Commentary By: David
Issue: Everyday Low Pricing and the Wal-Mart Dilemma
Today the Wall Street Journal reported that Wal-Mart will be offering a low price guarantee on Friday, November 25th – the day after the U.S. Thanksgiving holiday and the largest shopping day of the year in the United States.
This offer is Wal-Mart’s attempt to rebound from a disappointing holiday season last year when Wal-Mart held pricing firm and lost significant business to other mass merchandisers, speciality stores and big box retailers who discounted aggressively in the post-Thanksgiving period.
All of which raises a very significant question for Wal-Mart and others who would like to pursue an “EDLP” (everyday low price) strategy – What is the effect of running big seasonal sales on the brand positioning of EDLP brands?
This is a more pointed issue than usual this year because instead of just discounting prices, Wal-Mart will be promoting the fact that it will match lower prices. Which means that Wal-Mart will be admitting that it does not have the lowest prices. This may come as news to some of its brand faithful. Admittedly, anyone who has shopped at a Costco, BJs or Sam’s Club (or a dollar store) knows that Wal-Mart is not always at the bottom of the pricing ladder. But as this Advertising Blog has argued before, Wal-Mart has staked its brand positioning on everyday price leadership.
The Christmas season is a classic Prisoner’s Dilemma game for retailers. Last year, Wal-Mart tried to signal cooperation by holding prices and hoping that the entire industry would follow and garner higher profits. Instead (as usually happens in this game theory scenario), the competitors defected, receiving a quick jolt of sales on ‘black Friday’ (as the Friday after Thanksgiving is known in the U.S.) but suffering when Wal-Mart was forced to join in and retail industry pricing followed a rush to the bottom.
This year, Wal-Mart is opting for the third best alternative in the Prisoner’s Dilemma (where both sides gain some revenue but lose profitability) to avoid the worst alternative (where Wal-Mart loses both sales and revenue and competitors gain both). But is this the only price Wal-Mart will pay for discounting heavily on prices that are already supposedly ‘the lowest’? The issue here is whether consumers will begin to distrust Wal-Mart’s basic brand proposition as an EDLP retailer.
To give them fair credit, American consumers are more sophisticated than they might at first appear. In particular, American consumers expect that they will be seduced by socalled ‘Door Buster’ deals during the holidays (and that everything will be even cheaper immediately following New Year’s day as stores clear out remaining inventory). So Wal-Mart can argue that EDLP really does mean something different to consumers in late November than it does in March or September.
But this is a fine-edged sword and this Ad Blog believes Wal-Mart may be sliced by the keen blade this time around. Why? Offering seasonally lower prices in EDLP is one thing. Offering to match competitors even-lower prices is another. We believe this is closer to a heroin strategy for Wal-Mart. It will work this time, probably very well. But each repitition will erode consumers confidence in Wal-Mart’s everyday low prices to the point where Wal-Mart may cease to be identifiably distinct from other retailers in consumers minds. Yes this must sound absurd to a stock analyst looking at Wal-Mart’s performance over the past twenty years. But brands which are built over time can be destroyed in the same manner.
Here’s the problem: consumers recognize holiday promotion tactics at most retailers for what they are – a bait & switch game. Most retailers mark down a small percentage of items to an absurd level and discount the rest much, much less. Enterprising consumers will cherry-pick the best of all of these deals but most of the rest of use get lured in by the bold offer and buy other things at better margins for the retailer.
Wal-Mart, when it lowers prices seasonally, competes well against this model. While consumers don’t save as much on any one item, they feel that they are doing just as well or better on the entire shopping cart. That maintains consumer loyalty to the EDLP system in spite of the fact that Wal-Mart has been subverting it with lower seasonal pricing.
When Wal-Mart begins hugely promoting ‘door-buster’ prices of its own and offers matching discounts on other store’s merchandise, however, it implicitly validates those competitors. Just like naming a competitor in your advertising, explicitly acknowledging that other stores have lower prices carries coming from Wal-Mart, the king of low pricing. This is true even if consumers already know that there are better deals to be found on specific items.
So while we agree that Wal-Mart made a mistake last year, we believe this season could be more painful for the Bentonville gang in the long run. Instead of competing on door busters, Wal-Mart should really be more creative with service, loyalty or other bundling options to balance the value equation during the busy season.