Pricing is one of the key challenges in online grocery. This is mainly caused by two reasons: While margins in the highly competitive food retail sector are traditionally extremely small, the necessary logistics processes are complex and expensive. Achieving real profitability seems to be an extraordinarily difficult task under these conditions. Now, however, the US retail giant Walmart is trying to break out of the vicious circle with a daring pricing experiment.
As the Wall Street Journal reports, Walmart’s US online shop is currently listing two prices for selected groceries and other low-priced fast moving consumer goods such as toothbrushes or dog food: the regular in-store price and a higher price for home delivery. For example, a 14 oz bottle of Heinz tomato ketchup costs $1.53 in a Walmart store, and $2.73 for home delivery in the online shop (as of November 16,2017). In addition to the higher prices, online customers wishing to receive a shipment must pay a delivery charge of $5.99 if their order does not exceed $35 in value. Only above this level is delivery free of charge.
According to the Wall Street Journal, the company, which always had a focus on low price, had previously tried to align its in-store and online prices. The impression that the long-established retailer intends to make online orders unattractive with this change of strategy seems obvious. However, the experiment has some interesting consequences.
#1 The price difference between online and in-store shopping becomes transparent for the customer.
Instead of adapting prices in the online shop on the quiet and hoping that as few customers as possible will notice, Walmart makes its customers a transparent offer: Either you decide to buy in-store at a lower price or you use the delivery service and dig deeper into your pocket for this convenience. Walmart is thus sending out a clear signal to its customers: The delivery of food and other fast moving consumer goods is a cost-intensive additional service that cannot be obtained for nothing. The customer can thus make a well-founded purchase decision.
#2 The price difference could strengthen the bricks-and-mortar stores.
One reason for the experiment could be that Walmart wants to strengthen its bricks-and-mortar business. After all, the company’s still dense network of stores in the US has crumbled a little bit over the past two years: while around 150 Walmart stores had to be closed in 2015, Walmart reduced the number of stores by another 300 a year later. To stop this trend, more customers have to be brought back into the shops. The openly communicated price difference could be the appropriate incentive for this purpose – provided that customers do not migrate to another, possibly cheaper online store.
#3 The price difference increases margins in the online business.
The higher prices that Walmart demands for home shipments also have monetary consequences: The margin in the online business increases significantly, so that the retail group can better cover the costs incurred by logistics. It is not yet known whether the higher margins will actually make Walmart’s online business profitable.
Time will tell whether the experiment proves to be a success. However, there is a danger that Walmart will drive its online customers not only into its own stores but also into the arms of online competitors with such a pricing model. Therefore only such a financially strong company like Walmart can afford such a risk. Much will depend on whether Walmart will remain competitive in terms of pricing compared to its competitors on the World Wide Web, despite higher online prices. Walmart continues to pursue this goal.“We always work to offer the best price online relative to other sites,” a Walmart spokeswoman told the Wall Street Journal. “It simply costs less to sell some items in stores. Customers can access those store prices online when they choose to pick up the item in store.”