Wal-Mart discounts could spur price war

Wal-Mart Stores Inc., the world’s largest retailer, set the stage for price wars Monday as it announced that it was cutting prices on more than 16,000 items starting this week in a bid to turn around sales for the crucial back-to-school season.

Shares of key retailers such as Sears Holding Corp. and J.C. Penney Co. were down as investors worried about how ensuing price wars would affect profit margins. Wal-Mart rose 5 cents to $48.11.

Wal-Mart’s price cuts, which range from 10% to 50%, will be backed by an ad campaign on how to save money as gas prices remain high and kids head back to school. The cuts are deeper and involve even more items than in the year-earlier period and top the 11,000 items discounted in advance of last year’s holiday season, spokeswoman Melissa O’Brien said.

Bentonville, Ark.-based Wal-Mart has been playing up its low prices since late last year after getting hurt by a focus on trendy merchandise in an effort to get affluent customers to buy more than just groceries.

Although the upscale strategy worked in electronics, it failed in home furnishings and apparel, resulting in sluggish sales since last fall.

This fiscal year, Wal-Mart has averaged a same-store sales gain of a meager 1%, compared with rival Target Corp.’s 4.1% increase, according to Thomson Financial.

Same-store sales are sales at stores open at least a year and are considered a key indicator of a retailer’s health.

In April, Wal-Mart’s same-store sales dropped -- the weakest performance since it began publishing monthly sales in 1980.

Last year, Wal-Mart’s same-store sales averaged a 2.1% increase, and Target had a 4.9% increase.

Wal-Mart did enjoy some improvement last month, when it posted a better-than-expected same-store sales gain of 2.4%, indicating that its more aggressive discount strategy might be resonating with shoppers.

“We’ll provide families savings where it counts, and continue to work closely with key suppliers, reduce packaging and lower shipping costs as we steer this program through fall and beyond,” Bill Simon, chief operating officer of Wal-Mart Stores U.S., said in a statement.

Retail consultant Burt Flickinger III applauded Wal-Mart’s move but noted that the jury was still out on whether it would be effective.

“While it is a smart strategic move, it is going to add profit margin pressure,” Flickinger said. “There is also no guarantee that it will increase customer count and sales.”

Flickinger also noted that rivals such as Target have capitalized on Wal-Mart’s weakness in recent months as the biggest retailer confused shoppers with its upscale strategy. He also added that Wal-Mart faced increased competition from drug and grocery chains who are aiming to get a bigger share of the back-to-school business.

Under Wal-Mart’s new pricing plan, $1 will buy four wide-ruled notebooks, two bottles of Elmer’s glue and a 24-pack of crayons. A $50 budget will purchase a week’s worth of school clothes, and $80 will buy two pairs of prescription glasses at the Wal-Mart Vision Center.

The price-cutting campaign comes as Wal-Mart has also been making changes to its merchandising team.

The company said Friday that Claire Watts, a top Wal-Mart apparel executive, had resigned. She had been behind the failed makeover to trendy items from low-price basics.

As part of the changes, Wal-Mart promoted Dottie Mattison, formerly chief merchant for Walmart.com, to senior vice president overseeing women’s apparel, jewelry, shoes and accessories as well as product development. Mattison will be based in the company’s fashion office in New York.