Pricing in Marketing
In 2003, Wal-Mart used a controversial retail pricing strategy known as “loss leaders” for toy sales during the Christmas holiday season (Fox, 501). As a result, according to some analysts, profits for major toy retailers such as Toys R’ Us, KB Toys, and F.A.O. Schwartz were seriously damaged, due to an inability to compete with the low pricing for the year’s hottest toys and games (Grant, B8). Despite what critics might say, however, Wal-Mart’s pricing strategy in 2003 was an acceptable solution in a competitive market economy.
Loss leaders” is a term commonly used in retail pricing, and refers to the deep discounting of popular items in an effort to draw customers into a store. The concept relies on the consumer purchasing not only the loss leader item, but also additional items at regular or marked-up prices. In this way, the store can increase traffic and overall sales, thereby recouping any losses from the loss leader products (Gillooley, 129). In 2003, Wal-Mart employed this pricing strategy in their toy department near the holiday season in an effort to increase overall traffic. As the largest retailer of groceries, toys, and furniture in that year, the retailer relied on customers to enter the store for loss leader pricing, and to purchase additional items at regular prices (Lohr, C5).
To understand the importance and impact of Wal-Mart’s use of loss leaders, it is important to understand the various retail pricing strategies commonly used, and the reasons each are used in a competitive market. Mark-ups are the most common pricing strategies, since this form can be used in a variety of circumstances. Mark-ups apply a profit margin to the cost of items to calculate retail. The use of a vendor suggested retail price can also be effective for smaller companies who choose not to participate in price wars, but still wish to maintain a profit margin (Gillooley, 130). Competitive pricing, either below or above competition, can be used by discount retailers wishing to undercut other stores, or by specialty stores whose goods are uncommon and thus, more costly. Psychological pricing, a tactic used by retailers to imply a bargain to consumers, uses pricing ending in $.99, such as $19.99, to cause consumers to think of the pricing as less than $20.00. Finally, discount pricing, such as loss leaders, are used to draw customers into a store from competitors in the hopes the consumer will purchase other items, as well (Gillooley, 131).
In 2003, Wal-Mart, competing with such mainstays of toy retail as F.A.O. Schwartz, KB Toys, and Toys R’ U.S., saw a need to increase traffic to their stores while simultaneously decreasing traffic at high end retail outlets competitively. Additionally, Target and other discount retailers in direct competition with Wal-Mart had begun aggressively advertising their own low prices. In response, Wal-Mart elected to use loss leaders as a way to achieve both goals (Grant, B8). In using loss leaders, Wal-Mart had an opportunity to increase customer traffic through lower prices on popular toys, and could then conceivably sell other merchandise to those consumers at regular prices, thus recouping any losses on the popular merchandise sold for far less than desired margin.
In December of 2003, the corporate owner of F.A.O. Schwartz stores announced the company would be filing for bankruptcy, and shortly thereafter liquidated all assets. Analysts criticized Wal-Mart, claiming F.A.O. Schwartz’s use of a mark-up pricing method could not compete with such deep discounts, even with the added attraction of a larger selection and more upscale surroundings (Lohr, C5). During the following fiscal year, Toys R’ Us announced closure of the Kids R’ Us stores, as well as their educational toy chain of Imaginarium. Further, the remaining stores used sharp discounts to thin extra stock within the stores. KB Toys closed numerous locations, and the remaining stores operated at the time under bankruptcy protection (Grant, B8).
Critics of Wal-Mart’s strategy during the 2003 holiday season claimed the loss leader price promotion was the cause of these, and other toy-based retailer’s massive losses, as well as for losses in the toy market altogether (Hotten, 46). Ben Green, chairman for the Toy Retailer Association, noted the price reductions of Wal-Mart were “at their worst.” Green stated loss leaders in particular have a drastic effect on those brands that are deeply discounted in the process. According to Green, when consumers see such deep discounts on specific toy items, there is an assumption that such toys are “fads,” or popular only in the short-term. Particularly, if other retailers respond to such deep pricing gashes, as did many retail toy outlets in response to Wal-Mart in 2003, this image of a temporary toy fad is increased. According to Green, such actions can actually cause a toy to ‘die,’ or become less popular, resulting in less sales for the toy manufacturer (Hotten, 47).
However, such critics fail to note the less partisan view of Wal-Mart’s actions, which note the place of such actions in the global capitalist economy (Lohr, C5). As Robert B. Reich, former labor secretary, noted, Wal-Mart’s actions and dealings in business represent the true end point to the current economy, that of the best deal for consumers (Lohr, C5). In the age of computer technology, online shopping, international shipping, and low cost imports, such deep discounting is vital to the success of Wal-Mart’s main marketing tactic, that of low prices for consumers. Without the ability to participate in such standard retail pricing tactics, Wal-Mart could fail to compete with the global marketplace (Lohr, C6).
In addition, critics fail to admit the clearest reason retailers such as Wal-Mart continue to survive, while high-end toy retailers continue to fall: their variety and their adaptability. Retailers such as Toys R’ Us, Dhruv Grewel, professor of marketing and retail at Babson College, notes, are highly concentrated in their offerings, making one-stop shopping difficult (Grant, B8). On the other hand, Wal-Mart, whose products range from toys to books to household goods to clothing, makes shopping simple for consumers looking to save time as well as money. This wide range of products allows Wal-Mart to use loss leaders with a higher reassurance that consumers will purchase additional items at regular prices, cutting their losses.
Further, Wal-Mart has adapted to a new generation of toys. Anthony Gikas, a retail analyst, notes children are playing video games at younger ages, and are using computers far earlier (Grant, B8). Again, Wal-Mart, who carries a large selection of electronics, including desktop and laptop computers as well as all game consoles, can introduce loss leader prices on some of the more popular titles of the season, since their wide range of products ensures additional purchases by consumers.
By 2004, Wal-Mart was expected to soften the blow to other retailers by maintaining a much higher margin, and virtually eliminating the use of loss leaders for the 2004 holiday season (Grant, B8). While critics claim Wal-Mart’s practices in 2003 to be predatory, or aimed at eliminating competition, supporters note Wal-Mart’s 2004 tactics, as well as their after-holiday 2003 actions, do not show evidence of a price hike following competition removal that is typical of predatory corporations (Lohr, C5). Clearly, the 2003 holiday loss leaders were an effort by Wal-Mart to maintain competition in worldly market rather than an effort to drive others out of business.
There is no question that Wal-Mart’s use of loss leaders during the 2003 holiday season was a direct hit to high-end toy retailers. But in a competitive, world market economy, such actions should be expected, rather than criticized. As a large retailer who has consistently offered low prices to consumers, the use of loss leaders is an effective way to increase traffic and overall margins, particularly when selection is vast and varied in content. High-end retail toy stores such as Toys R’ Us, rather than bemoaning their losses in light of such tactics, should follow suit, and expand both their product line, as well as their overall company pricing strategy, to compete in today’s global market.
Fox, Mark A. “Market Power in Retailing: The Case of Wal-Mart.” Popular Music and Society 28.4 (2005): 501-505.
Gillooley, David. Retail Product Management: Buying and Merchandising. London: Routledge, 2001.
Grant, Lorrie. “Wal-Mart Doesn’t Plan to Toy Much With Prices.” USA Today 11 Oct. 2004: B8.
Hotten, Russel. “Tough Game for the Big Players in Toys.” The Evening Standard 17 Dec. 2004: 46.
Lohr, Steve. “Is Wal-Mart Good for America?” New York Times Week in Review 7 Dec. 2003: C5.
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