Wal-Mart's Savings Catcher Is a Step in the Wrong Direction

Wal-Mart (WMT 0.57%) has announced that it plans to expand Savings Catcher, its experimental price comparison service, nationwide this summer. The service, which was developed by Wal-Mart's @WalMartLabs R&D center, was tested in a pilot trial in seven test markets.

Most price comparison apps scan a barcode and search for better deals online. Wal-Mart's Savings Catcher does the opposite -- customers purchase an item first at Wal-Mart, but receive credit in their account if the product was available for a lower price elsewhere. Savings Catcher will initially only be available on the web, but will be added to Wal-Mart's mobile app during the summer.

Image source: Getty Images.

Major retailers like Wal-Mart have struggled with the practice of "showrooming" -- where customers check out products at brick-and-mortar stores but use price comparison apps to find better deals online. Wal-Mart's industry peers Best Buy (BBY 1.09%) and Target (TGT -0.54%) have aggressively pushed back against Amazon (AMZN -1.65%) and other e-tailers by sacrificing margins and matching online prices.

Wal-Mart's Savings Catcher appears to be a defensive move against both challenges. Yet upon closer examination, the service feels more like a conservative, half-hearted effort than focused strike against e-tailers.

More limited and complex than it seems
The biggest problem with Savings Catcher is that it is blatantly designed to retain Wal-Mart shoppers.

Here's how it works. Customers enter the number of their receipts on the Savings Catcher website, along with the date of their visit. The service then examines the purchased items, compares the prices to local retailers such as Target, Walgreens, Dollar Tree, and Kroger, then refunds the difference in an eGift card within 72 hours. However, Savings Catcher doesn't scour storewide comparisons across a competitors' entire inventory -- it only includes prices listed in weekly print ads. Most importantly, Savings Catcher does not compare its prices to Amazon.

Now consider this scenario -- two customers go to Wal-Mart to purchase an item. The first customer, using Amazon's barcode scanner, simply scans the package, finds a better price online, and makes a purchase. The second customer, using Savings Catcher, buys the product, finds out later that there was a better deal, then receives Wal-Mart store credit. The second customer is now obligated to spend the difference back at Wal-Mart. What's more, he or she might still have missed out on a better deal online.

That example notably doesn't work for groceries (although Amazon is trying to change that with AmazonFresh), but Savings Catcher feels fairly restrictive compared to other price comparison tools. Wal-Mart shoppers also won't know how much they overspent until after they leave the store.

Wal-Mart's own barcode scanner, Scan & Go (which is part of Wal-Mart's mobile app), has similar problems as Savings Catcher. Instead of encouraging customers to scan products at competitors' stores, Wal-Mart promotes Scan & Go as an express check-out device for its own stores. Moreover, many U.S. shoppers haven't even heard of the feature, since it is only available in select stores in seven states.

Simply put, it feels like Wal-Mart built its entire mobile strategy around keeping its customers out of competitors' stores.

The margin-crushing practice of price-matching
Retailers employing price-matching practices is certainly great for consumers, but it can crush bottom line growth.

Best Buy's promise is bold -- it will match the price of any "new, identical, and immediately available products" from Amazon, Staples, Target, Wal-Mart, and other competitors at the time of the purchase. Best Buy will also refund the difference if it lowers its price within 15 days of the purchase.

Last January, Target followed suit and claimed that it will match prices at Amazon, Wal-Mart, Best Buy, and other retailers year round. Target also promises to refund the difference if a lower price is found within seven days at Target, Amazon, Wal-Mart, Best Buy, Toys "R" Us, or a local competitor's printed ad.

This simple comparison of margins, revenue, and earnings growth shows the brutal cost of price matching on the bottom line:

Data source: Yahoo! Finance, June 6.

Amazon is still squeezing out big bottom line growth with tiny margins, thanks to its much stronger top line growth. In other words, brick-and-mortar retailers simply lack the revenue to support a prolonged pricing war against Amazon.

Wal-Mart, which has made 12 e-commerce acquisitions over the past three years, is trying desperately to catch up to Amazon in e-commerce. Last quarter, Wal-Mart's e-commerce sales rose 27% year-over-year, but it only accounted for 0.3% of its overall U.S. sales, or $203.5 million -- pretty underwhelming compared to Amazon's $11.9 billion in North American sales last quarter.

The Foolish takeaway
In conclusion, Wal-Mart's Savings Catcher is an interesting attempt to address the problems of showrooming and price-matching, but it's clearly more restrictive and inconvenient than barcode scanners and Best Buy and Target's broader price-matching promises.

Wal-Mart needs to either fully embrace e-commerce or abandon it altogether. Half-hearted attempts like Savings Catcher and Scan & Go just seem too concerned with keeping customers coming back to Wal-Mart than boosting long-term e-commerce revenue.