Aiming the pricing dagger at a competitor’s heart

Last fall, Wal-Mart cut the price on a Panasonic 42-inch flat screen TV below $1000. Pushing through this “magic” price-point set of a wave of price drops across the electronics retailing industry, destroying a lot of the profits in a key segment for Best Buy, Circuit City, Sears, and CompUSA. This is a classic example of aiming price cut right at your competitors’ weak points.

The article on MSNBC notes:

The fallout is evident: After closing 70 stores in February, Circuit City Stores (CC) on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group (TWTR), the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores (RSC) is boarding up dozens of outlets, as well as selling 94 of its 211 stores. “The tube business and big-screen business just dropped off a cliff,” says Stuart Rose, chief executive officer of Dayton-based Rex Stores. “We expected a dropoff, but nowhere near the decline that we had.” Clearly, these retailers are taking such drastic measures because they don’t see any respite in sight.

Two important points for people considering aggressive pricing moves:

  • It didn’t hurt Wal-Mart all that much. They don’t actually sell a ton of TVs, unlike other retailers that were counting on them. (Wal-Mart may have also decided that they were going to unilaterally take a “cost reduction” from the supplier. Panasonic refused to comment in the article.)
  • The competitors had no effective way to retaliate, or deter future attacks. This is a rare situation. Wal-Mart’s cost advantage gives it a power that few other firms enjoy. In other words, most companies should NOT be attempting these kinds of moves.

Contrast this with Intel’s price war against AMD. Sure, it hurts AMD (shares down over 30% this year) more than Intel (shares up over 7%), but Intel’s stock has been been flat for years, partly because they keep transferring money to their customers.

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