Wal-Mart's Soda Price Cuts: Not so Sweet?
Wal-Mart Stores' aggressive price cuts on soft drinks are a good deal for consumers stocking up for their Memorial Day barbecues, but they might not be so sweet for Coca-Cola, Pepsi, and Dr Pepper Snapple Group — not to mention Wal-Mart itself— in the long run.
In an effort to drive store traffic, Wal-Mart has been cutting the price of carbonated soft drinks to holiday levels — and prices for the Memorial Day weekend should be lower still, according to research from ConsumerEdge analyst Bill Pecoriello.
In the short term, the low prices have been good news for beverage companies. That's because Wal-Mart is the one footing the bill for the deep price cuts, and demand has been so strong that the beverage companies are struggling to keep up, Pecoriello said.
However, longer term, these price cuts could undermine efforts to drive soft drink prices higher over time, he said.
The aggressive pricing also raises questions about Wal-Mart's business.
Wal-mart shares have fallen 7 percent since hitting a 52-week high in mid-March. That decline comes as other retail stocks have continued their upward climb.
UBS analyst Neil Currie said in a research note that it appears investors are bracing for disappointing first-quarter earnings from Wal-Mart, based in part by an assumption that sales have been weak. According to Thomson Reuters, analysts are expecting Wal-Mart to report earnings per share of 85 cents on revenue of $98.45 billion when the retailer reports earnings next Tuesday.
The recent rollbacks at Wal-Mart have been extensive, and are being seen as a way to drive traffic and sales, but there have been worries among investors about who has been funding these price cuts.
As far as soda prices go, Pecoriello says it has been Wal-Mart.
How low have soda prices fallen?
In recent weeks, a pack of 24 soda cans has been selling for about $5, according to Pecoriello's research. This price spans all major brands from Coca-Cola , PepsiCo and Dr Pepper Snapple Group , he said.
For the Memorial Day weekend, those prices will drop as low as $3.99. That's a promotional price point that hasn't been seen for about five years, he said.
That's good news for your Memorial Day barbecue, but what about competitors like Safeway andKroger.
According to Pecoriello, competitors have been selling 24-packs for about $6.99 since May 1, but promotional prices have dropped to about $5.99. He doesn't yet know what promotional prices will be at these stores during the upcoming holiday weekend.
If these grocers match Wal-Mart, it may be a long time before Coke and Pepsi get the pricing they want on their beverages. And that may be tough to swallow.
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