Wal-Mart (NYSE:WMT) has built its image around offering "everyday low prices," but the giant retailer's latest move could put that reputation in jeopardy.
According to The Wall Street Journal, Wal-Mart has been quietly raising prices for household items like Colgate toothbrushes and Kraft macaroni and cheese on its website.
For certain items, Wal-Mart is listing prices in store that are slightly below the online price. For a 6-pack box of Kraft Easy Mac, for example, the company charges $3.83 online if you have it shipped, but just $2.87 for customers who order online but pick it up in the store.
Wal-Mart is attempting to price match Amazon (NASDAQ:AMZN), and the logic in the decision is clear, following on its earlier Pickup Discount proposition for items not normally carried in stores. Shipping such small items is relatively expensive, and it eats into the company's margins to offer them at the same price as customers pay in store. Marc Lore, who heads Wal-Mart's e-commerce operations, is hopeful that the policy will induce customers to use the in-store pickup option instead, but it could backfire.
Jet.com, which Lore founded and Wal-Mart acquired last year, introduced a "smart basket" pricing model, under which the prices of individual items fell as customers added more to their orders, or made decisions like giving up the right to return something or paying with a debit card. Lore is clearly a fan of dynamic pricing that better reflects costs, but too much of that can confuse and frustrate customers who prefer simplicity.
Similarly, much of Wal-Mart's success can be attributed to its mastery of the everyday low prices model. Unlike most traditional retailers, which offer periodic sales and discounts to clear out merchandise or celebrate holidays, founder Sam Walton built trust with customers by promising the same deals consistently, and Wal-Mart's size and economies of scale have usually enabled it to underprice competitors.
Offering customers two different prices online could confuse shoppers, or annoy them enough to send them to rivals like Amazon instead. Certainly when it comes to purchases other than groceries, customers who shop online are often doing so because they'd prefer to have the products delivered, and would rather not visit a store.
While Wal-Mart appears to be raising prices ahead of the holidays, Amazon is slashing them. And not just on its own products: The e-commerce giant is cutting prices on some third-party merchandise by as much as 9%, and subsidizing the discounts by paying merchants the difference.
Not all merchants are happy about that; some assert that the discounts undervalue their products, but Amazon is undeterred. It's doing everything it can to reinforce its own reputation for low prices, which has helped it win nearly half the market share in retail e-commerce.
While Wal-Mart has succeeded based on its everyday low prices, Amazon uses algorithms to constantly update prices to match or beat competitors. The company is also savvy with its pricing model in another way as it tends to offer its best deals only on the most popular merchandise, attracting customers with such products, and then making up ground by charging higher margins on less popular items.
Wal-Mart would do well to heed Amazon's lesson. In the e-commerce era, price comparison is easy, and a reputation for low prices carries even more weight as location becomes irrelevant. With tens of millions of Americans already signed up on Amazon Prime, Amazon has yet another advantage.
Offering customers another reason to visit its stores is not a bad idea for Wal-Mart, but it can't cede the online price battle to Amazon so soon. The company should affirm its low prices pact with customers with a promise to match Amazon's prices online, or by framing the bifurcated model as a discount for picking up in-store rather than just two separate prices. Staying competitive in the price war with Amazon is crucial if Wal-Mart is going to close the gap between itself and the e-commerce leader.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.