06/20/2010 05:12 am ET Updated May 25, 2011

Morgan Stanley Downplays Wal-Mart's "Bite"

Is it credible when Morgan Stanley says Wal-Mart's impact on grocery stores is more bark than bite?

In mid March, an analyst at Morgan Stanley floated the story that Wal-Mart was planning to slash its food prices beginning in April and launch a major media campaign to prevent market share from drifting to other grocers.

The Morgan Stanley report chopped up the food retail index like a vegematic. The analysis was described as a "threat" to the grocery industry, and "a major setback" for Wal-Mart's competitors.

"While this helps address Wal-Mart's traffic woes," the Morgan Stanley analyst wrote, "we view this as a major setback for the grocery stocks, which have been rallying on hopes of a return to more rational pricing."

This markdown on "10,000 items" was supposedly Wal-Mart's response to nervous investors who feared that foot traffic was leaving the giant retailer as the recession eased.

The media stories that accompanied the Morgan Stanley report noted that shares at competitors like Safeway, Supervalu, Kroger and Whole Foods all were down. Wal-Mart shares were down also. The Morgan Stanley report did not help anyone.

So less than four weeks later, Morgan Stanley dramatically changed the tone of its message about Wal-Mart's prices -- as dramatically as the retailer's reported price cuts. What began as a "threat" and "major setback" in mid March, suddenly became not "overly threatening" by mid April. The same Morgan Stanley analyst now had a very different take: "While the price cuts to date don't appear overly threatening to the grocers, the threat of ongoing reductions does leave a cloud over the group, in our view." Morgan Stanley wondered out loud if "Wal-Mart's bark is worse than its bite." Or, more appropriately, was Morgan Stanley's bite worse than its bark?

This story is clouded by the fact that Morgan Stanley doesn't just conduct price checks on Wal-Mart. Morgan Stanley is an intimate business partner with Wal-Mart. For years these two companies have been developing retail ventures. For example, the Morgan Stanley Real Estate Funds have been developing at least a dozen retail shopping centers in China, each anchored by a Wal-Mart, totaling 8 million square feet of retail area. Wal-Mart's Vice President of Development for China told the media that the joint venture with Morgan Stanley "will add an entirely new level of mall development and management expertise to the China retail landscape."

Another example: In June, 2007, Morgan Stanley announced that it would own and finance solar electric power systems at seven Wal-Mart facilities in California, helping the giant retailer put on a green face to cover its expansive sprawl.

Morgan Stanley said it learned about Wal-Mart's price war with grocery competitors during a store tour and presentation with the retailer. But given the intertwined fate of these two companies, it's not clear what to make of Morgan Stanley's flip-flop analysis about Wal-Mart.

First it sounds like Wal-Mart is going to eat its grocery competitors for lunch, then it turns out that Wal-Mart's bite has no teeth. Why did Morgan Stanley decide to low-key Wal-Mart's impact on its rivals? Could it be that Morgan Stanley's comments were not helpful to it's partner Wal-Mart's stock?

What's certain is that Wal-Mart's "bite" has cut the grocery industry into small pieces. Wal-Mart was not in the grocery business until 1989. By 1992, the company only had 6 supercenters. But then things took off. Today, groceries account for more than half of Wal-Mart's domestic sales. As the consultant Retail Forward wrote in 2003, "It's hard to imagine that just a decade ago, Wal-Mart was barely on the food radar screen." Now Wal-Mart is the whole radar.

If you want to understand the real impact that this huge corporation has had on groceries, you have to look at the local trade area level. The Dallas Morning News, in reporting the Morgan Stanley story, noted that Wal-Mart now controls 40% of grocery sales---two and a half times greater than its nearest competitor Kroger.

Wal-Mart has carved out 40% of the food market in many trade areas across the country---after people in the food business said Wal-Mart would never do groceries well. That's the ugly truth hiding behind the soft "bark" stories out of Morgan Stanley. It wasn't Wal-Mart's bark that killed many regional grocery chains, including several this past year.

It's also important to state the obvious: Morgan Stanley prospers when Wal-Mart prospers, and they are business partners in making Wal-Mart the Emperor of Food.

When do the anti-trust discussions begin?

Al Norman is the founder of Sprawl-Busters. He has helped communities fight big box stores for the past 17 years. He is the author of Slam-Dunking Wal-Mart: How You Can Stop Superstore Sprawl in Your Hometown. His website is