Walmart’s Low-Price Strategy Under Pressure

August 12, 2019, 5:44 PM UTC

Walmart Inc. prides itself on rock-bottom prices for everyday goods, but as soda, snack. and toothpaste makers boost what they charge retailers in response to rising costs and looming tariffs, something’s got to give.

The question is where.

Average prices for consumer goods rose 2.3% in the first six months of 2019—the fastest pace in several years, according to data tracker Nielsen. At Walmart, store officials said there was “modest” inflation in the first quarter. However, according to Gordon Haskett Research Advisors, a Walmart shopping trip was 5.2% more expensive in June compared with a year earlier. For thrifty Walmart shoppers, that matters.

Suppliers charging more

Coca-Cola Co., PepsiCo Inc., Procter & Gamble Co., and Kellogg Co. are among those jacking up prices, pressuring Walmart into a decision: The retailer can absorb the price hike and see its profit margins suffer, pass along the increase to shoppers and risk losing sales, or use its clout with suppliers to delay or mitigate the impact.

Walmart won’t comment on its plans, but experts say the retailer will likely employ a blend of all three strategies to cope with inflation.

“Walmart will do everything they can to not pass this on to consumers, but at some point they will have to because there is not enough cost savings to offset the inflation we’re starting to see,” Brian Yarbrough, an analyst at Edward Jones, said in an interview. “Still, they have a lot of leverage over suppliers so I’m sure they’re pushing back.”

Nevertheless, expect more adjustments to come. Starting next month, the next round of 10% tariffs on a broad swath of $300 billion worth of Chinese imports begin. This will inevitably lead to price increases, Walmart executives have said— just as the holiday shopping season gets underway.

How much of those increases will be borne by consumers? “None of us know,” Yarbrough said, “except Walmart’s CFO.”

Inflation squeezing profits

Retailers typically welcome a bit of inflation, especially if economic conditions are favorable as they are now: Unemployment is near record lows and consumer confidence is high. After grappling with a historic bout of food deflation in recent years, grocers in particular are keen to flex their pricing muscles.

But Walmart’s different. Its dominance of the retail sector rests on a foundation of having the lowest prices, which are typically about 10% below traditional supermarket chains like Kroger Co. and 5% lower than rival Target Corp., according to Gordon Haskett. Raise those prices just a bit, and it could send shoppers down the road to deep-discounters like Aldi or Dollar General Corp., or even online to Inc.

“Walmart is convinced that the more they widen their price advantage, the better off they will be,” Jim Hertel, a senior vice president at retail consulting firm Inmar Analytics, said in an interview.

Yet if Kroger, Target. and others raise their prices, Walmart is leaving money on the table by not following suit. The Arkansas-based retailer could certainly use a profit boost, as higher wages, transportation costs, and e-commerce investments have squeezed its margins.

Walmart already has increased some prices, according to checks on a basket of about 76 identical items conducted by analysts at Gordon Haskett over the past year. So has Target. Of course, investors will be watching as Walmart on Thursday reports results, and Target follows on Aug. 21.

It’s not just the big boxes. Smaller, specialty retailers like O’Reilly Automotive Inc. and Tractor Supply Co. both hiked prices in the second quarter, largely in response to existing tariffs in place. That’s given cover for others to do the same.

“Everybody is under the same pressure from the price increases,” O’Reilly Chief Operating Officer and Co-President Jeff Shaw said July 25. “And what we’re seeing in the field is everybody adjusting the prices accordingly.”

More must-read stories from Fortune:

Sales are so common—are they meaningless?

—Over 1,000 new craft breweries have opened in the past year

—Victoria’s Secret hires its first trans model

—Has mezcal become too big for its own good?

—Listen to our audio briefing, Fortune 500 Daily

Follow Fortune on Flipboard to stay up-to-date on the latest news and analysis.

Read More

Great ResignationInflationSupply ChainsLeadership