It is a time-honored tradition within the retail industry. When sales drop, so do prices. Of course, not all retailers can afford that. As the holiday season in 2008 showed, many stores simply close their doors and lay off workers. The economy is still bad enough that the practice has continued through 2009 into 2010.
Wal-Mart’s (WMT) US same store sales have been weak, and the firm means to change that.
According to The Wall Street Journal, the world’s largest retailer will cut prices on about 1o,000 products over the next week. The paper says that the reductions will be “mostly food and other staples.” If the process works, watch Wal-Mart accelerate the process by expanding it into a greater number of items.
Wal-Mart’s domestic sales have dropped about 2% during the last year at stores open over 12 months. Now analysts wonder if customers who went “down market” during the recession will go back to mid-tier retailers.
Wal-Mart has the balance sheet to drop prices and hold them down indefinitely. It keeps $7 billion of cash on hand. But the problem that the company and its investors face is that Wal-Mart already operates on very low margins. In its last fiscal year, its operating income was only $23 billion on $408 billion in revenue.
Wal-Mart may retain some of the customers it picked up during the economic downturn. New low prices may get some customers to buy a greater number of items while they are in Wal-Mart stores. But, there will be hell to pay on Wall St. if the discounts turn EPS numbers sour.
Douglas A. McIntyre
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