Walmart's price cuts should terrify Target, Dollar General, and Family Dollar

Thomson Reuters

Walmart is slashing prices, and that's having a ripple effect across the retail industry.

The companies most vulnerable to Walmart's price cuts, which were launched earlier this year, include Target, Family Dollar, and Dollar General, according to a 56-page UBS analysis published Monday. 

All three companies stand to lose a collective $35 billion in revenue as a result of Walmart's cuts, according to the report.

Target has about $21.5 billion in sales at risk (or about 30% of its total sales), Dollar General has about $9 billion in sales at risk (39% of sales), and Family Dollar has about $4.5 billion in sales at risk (20% of sales), analysts said.

The UBS analysts measured the potential risk to each company by looking at how exposed they are geographically to Walmart stores, as well as how much of their product assortment overlaps.

Target is among the most exposed, with 71% of its stores within a 10-minute drive of Walmart, and 90% of its stores within a 20-minute drive of Walmart.

Thomson ReutersIf Target, Dollar General, and Family Dollar respond to Walmart's price cuts by also slashing prices, then earnings per share for each company could drop by 6%, 5%, and 3% respectively, as a result, according to the analysts.

If they don't follow Walmart's lead and also cut prices, then all three companies could lose sales due to loss in market share — meaning customers could choose to shop at Walmart over Target or dollar stores because it's cheaper. 

Walmart's price cuts are part of a multi-year, multi-billion-dollar investment that the company launched in the first quarter of the year.

Since December, the company has dropped prices by 10% in its grocery department, according to Business Insider's most recent price check at a Richmond, Virginia store.

Target, by comparison, is about 15% more expensive than Walmart in the grocery department.

No matter how the price wars shake out, they are are good news for customers, because the cost of goods is only going to get cheaper. 

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