Margin preservation reality meets pricing perception

A monthly pricing survey conducted by Credit Suisse in December shows that while Walmart remains the lowest price on a basket of 60 products across two major markets the gap continues to narrow and is now at the lowest level in three years.

This is seen as an encouraging sign by those in the financial community who interpret the data as evidence of a rational pricing environment, even though from a shoppers perspective there exists less of a clear distinction between Walmart every day low prices and those of its competitors.

“Our monthly pricing survey showed that Walmart’s price gap remains relatively stable, an encouraging trend that suggests more rational pricing for the entire industry,” according to the Credit Suisse report from earlier this week.

Overall, the firm said 2010 proved to be a challenging year in consumables pricing and unit demand and noted that concerns over Walmart’s aggressive pricing strategy turned out to be overblown.

“Our survey results indicated Walmart’s average pricing gap relative to competitors in both Dallas and Chicago narrowed to its lowest level in nearly three years,” according the firm.

Target was Walmart’s closest competitor in December with prices that were 3.7% higher. More meaningful differences were evident at grocery competitors Kroger, Safeway and Supervalu who were 10%, 17% and 19% higher, respectively. Drug chains Walgreens and CVS were 23.8% and 24.7%, respectively.

The firm said meaningful inflation failed to surface in 2010 although the situation began to change during the past five months with moderate inflation in food and health and beauty products.

“We believe inflation is poised to possibly accelerate further in 2011 largely due to higher prices in dry grocery. We think the ability to pass on further price increases ultimately depends on the health of the consumer, the degree of consumer demand elasticity, and the overall competitive environment, i.e. Walmart. We believe dry grocery inflation will be easier to pass through versus commoditized categories such as dairy and that the retail pricing environment will remain rational, consistent with the last five months of 2010.”