Wal-Mart Discounts Soda

At Chicago area Wal-Mart stores, shoppers are finding Coke cases at a special price: 24 cans for $5, the Chicago Tribune reported.

The 20 cents per can price demonstrates Wal-Mart’s purchasing power, and is less than good news for the beverage industry, where after higher bottling prices and 10 years of stagnant pricing beverage companies only recently persuaded consumers to pay more for soda, according to industry analysts. Now, Wal-Mart is using its size to negotiate lower prices and pulling customers away from other chains, leaving smaller, independent chains working to keep up, the Chicago Tribune reported.

The promotion, which began shortly before Memorial Day, is pushing other retailers to reduce prices to pre-1990s levels to compete. And some fear Wal-Mart’s buying power could work against the interests of the industries that supply their stores.

“They just have so many stores that they can really push back, they can really squeeze, not just soft drink companies but other food firms, to force them to take the hit and take their margins down,” said Philip Gorham, an equity analyst with Chicago-based Morningstar who covers the beverage sector.

The price cuts are part of an initiative Wal-Mart announced in October 2008 and began to roll out in spring 2009. In May 2010, deep discounts on products from soda to ketchup raised Wal-Mart’s pricing lead versus other competitors fivefold compared with the previous month. Analysts say the promotions are expected to appear around every holiday through the second half of 2010.

“Wal-Mart is so huge that any action they take tends to have a big consequence. So if they do a rollback on a core product, they drive huge volume, so much that they disrupt the supply chain of producers,” said David Garfield, who is based in Chicago and leads the Consumer Products practice of AlixPartners.

Soda is the single-most consumed beverage in the U.S., and a $70 billion-plus market. For many retailers, it is also considered an important driver for pushing traffic into their stores. But for the megachains like Costco and Wal-Mart, soda is less important, which gives them more room to negotiate, the Chicago Tribune reported.

“There’s been a power shift over the past 10 years where the power has shifted from packaged-goods firms to these huge grocery store chains,” said Morningstar’s Gorham.

Median sales decrease 40% at similar high-volume stores when a Wal-Mart enters the market, 17% at supermarkets and about 6% at drugstores, according to a study published in June 2009 by researchers at multiple universities and led by the Tuck School of Business at Dartmouth College in Hanover, N.H. Similar high-volume stores, like Target, fare the worst when a Wal-Mart moves into an area because they are forced to reduce prices to compete, the study found.

“We’re fiercely competitive on price and routinely shop our competitors, including Wal-Mart, to ensure we’re providing our guests with the best possible value,” said Jennifer Mooney, a spokeswoman for Target. She added Target has a promise to match print-advertised prices on identical products featured by a local competitor.

Drugstores like Deerfield-based Walgreens are the least impacted, according to the study, and are generally able to stay afloat by increasing their assortment size.

“Overall we compete very well with Wal-Mart,” Jim Cohn, a spokesman for Walgreens told the Chicago Tribune. “We cater to a wide customer base, and often the need or occasion for a Walgreens shopping trip is different from many of our competitors.”

But a recent analysis by J.P. Morgan found that Wal-Mart’s rollbacks on pop have already upset grocery stores and have the potential to disrupt the beverage industry. Following Wal-Mart’s soda promotions before Memorial Day weekend, national soda sales shifted dramatically to Wal-Mart and away from other grocers, according to the equity research firm. Memorial Day weekend is traditionally seen as a lift for beverage sales, but sales volume dropped 9% during the four weeks ended June 12, according to data from the Nielsen Co.

Analysts say when customers see cheap pop in bulk quantities, they tend to stock up leading to fewer sales following a promotion.

“The risk of such rollbacks are several,” according to J.P. Morgan. “For one, a rollback creates a powerful lift and thus demand for a product, necessitating a production spike and disruption to the supply chain. Inventories can be thrown off kilter. And ultralow pricing poses a threat to brand equity.”

Pradeep Chintagunta, a marketing professor at the University of Chicago Booth School of Business, told the Chicago Tribune that retailers are less likely to react to low pricing when a single Wal-Mart moves to an area. But dozens of Wal-Marts could mean significant changes for a city, particularly among chains that rarely localize their promotions on a store-by-store basis.





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