3 Stocks May Get Crushed in Walmart’s Discount War

Competition is alive and well in the U.S. discount retail business with Walmart doubling down in its price war with other retailers. The increasing aggressiveness of Walmart’s price cuts on its wares is causing analysts to lower their ratings for competitors of the discount retail giant. Raymond James analyst Dan Wewer recently lowered his rating for Dollar Tree Inc. (DLTR), Dollar General Corporation (DG) and Big Lots Inc. (BIG), claiming that Walmart is “becoming increasingly price competitive,” according to Barron’s.

Increasing Price Competitiveness

Despite the lowered ratings, all three of the stocks still have an Outperform rating from Wewer. But the lowered ratings, as well as lowered price targets, are indicative of his weakened optimism for the performance of these stocks in light of Walmart’s increased price competitiveness. That competition has ramped up considerably even in just the last couple of months, according to pricing surveys Wewer conducts every couple of months in the Atlanta market.

His latest survey results showed that prices for Walmart’s national-branded consumables are now 4.4% lower than those of Dollar General, the largest gap since a year ago. Compared to Family Dollar, which is now owned by Dollar Tree, Walmart’s consumables are 6.5% lower, a huge change compared to a -3.6% gap just two months ago in February. Walmart lowered prices on “traffic-generating products” such as Cheerios by as much as 42%, and Old Spice Body Wash by 24%, according to Barron’s. (To read more, see: How Walmart Model Wins With “Everyday Low Prices”.)

Competing With Giants

Walmart’s price-cutting puts pressure on discount retailers to either lower their own prices, which will likely hurt profit margins, or try to promote their “convenience niche” compared to Walmart. Either way, protecting their market shares will be a challenge moving forward, especially considering the giant they are competing against.

Just to get an idea of what these smaller discount retailers are up against, Walmart’s total sales last year amounted to $500.3 billion. In comparison, Dollar Tree had total sales of $22.2 billion in 2017, while Dollar General had total sales of $23.5 billion, and Big Lots had $5.3 billion in total sales. That makes Walmart nearly 10 times the size of these three companies combined in terms of total sales.

As for its increasingly aggressive pricing strategy, it’s not that Walmart has suddenly become worried that these smaller entities pose bigger threats than previously anticipated. No, Walmart is busy fighting its own Goliath—Amazon. (To read more, see: Food Wars: How Walmart Plans to Beat Amazon.)