People aren't just cherry-picking as much as they used to," says Louis Stinebaugh, president and chief operating officer of Fresh Brands, operator of 87 Piggly Wiggly stores. He says the store is still offering most of its weekly specials.

Giant Eagle, with 221 stores, says its sales and market share have increased since it cut prices on 3,000 items last November. In April, it cut the price of another 1,300 items.