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Bloomberg reports that Walmart's recent efforts to battle the dollar store segment by "using its hefty $10 billion in free cash flow year to date to cut prices on key traffic-driving items such as laundry detergent and fresh fruit in the locations closest to dollar stores" seem to be working.

Both Dollar General and Dollar Tree have reported disappointing quarterly sales numbers in recent days, blaming increased competition, inflation and in one case, "that sadly common retailer affliction, 'unseasonably mild spring weather'."

At the same time, Reuters reports that Dollar General "said it was cutting prices on its most popular items such as bread, eggs and milk, intensifying a price war with retail giant Wal-Mart Stores Inc. to win back market share ... Dollar General cut prices by 10 percent on average on about 450 of its best-selling items across 2,200 stores during the quarter."

The story notes that "dollar store operators have expanded aggressively in recent years, taking market share from Wal-Mart and other retailers, thanks to their smaller store sizes, improving product assortment and price points starting $1." Walmart originally seemed to think that the best way to compete was with small format stores, like the Walmart Express concept. But when that didn't work out as well as it hoped, Walmart closed or sold off those units and refocused its attention on the supercenter and Neighborhood Markets concepts.

It isn't just Walmart and the dollar stores that are engaged in the price battle. The Cincinnati Business Courier reports that Kroger has implemented price reductions on 1,000 SKUs in its 120-store Mid-Atlantic region, described in the story as an effort "to cut off Wal-Mart at the pass when it comes to cutting prices."

It doesn't seem likely to get any better. Bloomberg notes that "German no-frills supermarket Aldi has also been expanding in the U.S. at a faster clip. And with its other German competitor, Lidl, poised to enter the U.S., the race to the bottom is unlikely to abate.

"Cutting prices to the bone -- worsening the deflation that has gripped America's mass merchants lately -- doesn't tend to be a winning long-term strategy. It especially hurts retailers that aren't opening new stores, which lets chains make up the difference on volume, at least in the short term."
KC's View:
One of the things that I think a lot of retailers have to be careful about is getting engaged in price wars that they cannot possibly win. Some will be tempted ... and while I think it is important to be as competitive as possible, it is much more important to figure out other competitive advantages.

And while I know I say this a lot, it is always worth repeating that if you run a food store, your most natural advantage is (go figure) food. Invest in good food, distinctive food, higher-common-denominator food, and I think you'll find that some people are willing to vote with their taste buds. Do it for long enough, and the number of people who do so will grow.