By John Jannarone, Oct 6, 2009Investors hoping for a big retail performance next year should beware the Wal-Mart effect.
In a way, the recession has been a break for the world's biggest retailer, directing more traffic to its stores at the expense of pricier rivals. And while many retailers reduced spending and slashed prices, Wal-Mart Stores has actually spent more and avoided aggressive price cuts.
But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.
That could put Wal-Mart's smaller rivals further on the defensive. Take grocery stores. J.P. Morgan's Charles Grom says prices of identical baskets of 31 products have fallen 14.4% between January and September at Kroger, while Safeway has seen a 9.7% decline. Wal-Mart, meanwhile, has only lowered prices by 2.6%.
Even so, Wal-Mart is still cheaper. Its basket costs $92.77, compared with $100.98 at Kroger and $113.03 at Safeway. If Wal-Mart gets more aggressive in using its scale, rival grocers will likely have to cut prices further, translating into gross-margin declines.
Other rivals such as Best Buy could also suffer if Wal-Mart offers better deals on consumer electronics. Best Buy already saw its U.S. gross margins decline 0.6 percentage point last quarter as it competed with Wal-Mart and Amazon.com. While the economy will probably be better for retailers next year, investors should remember how fiercely Wal-Mart can compete.
In a way, the recession has been a break for the world's biggest retailer, directing more traffic to its stores at the expense of pricier rivals. And while many retailers reduced spending and slashed prices, Wal-Mart Stores has actually spent more and avoided aggressive price cuts.
But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.
That could put Wal-Mart's smaller rivals further on the defensive. Take grocery stores. J.P. Morgan's Charles Grom says prices of identical baskets of 31 products have fallen 14.4% between January and September at Kroger, while Safeway has seen a 9.7% decline. Wal-Mart, meanwhile, has only lowered prices by 2.6%.
Even so, Wal-Mart is still cheaper. Its basket costs $92.77, compared with $100.98 at Kroger and $113.03 at Safeway. If Wal-Mart gets more aggressive in using its scale, rival grocers will likely have to cut prices further, translating into gross-margin declines.
Other rivals such as Best Buy could also suffer if Wal-Mart offers better deals on consumer electronics. Best Buy already saw its U.S. gross margins decline 0.6 percentage point last quarter as it competed with Wal-Mart and Amazon.com. While the economy will probably be better for retailers next year, investors should remember how fiercely Wal-Mart can compete.
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