High stakes battle for Wal-Mart in the U.S. groceries market

With Germany-based Aldi quickly gaining market share in the highly competitive U.S. groceries market, Wal-Mart, the pioneer and king of low prices is feeling threatened and has high stakes in this price war.

According to sources familiar with Wal-Mart Stores new pricing strategy, the store is running a new price-comparison test in at least 1,200 U.S. stores in a bid to compete with Aldi, a German-based discount grocery chain store. As a result of its move, packaged goods suppliers, including Kroger Co are feeling the heat.

The store has launched the price comparison test across eleven Midwest and Southeastern states which include Florida, Iowa and Illinois.

Wal-Mart’s strategy is to find the right price point across a range of products to gauge which price point attracts most shoppers and then adjust prices accordingly.

Comparing price point across a basket of groceries sold by Wal-Mart and Aldi show that Wal-Mart’s efforts to lower its prices is already taking hold. The U.S. retail giant is consistently offering lower prices than Aldi.

The competition between groceries stores is intense, with competitors selling a dozen large eggs for less than $1. Even a gallon of milk at some stores were priced at nearly $1.

As per sources familiar with the matter at hand, last week Wal-Mart held meetings in Arkansas and Bentonville, with food and consumer products vendors, including Unilever PLC, Procter & Gamble and Conagra Brands Inc in which they demanded that they reduce their charge by 15%.

As per vendor sources, Wal-Mart told them that it expects their help to meet head-to-head pricing for 80% of products. The suppliers with whom Wal-Mart had a discussion includes Kraft Heinz Co and Johnson & Johnson among others.

The move by Wal-Mart marks a new price war for U.S. shoppers. For more than a year, Wal-Mart had been saying it was investing in price without sharing any specifics.

When asked to comment on the outcome of the test vis-à-vis demands from grocery suppliers, Lorenzo Lopez, Wal-Mart’s spokesman said the company is “not in a position to share our strategy for competitive reasons.”

The move comes midst Aldi gaining market share in the hotly competitive grocery sector which is already crowded by names such as Kroger, Publix Super Markets, and Albertsons Cos Inc.

Lidl, another German-based discount grocer, is also planning on entering the U.S. market this year and together they pose a threat to Wal-Mart’s dominance in the U.S. grocery business.

For Wal-Mart, the stakes are pretty high, said Scott Mushkin, managing director of Wolfe Research, a leading pricing analyst. In order to remain competitive, Wal-Mart will have to spend $6 billion to regain its market share from all of its grocery rivals.

Furthermore, Wal-Mart will have to finds ways to cut costs without damaging its bottom line. Already in the latest quarter, gross margins fell by 8 point while net income dropped by 18%.

Wal-Mart explained the drops to factors including price investments which essentially means the cost of cutting prices.

Wal-Mart has told vendors that it intends to hold on to its margins while losing money on some goods, as part of its larger pricing plan. Wal-Mart told vendors that it was ready to absorb their losses so as to help suppliers get used to the new pricing system.

As per a supplier of consumer goods, in the last few months, Wal-Mart cut prices on some of his company’s products by nearly 30%.

“It helped them figure out the sweet spot that drives traffic,” the person said.

Wal-Mart is also telling vendors to make logistics improvements in order to boost their sales by as much as $1 billion. However, it did not provide the length of time.

“Wal-Mart is trying to go back to where they were 10 years ago when they were absolutely the low price leader,” said a large packaged food supplier on the condition of anonymity. “We understand they are willing to give up profits to a large extent in some cases, so they can invest in their own brand.”

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