Walmart’s Price cuts should scare you to Death

Walmart’s prices are too high for many Americans to afford. The discount giant is planning to slash prices on around 1,200 grocery items in 11 states by 15%, Reuters reported.

Walmart (NYSE: WMT) called in executives from several suppliers; including Procter & Gamble (NYSE: PG), Unilever (NYSE: UL), Kraft Heinz and Conagrara (NYSE: CAG) and told them to cut prices or else, a Reuters article claims. Walmart is demanding a 15% price cut from vendors which is very bad news for companies like Procter & Gamble.

Walmart Price Cuts might Trigger Consumer Products Apocalypse

P&G’s revenues have fallen by $5.16 billion in the past two years. Back in December 2014 the maker of Tide reported making $70.39 billion in revenues that fell to $65.23 billion December 2016. One has to wonder if Procter & Gamble can afford those price cuts.

Nor is it just P&G during the same period Unilever’s revenues fell by $5.24 billion. In December 2014 Unilever reported $63.45 billion in revenue that fell to $58.21 billion just two years later. Smaller consumer products companies like Colgate-Palmolive (NYSE: CL) are even more vulnerable. Colgate’s revenues fell by $2.08 billion; more than 10%, in the last years, dropping from $17.28 billion to $15.2 billion between December 2014 and 2016.

There might be no way companies like Colgate-Palmolive can survive Walmart’s latest round of price cutting. Yet there might be no way they can survive without Walmart. Such price cuts might even trigger a consumer goods apocalypse while making the retail Armageddon playing out in America’s shopping centers worse.

Will Big Retail Buy out Consumer Goods Makers?

Suppliers are in a bind because other retail giants; such as Kroger (NYSE: KR) and Amazon (NASDAQ: AMZN), will cut their prices to match Walmart’s. Then to make matters worse Walmart’s deep discounting will probably drive even more competitors such as regional grocers out of business. Or force them to sell out to Kroger or Safeway leaving suppliers at the complete mercy of Big Retail.

A possible outcome of this is that companies like Colgate-Palmolive might end up being bought out by a large retailer; such as Walmart or Amazon. Kroger; which owns 12 bakeries, 17 dairies, two meatpacking plants and seven beverage and food processing plants, would be the model for this new breed of integrated retailer.

Since Amazon, like Kroger is already selling its own private label products it too is likely to augment its fulfillment centers with food processing plants or soap factories. One potential menace here is Amazon’s buttons, which allow people to shop for stuff like detergent without even picking up the smartphone or sitting down at the computer.

The Frightening Reason why Walmart is cutting Prices: Income Inequality

The Reuters article speculates that Walmart is cutting prices in order to compete with deep discounters such as Aldi and Kroger which is plausible. Yet there is a more frightening rationale for the price cuts, that the media elite is afraid to talk about; income inequality, job loss and wage stagnation.

Reuters itself published a map of the regions where Walmart is testing the price cuts. It overlaps with the rustbelt and Trump country, states where price cuts are being examined include North and South Carolina, Georgia, Virginia, Kentucky, Indiana, Illinois, Michigan and Iowa.

Those are some of the states most affected by the jobs apocalypse; and all but three of them (Iowa, Virginia and Illinois) were states the Donald carried on Election Day. This makes me begin to wonder if Walmart’s real problem is that a large percentage of the populace in those areas cannot afford its’ prices?

Recent data shows this that this is certainly possible; the percentage of middle class households in some communities is shrinking dramatically. The percentage of middle class households in Goldsboro, North Carolina fell from 60% in 2000 to 48% in 2014, the Pew Research Center reported. North Carolina is one of the states where Walmart is cutting prices.

Pew also found that the median income of all U.S. households was 8% lower in 2014 than it was in 1999. The annual income of the average lower class family; Walmart’s target demographic, by $2,562 between 1999 and 2014, dropping from $26,373 to $23,811, Pew data indicates. Another frightening statistic uncovered by Pew was that the percentage of lower class households (those making less than $42,000 a year) increased in 160 U.S. cities.

All this indicates that there might be millions; perhaps tens of millions of Americans, that can no longer afford to shop at Walmart. That’s a pretty frightening situation and it bodes ill for a great many retailers and their vendors.

The Shadow of Jeff Bezos and Amazon

Also falling over suppliers and Walmart alike is the shadow of Amazon. Jeff Bezos has positioned his company as a deep discounter with the ability to ship low cost merchandise straight to customers’ door steps.

This forces retailers which already operate at a very low margin to cut prices to the bone to compete with Amazon. The only way they can lure customers in the door is to offer prices that might be half or a third what Amazon charges. After all why drive to Walmart and spend an hour shopping when I can order the same stuff in a minute on Amazon and stay home and watch NASCAR or House of Cards instead.

Walmart’s price cuts indicate that the terrible situation American retailers and their suppliers are facing is about to get a lot uglier. The retail apocalypse will become far worse, and end up devastating many more communities. Even though most of us will benefit from the lower prices at Walmart, we should all be scared to death of them.