Retailers’ Inflation Improvisation Part I: Perilous Parity

The following is Part One of my two-part series on how retailers are waking up to inflationary realities ... and what they are leaving out.

Rising fuel and raw materials prices are inescapable, escalating realities that have predictably become unavoidable topics in recent retailer financial calls, conference presentations, and interviews. Woe to any Pollyanna retail execs who don’t proactively go to the dark side in their presentations, or who hope to skate by with vague references to “headwinds.” Some pesky analyst will drag it out of them during Q & A and refuse to let things rest. Will they pass cost increases along? Are their performance projections taking inflationary realities into consideration? Can we have a bit more specificity regarding timelines?

Retailers have been understandably measured when broaching the subject of passing increases along to their customers, who, in addition to high gas prices, will be dealing with underemployment and economic uncertainty for an undetermined period of time. However, in some cases, retailers appear to be backing their existing strategies into an inflation-ready talk track under duress rather than speaking to longer-term, big-picture realities.

Despite retailers’ attempts at articulating short-term fixes, I see several market dynamics converging that promise to compromise their well-crafted stories.

Who do you Trust?

Both Walmart and Dollar General have recently made it clear that high-low price shenanigans are off the table and that building trust through price consistency (or what Michael Moore, Walmart’s central region president, referred to in a recent presentation as “trip consistency”) is of the highest value. In a presentation at last month’s William Blair Growth Conference, Rick Dreiling, Dollar General’s CEO claimed that “price integrity is building loyalty” with its customers and that those customers “truly trust” the retailer’s everyday low price positioning.

It’s one thing to maintain the perception of consistent price leadership when you own the turf, but what about when the field gets more crowded? Dollar stores are facing new competition from big-boxers, from Best Buy to J.C. Penney, Staples, Target and Walmart, who are determined to downsize their way in by shoving small formats into previously unexplored urban and rural markets, many of which are already populated with the original small format specialists. I’ve written extensively about how this wave of new formats that retailers are opening in the US will transform the competitive landscape. Given this new encroachment, current inflationary dynamics and dollar stores’ inherently narrow wiggle-room on both price and physical space, their sovereign reign over some urban and rural fiefdoms may be at risk and yet they aren’t betraying much vulnerability.

Perilous Parity

Dollar General’s Dreiling recently spoke of the company’s “radical shift” to “proudly” selling national brands alongside private brands. However, the more Dollar General focuses on procuring the same national brands that Walmart and others carry, the more they will have to obsess over comparative value, especially since local price adjustments are standard operating procedure for both Target and Walmart, who both have ad price match guarantees that clean up any glaring anomalies.

I got a kick out of Walmart’s uncharacteristically quirky statement regarding local pricing on its FAQ page, which details three reasons why pricing may vary from store to store. They close the point by stating, “It is not our policy to price match our own stores or our online service, since we are not in competition with ourselves.” Well, they kind of are unless the promise of trip consistency, in fact, relies on shoppers’ trips being limited to a single store and, as Walmart slowly rolls out its new small format Express concept, those stores will be benchmarking against new rivals.

Flummoxing Fluctuations

Recent price checks of Walmart’s brand-new Express location in Gentry, AR and the local Dollar General, less than half a mile away, revealed a few impressive examples of same-item, national brand price parity (they managed to get within five cents of one another on some staple items). They also shed light on baffling price discrepancies – my market basket of 20 identical (same brand, packaging, and quantity) items uncovered multiple examples of 20-30% price differences that went back and forth between the two retailers, sometimes within the same narrow category. Of course, given the dollar store model, those differences amounted to fractions of a dollar in many cases; however, they won’t be lost on dollar store customers – it all adds up. Walmart netted out 8% higher overall, but considering the lack of cross-category consistency, I wouldn’t place bets on that being the case for every basket.

Family Dollar’s CEO, Howard Levine, noted in the company’s Q3 2011 earnings call that “so far, our market and price checks are confirming that our competitiveness remains strong” and went on to say that Family Dollar is looking at the competitiveness of various markets and taking advantage of “higher pricing opportunities” in those that aren’t as competitive. He added that Family Dollar is continuing “to learn more about these opportunities, particularly as we open up more and more stores in urban markets where that’s a lever that we can pull to help the margin.” In other words, Family Dollar is banking on localized pricing winning the day, even as others who have arguably had more practice at it head their way.

Dollar stores have a very defensible position as they are thousands of stores ahead of the interlopers, but the nagging exceptions (markets that the big boxers have taken a shine to) have the potential to upset their apple carts as everyone attempts to adjust pricing to increasingly complex local market dynamics. Throw in Walmart’s Site-to-Store and Pick Up Today services, which have the potential to transform every Walmart Express location into an endless aisle delivery mechanism (the brands and products in the store may eventually represent only a fraction of the actual item transactions that occur in the store), and you have a multi-layered, localized moving target. So how will dollar stores be able to carry out a balancing act and live up to price consistency claims while the continuous upward crawl of commodity prices adds even more complexity to the picture?

In Part Two, I delve deeper into branding and proximity ... and I throw in sourcing for a touch of spice.

Want to explore what these and other retail dynamics mean to your retail positioning? Contact me directly at