Wal-Mart looking to steep price cuts to redeem low-cost model

NEW YORK -- Wal-Mart is counting on $1 bottles of ketchup and sub-$4 cases of Coke to get its low-price mojo back.

The sharp cuts at its U.S. Walmart stores before Memorial Day weekend have already pushed rivals such as Target into price wars. And the markdowns are expected to keep coming throughout the summer.

They're one of the boldest moves the world's largest retailer is making to turn around sluggish business at its U.S. namesake chain and win back shoppers from rivals. The cuts target 22 foods and other essentials at an average savings of 30 percent -- splashy enough to get attention and perhaps change perceptions.

Wal-Mart is also restoring items like certain soups and laundry detergent that it stopped carrying when it tried to unclutter its stores. It's also pushing more basic clothing such as socks and underwear after putting too much focus on trendy items that didn't sell.

Wal-Mart was one of the few beneficiaries when the Great Recession began as shoppers traded down to save money. Now it's having trouble keeping customers in a slowly recovering economy. Cash-strapped shoppers are looking elsewhere, such as at dollar stores and local grocery chains, for better deals. And some customers who are feeling more flush are starting to head back to the mall.

Wal-Mart, which generated more than $400 billion in revenue in 2009, has blamed high unemployment and tight credit for adding to financial strain on its blue-collar customers, some of whom have limited access to financial services and are running out of unemployment benefits.

But it also takes part of the blame for four straight quarters of declines in revenue at Walmart stores open at least a year -- a key indicator of a retailer's health.

"Wal-Mart is all about price, and they're all about one-stop shopping. Those are the key ingredients," said Bob Buchanan, a former retail analyst who now teaches finance at Saint Louis University. "Now, you kind of scratch your head and wonder if either of them are true."

"Wal-Mart has made a lot of noise, but customers want to see it in the stores," he said. "This action is long overdue. They need to drive that message hard."

Wal-Mart acknowledged during its latest conference call with investors that its moves to carry fewer items went too far. It's now replenishing 300 it had dropped. Analysts said Wal-Mart pared up to 15 percent of its inventory, sending shoppers elsewhere in search of their favorite brands.

Wal-Mart is still making big profits. Its first-quarter net income rose 10 percent, fueled by cost cutting and growth overseas. Wal-Mart's thinking: Lower costs let it lower prices, which in turn should drive up revenue, and that money would be invested to yield more cost savings.

Wal-Mart, not its suppliers, is bearing the cost of some of the deep price cuts, said Bill Pecoriello, an analyst who heads ConsumerEdge Research Llc., based on discussions with industry officials.

According to Pecoriello, the total price of a basket of five grocery items, from Coke to Lay's potato chips, was $11.23 at Wal-Mart, 24 percent less than it was a year ago. It's also almost 14 percent lower than Kroger and almost 26 percent lower than Safeway, according to Pecoriello's estimates. The firm gathers pricing data representing 15,000 stores nationwide.

That doesn't include Wal-Mart's move to lower prices on 24-packs of Coke and Pepsi further in the past few days, from the announced discounted price of $5 to as low as $3.77 in certain markets. The original price was $6.98 for a 24-pack.

Pecoriello noted in his report that Target was selling 12-packs of soda for $2, roughly matching Wal-Mart's price, while Kroger was selling 12-packs for $2.50, less than a year ago.

Some Wal-Mart stores have sold out of the packs, and suppliers are having trouble keeping up, Pecoriello said. He said he hasn't seen such low prices on soda in at least five years and says the overall price of soda is down about 20 percent from a year ago.

Linda Blakley, a Wal-Mart spokeswoman, declined to comment on sales and said it has the lower-price 24-packs only where it faces "regional competitors." PepsiCo declined to comment, and officials at Kroger, Safeway, and Coca-Cola didn't immediately return calls.

Although it sells all kinds of items, groceries keep customers coming back, and Wal-Mart has hit hard on the theme of low prices in recent TV commercials. One shows a friendly associate walking down a store aisle placing discounted items from Heinz ketchup to Breyers ice cream. The ads put the low prices, such as the $1 deal for a 40-ounce ketchup bottle, at center stage. The original price was $2.42.

Wal-Mart is advertising some deals in newspapers for the first time since June 2006, according to Michael Exstein, an analyst at CreditSuisse. In addition to store circulars, Wal-Mart advertises in newspaper inserts like Parade, which have lower costs and require a longer lead time, Exstein said.

Blakley said, "We are working hard to bring our customers the best prices on items they need right now and to share the news of these price cuts."