Wait! Maybe Retail Deflation Isn't So Clear

Charles Grom at JPMorgan has some excellent insights into food retail pricing. These are some interesting observations that you can check out.


  • Take 1: Whole Paycheck? Not Anymore. Based on our checks, it appears that Whole Foods continues to stick to the course, with select price cuts throughout the store as opposed to a broad promotional strategy. While the company’s prices are still higher than KR/SWY/HT by roughly 14%, on average, this is down from last December (~19%). Of note, we did observe two important trends in the store: (1) the company has launched a special “One Day Deal,” promotion that highlights new savings every Friday and (2) traffic has improved with customers purchasing both discretionary and non-discretionary products – see our FC note out 3/30/10, “Whole Foods: Trends Firming to the Upside, Overweight” for additional colour on Overweight-rated WFMI.


  • Take 2: Wal-Mart’s New Rollback Strategy Appears More Strategic: On April 1st, Wal-Mart launched a new wave of price rollbacks across its entire chain to help solidify its price leadership position. During our field work, we observed (1) enhanced signage used to identify new price cuts (Rollbacks) and bring attention to already low prices (Unbelievable Buys, Save More), (2) the use of end caps to highlight new rollback merchandise, and (3) the return of Action Alley. However, in spite of all the visual signs of price investment throughout the store, the average price in our 31-item basket (entirely food/consumables) actually increased 2.3% sequentially from February. This increase comes on top of a 1.9% uptick from January to February. Importantly, we found it difficult to determine which price cuts in food/consumables were incremental and which were a result of standard promotions the retailer typically puts in place. When it’s all said and done, however, Wal-Mart is still priced ~12.0% lower than the traditional grocers, on average (vs. 15.6% lower in February).


  • Take 3: Kroger Slowly Pumps the Brakes: In April, we saw ongoing signs that Kroger has begun to tap the brakes on its heavy price investment (as CEO David Dillon indicated on the company’s 4Q call) and shifted its focus to more targeted promotions. For example, this was the first month in 2010 that the grocer hasn’t run its 10 items for $10 promotion – instead opting to focus price cuts on Passover and Easter products. As a result, average prices at the grocer increased 1.4% in April, which follows a 2.9% increase from January to February. On observations, traffic looked relatively in-line with February levels, but the number of items in the basket was noticeably higher than in our previous visit.

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