Walmart Shakes Up Another Sector with Price Cuts

The opening of a big Walmart store nearby has long been bad news for local retailers. But now that it's flexing its muscles in new sectors and online, Walmart is also squeezing margins for big box retailers like Best Buy and even the dominant player in the virtual retail world, Walmart, jokes Wharton marketing professor Z. John Zhang, "really is trying to take over the world."

Walmart's consumer electronics ambitions were described in an April Knowledge at Wharton article, Best Buy vs. Walmart: Is There Room for Both, and Others?, after the two retailers rushed to claim customers from the recently departed Circuit City stores. Now, it has triggered a price war online in an effort to divert sales from Amazon. The Wall Street Journal reported this weekend that Walmart's incursion into book sales comes as Amazon, which made its name in books, has tried to extend its reach into new territories, including consumer electronics and clothing. Walmart triggered the price war last week, announcing it would drop the price for the 10 most popular books online to $10. Amazon immediately matched the price point, then did so again after Walmart cut its price to $9. So far, Walmart's lowest price: $8.99.

"This is really a very good strategy for both companies," says Zhang, whose research often focuses on pricing strategies. Walmart and Amazon are "trying to attract people to their web site with a low price [for one type of product], and then get them to buy something else while they are there." And, he notes, Walmart is wise to pursue the book sector, because it provides a juicy demographic segment. "Who buys books? Generally people with more education. People with more education generally have more income that they can spend on lots of things."

But Walmart has a long way to go to catch up to Amazon in the online retail business, The Journal notes, and the gap has been growing. Amazon's advantage is that "people are already comfortable shopping there, so they're going to feel comfortable buying new things from Amazon." But Amazon can't afford to lose its dominance of the book market. "From Amazon's point of view, the book is their category. You can't lose that or the whole thing is going to collapse. The question is, how far do you go to defend it?"

Zhang expects Amazon will hold on to its core turf because, even with high-volume discounts, publishers cannot give one retailer a better price than a competing retailer. And if Walmart is selling books for less than the wholesale price, he says Amazon will likely hit them with a lawsuit over predatory pricing.

This price war comes just in time for the holiday shopping season, the first since the economy has started to recover from the financial meltdown of 2008. Retailers are "nervous about what consumers will do this [year]. It's not just about whether the economy is better or if [consumers] have more money in their wallets. During the crisis, consumers learned some good lessons about the value of thrift…. And there are a lot of unnecessary items on those shelves."