Why Walmart May Not Be the Cheapest Anymore

Walmart isn’t rolling back anything when one takes into account the pricing of goods such as paper towels and diapers at its stores relative to their package size, one analyst argued on Wednesday.

"Walmart appears to be driving its customer base to spend more dollars through purchasing larger package sizes, while it may not be offering the perceived reward of more actual savings on a per unit or per ounce basis," said Mark Montagna, an analyst with AvondalePartners. "After adjusting for product sizes, we found Dollar General prices at parity with Walmart."

Walmart doesn’t appear to be fooling shareholders. Since it was taken public by KKR in 2009, Dollar General (DG) shares have doubled, while the biggest retailer’s stock is little changed. Share prices for other dollar stores, including Family Dollar (FDO), have also soared.

In May, the analyst purchased a market basket of 102 items from both stores. The Dollar General basket priced out to $308.20 and Walmart’s items rung up at $308.41 when the analyst adjusted for ounces or units. For example, a gallon of milk was 42 percent cheaper at Dollar General than an equivalent size at Walmart. Cantaloupe was 25 percent cheaper.

The consumer could use some genuine help these days. Core inflation climbed to its highest level in three years, while economic growth slowed, according to reports out Wednesday. These may foreshadow a period where consumers’ wages stay the same and prices at the store go up. So a decrease in real income.

"Investors should anticipate low risk earnings growth of 14 percent to 20 percent as rising commodity costs drive higher prices for consumables," wrote Montagna of Dollar General in the report Wednesday. "This should continue the two-plus year trend of market share gains at the expense of grocery/drug stores to dollar stores as consumers seek low cost retailers of name brand items and comparable private label quality at a better value than is offered by grocery and drug stores. Dollar General is the best positioned dollar store for this likely permanent consumer dynamic."

To be sure, it is not ever going to be exactly clearcut for consumers to gauge which store is best for them. Not every good was cheaper at the dollar store in this study. Cocoa Pebbles and Chips Ahoy were priced higher at Dollar General than at Walmart, for example. The analyst also cited Walmart’s much wider selection in its giant Supercenters as something that may be advantageous to consumers who don’t want to make multiple trips.

Walmart’s slogan is "Save Money, Live Better" and it tries to back that up with numerous studies on its web site showing that its prices are not only cheaper, but that the overall effect of Walmart’s expansion has brought prices down for consumers everywhere, not just at Walmart.

That may very well be true and this phenomenon drove gains in Walmart’s share price for years. But now that the playing field has been leveled and Walmart’s methods have been copied, this analyst report suggests the retailer may need to come up with another advantage than just price.

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http://www.cnbc.com/id/43403195