Wal-Mart plans to crush competition more than usual
Part of the Wal-Mart (WMT) legacy is that it moves into regions with its huge stores and uses low pricing to push local retailers out of the market. This may give consumers more buying power, but it has caused many local communities to resent the effects of Wal-Mart on mom-and-pop stores.
Wal-Mart now plans to go from hurting sales at smaller stores to hurting sales at its more direct rivals.In an exclusive interview, the company's CEO Mike Duke told The Wall Street Journal that he plans to slow gross margin growth. This means that the world's largest retailer is giving its stores the green light to cut prices on merchandise below their current "everyday low prices."
Allowing gross margins to flatten at Wal-Mart may be particularly hard on its rivals in the food retail business and on consumer electronics companies like Best Buy (BBY).
Investors have to wonder why Wal-Mart has been so slow to make such a critical decision. Why has it waited so long to lower prices in order to take more market share during a recession -- especially when it can use its wholesale buying power and balance sheet to significant advantage?
The answer is probably as old as the retail industry itself. Store owners have always been faced with the choice of either keeping prices and margins high, or lowering prices to get market share. Wal-Mart is about to make another push for market share which may improve its sales, but could drop margins low enough to hurt earnings.
Douglas A. McIntyre is an editor at 24/7 Wall St.