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Behind Walmart Plan, Some Healthy Business Logic

Above: Groceries sit on shelves next to a variety of other goods at a Walmart in Fairfax County, Va. Analysts say Walmart's announcement Thursday on healthy foods may attract customers who buy not only groceries, but other higher-margin goods.

Can Walmart make money selling healthier foods? After all, the giant retailer's business model depends on cutting costs and prices and there's less profit involved in selling strawberries and spinach than cookies and crackers.

In announcing its new healthy food initiative Thursday, Walmart said it would work to bring down the price of fresh produce by reducing costs in areas such as transportation. Andrea Thomas, a Walmart senior vice president, predicted consumer savings of $1 billion per year on fruits and vegetables as a result, if Walmart succeeds in making serious changes to the supply chain.

And in the past, what Walmart has wanted, manufacturers have supplied.

"It will have a major influence on our diet — there's no question," says Harry Balzer, chief food industry analyst with NDP Group, a market research firm.

Over the past year, New York City and other governments have called on food makers to offer healthier choices when it comes to packaged foods. But because of its size, Walmart may ultimately have more influence.

Walmart intends to lower its prices for healthier options, abolishing a premium it has charged for some products that contain whole wheat or reduced sugar or salt. The company says it will also work with health groups to add seals of approval on branded products that meet new standards such as 25 percent less salt.

And Walmart can control the trans fat, sugar and sodium levels in products sold under its store brand, Great Value. Walmart's marketing costs for Great Value are lower than what national brands spend, so the retailer can afford to lower its margins for store brand goods, says Christopher Shanahan, a food industry analyst with Frost & Sullivan, a business consulting firm.

"Walmart has always been willing to sacrifice margin for volume," he said. "Their strategy is to get people to come in for groceries and have to walk through higher-margin areas like electronics and clothing."

The bigger question is whether people will be drawn to healthy options, even as they're made more widely available. As people go about making their daily food selections, health often is a secondary factor, falling after issues such as ease of preparation, cost and taste-cravings.

Over the past two decades, food manufacturers have primarily tweaked their products by adding good-for-you ingredients such as Omega-3 fatty acids or whole wheat. If they lower sugar, they boost salt or fat, or vice versa.

Now, they are being asked to reduce all the unhealthy flavorings that people love. The only way this can work, says Balzer of the NDP Group, is if the whole food industry makes such a shift together. That's why it will be helpful for Walmart to roll out this initiative over five years, he says.

"We won't consume anything that we don't like the taste of," Balzer says. "There is no amount of advertising you can buy, or any way you can lower the cost enough, unless you satisfy that gold standard for taste."

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