ST. LOUIS — Schnuck Markets here last week launched an early offensive against what it sees as a coming Wal-Mart invasion, cutting everyday prices on more than 10,000 Center Store items.
The price cuts — as high as 25% on certain items — were funded by a program to reduce internal costs that has been ongoing for more than two years, Scott Schnuck, chairman and chief executive officer, told SN in an interview.
“We've made changes in our operation. We've pulled waste and shrink out of our business, and we're aggressively investing that back into lower retails,” Schnuck said.
The changes also reflect an increasing trend among retailers to attack long-held pricing practices as a means to hold onto market share amid competition from additional formats. Most recently, Ahold USA, Quincy, Mass., began an ambitious program to reduce prices at its Stop & Shop and Giant-Landover chains. Giant Eagle, Pittsburgh; Raley's, Sacramento, Calif.; and Wegmans, Rochester, N.Y., are among the chains to have launched similar programs in recent years.
“We're seeing more of these modified EDLP programs than we've ever seen before, certainly, and much of it is in response to the threat of Wal-Mart,” Jon Hauptman, vice president, Willard Bishop Consulting, Barrington, Ill., told SN.
Hauptman called Schnucks' move “dramatic and bold,” noting that 10,000 items are more than typically introduced at a single time. Sacramento, Calif.-based Raley's, for example, cut 5,000 items when it adopted an EDLP stance in 2004.
“This [trend] has to do with shoppers having more alternatives, and their loyalty to their primary grocery store decreasing,” Ginny Valkenburgh, senior vice president, Cannondale Associates, Wilton, Conn., told SN.
Many chains have accompanied their pricing shifts with edited assortments and reduced internal costs. Schnucks edited selections in some categories, but funded the majority of the lower retail prices through internal cost reductions and improved performance in shrink, Schnuck said.
“We're definitely placing a strong emphasis on private brand and in a lot of cases increasing the selection of private-brand items. In some categories we have trimmed some SKUs,” he said. “We've done some early negotiations with vendors, but that will start in earnest now. What's in it for the vendor is increasing the boxes we sell. Our business has been relatively strong, and I think the supplier community has been fairly pleased with our increases. We want to maintain that and think this is the way to do it.”
Schnuck emphasized the program was made possible through reducing costs in virtually all areas of the business, including transportation, warehousing and facilities. The company is also doing a better job at tackling shrink, which has been crucial.
“We have really worked hard behind the scenes to improve our efficiencies,” he said. “In shrink reduction in produce alone, we've reduced shrink by more than 3% of produce sales. Those are significant savings, and our strategy is to reinvest that.”
According to Hauptman, retailers adopting an EDLP strategy need to bolster their programs with shopper communication and a robust private-label program, and be prepared to absorb a significant hit in margins at least for the short term. “Going to a modified EDLP is one way to improve your price image, but it's not the only way,” he said.
Last week's price cuts come in addition to a 3,200-SKU price reduction Schnucks made a year ago, Schnuck said.
Schnuck described the modified EDLP as a combination of an everyday reduction in Center Store retails with the current weekly sales promotions. The price cuts have been made almost exclusively in Center Store, he said, although the price of bananas — lowered a year ago from 69 cents a pound to 59 cents a pound — was cut again, this time to 50 cents.
“Our marketing practices aren't going to change that much,” he said. “It's that we're bringing the overall level of the Center Store down to where shoppers will notice a difference in their cart.”
While Schnucks' move was expected to reverberate in its markets — competitor Dierbergs was to match price cuts on items like bananas, published reports said last week — the price cuts primarily address future competition, Schnuck said.
“We have to learn how to operate in a world with Wal-Mart,” he said. “We compete with 55 supercenters right now, and over the next couple of years, we expect they will move very aggressively into the metropolitan areas where we have a core group of stores. So we have to narrow the price gap with them.”
The cuts were introduced in 68 of the company's stores in the St. Louis and Springfield, Ill., markets Jan. 14. “In the beginning of the new year, customers are as price-sensitive as any time: They have come through the holidays, they have credit card bills and they're trying to cut back. So anything we can do to help our value image with customers, they are going to respond to more now than in November,” Schnuck said.