195-Always Low Prices Meets Lower Prices

Wal-Mart has come to dominate the grocery industry by offering wide product choices and low prices in their 2700 super centers. The company today is the biggest of the industry’s Standard Leaders. (See “Audio Tip #181: Using Physical Measures to Control Costs” on StrategyStreet.com.) And because the company has a well earned reputation for low prices, it found new customers during the last recession.

But underneath the new customer growth it found that some of their Core customers had migrated even further down on the food chain to discounting competitors, such as Save-A-Lot and Aldi stores. These companies offer even lower prices. They are able to offer these lower prices because they are Strippers. These are low-end, Price Leader (see “Audio Tip #83: Price Leader Products and Companies”), competitors who strip benefits from the product offering in order to achieve a low cost structure and consequent very low prices, which attract price-sensitive customers.

Save-A-Lot and Aldi compete with similar business models. They offer from 1400 to 1800 items, which is a small fraction of the offerings in a typical supermarket. The vast majority of their products are private labeled. The stores themselves are small, 15,000 to 17,000 square feet, and the store displays and amenities are spartan. Still, these retailers are growing relatively rapidly in the U.S. Wal-Mart feels like it needs to respond to their growth.

Wal-Mart does offer smaller stores. Their Neighborhood Markets concept are grocery stores in small towns and suburbs. But these are larger formats, averaging 42,000 square feet. The company’s small store format, called Marketside, has a 15,000 square foot footprint but has achieved relatively little presence so far. The Marketside business model has yet to develop any vibrancy.

Can Wal-Mart succeed at the very low end of the marketplace? I wouldn’t bet against them. They have succeeded in Mexico by offering seven separate store formats to meet the needs of consumers at various budget levels.

Posted 6/1/10

Update:

Walmart continues to dominate the US grocery industry. It enjoys an 18% market share and is far larger than the second ranked competitor, Kroger. It has proven adept at fending off competitors.

Walmart’s Marketside product was developed in 2008 to counter Tesco’s 2007 US entry with its Fresh and Easy concept. The Marketside product was experimental and confined to the Phoenix Arizona area. Walmart viewed Tesco as a dangerous competitor.

Tesco is the biggest retailer in the UK.  It has a strong international presence with more than 6500 worldwide stores.  It’s Fresh & Easy concept failed in the United States.  It opened its first store in November 2007 and by the end of the year had 150 stores open across California.  By 2009 the US concept reported a loss of $200 million and those losses continued.  In April 2013 the company withdrew from the US market at a cost of $2 billion.

As Walmart watched Tesco’s US entry fail, it discontinued its Marketside product in 2011.

Both Save – A – Lot and Aldi continue to compete in the grocery industry. Aldi, in particular, has shown real strength and high growth. By 2022, it was the third largest grocery retailer measured by number of stores. However, because of its store size and discount pricing, it does not fall in the top 10 of grocery retailers measured by revenues.

Walmart is impressive in its willingness to introduce new price points to counter growing competition. See HERE and HERE for more perspective.

9/22

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