Aisles are screaming with promises of deals, as the encroachment of Wal-Mart Stores and other value competitors has pushed many retailers to adopt a partial everyday-low-price approach, and, say the retailers, with good results.
Wholesaler Laurel Grocery, London, Ky., has lowered everyday prices for its Midwest and Southern retailer customers on roughly 4,000 items to within 5%-10% of Wal-Mart, whose prices are 13%-18% below traditional supermarkets'. At the 14 stores participating in the program, year-over-year total store sales rose 14% in March and 11% in April, said Bob Kirch, executive vice president and chief operating officer for the wholesaler.
Others, from Raley's in California to Giant Eagle in Pittsburgh to Riesbeck Food Markets in Ohio, have also reported improved sales due to lower-everyday-price programs.
Yet some pricing experts contend retailers who are adopting the partial EDLP model are going too far, and thus leaving precious margin points on the table.
The common practice is to lower prices on 3,000-5,000 frequently bought items, many of them in the Center Store, by redirecting vendor promotional dollars to the price of goods. Meanwhile, the retailer puts an emphasis on the quality of its perishables departments. In so doing, retailers hope to convince shoppers that once they've shopped the perimeter, they don't have to head for the nearest discounter to get a good value on Center Store staples.
"There are 40,000 items, typically, in a store," said Jack Haedicke, president of Arena Consulting Group, Eden Prairie, Minn., and an original team member at Demandtec, San Carlos, Calif., a leading price optimization software provider. "But people only really comparison shop about 250."
Jon Hauptman, a vice president at Willard Bishop, Barrington, Ill., who leads the firm's pricing practice, said that in recent years, some clients have improved their price image with a lighter touch, and grown sales without, in his view, unnecessarily sacrificing margin. "I think retailers can have just as much impact in a marketplace and do it profitably with a subtler approach, with somewhere around 1,500-2,000 [items]," he said.
Marc Dietz, senior director of retail product marketing for Demandtec, agreed that in general, retailers overdo the price cuts, but pointed out that stores with a large number of SKUs and/or tough competition may justify more aggressive measures.
Experts say a common reason retailers go too far with price cuts is that they fail to understand their price image and what's needed to improve it.
In its price-image analysis for 20 retailers, Willard Bishop has often found retailers have an incorrect perception of their image.
Willard Bishop looks at six areas that affect price image: everyday shelf prices, promotional prices, known-value item prices, per-unit prices, merchandising and price communication, and found that while many retailers pay attention to the first two, they often neglect the rest.
Indeed, there's a "fairly significant difference" between a retailer's actual prices and how consumers perceive them, said Neil Stern, partner at retail consulting firm McMillan-Doolittle, Chicago, who closely follows retailer pricing strategies.
That could happen if the retailer overprices a few key items relative to its rivals. Retailers also may not know which items are most sensitive to price changes, and as a result fail to make cuts where they really count. Or they don't drill down to the store level. "Getting to that universal list is never easy, because it varies by customer, by region, by market," Stern said.
Jim Hertel, a senior vice president at Willard Bishop, said hybrid EDLP retailers have a tendency to overdo cuts in high-volume categories like soda and bread, resulting in heavy discounting in certain parts of the store. He said that with selective price cuts, retailers can improve their price image without eroding margins. "Velocity is an important piece of it, and you've got to have representation across the entire store," he said. "It has to do with the way consumers develop their price image."
Some retailers are finding pricing optimization software helps by setting price boundaries that support their image, sales and profit goals.
Giant Eagle had become increasingly aware that it had to change its approach to compete against growing competition from low-price operators. In November 2004, it made what would be the first of several price cuts on commonly bought items, ultimately trimming prices more than 5,000 products.
By analyzing its sales data, the retailer knew which categories were most important to customers. It then developed pricing rules designed to achieve its desired price image, variously pricing items at, below or near its competitors.
"Giant Eagle's strategy is actually to lower prices and provide more value to the customer," said Stephanie White, director of pricing and promotions for the retailer. "Our long-term strategy is that if we continue to grow units and sales, it'll grow margin."
In March, it began using Demandtec's price optimization software to set prices, replacing a laborious manual process.
The tool understands that price elasticity may fluctuate depending on the geographic pricing zone, so the ideal price on an item might vary from market to market. It also takes into consideration related products, so if a breakfast cereal price is reduced, its private-label version and other sizes will be reduced by the same percentage. In a three-month pilot last year, White said, "We definitely saw increased revenue, profit and units."
Demandtec identifies the retailer's image-making items using volume data as well as items' price sensitivity. The software also considers competitors' prices and identifies items that are important to shoppers but aren't carried by the retailer. Users should measure success by sales of key items over time, their price vs. the competitors, and customer surveys, Dietz said.
SAP Khimetrics, Newton Square, Pa., another active-price-optimization tool provider, also supports retailers' price image goals by assigning the retailer a number between minus and plus one that represents the retailer's price image, based on the historical relationship between item price and sales, said Tim Manning, vice president of solution marketing, SAP. "Customers construct a price image based on those prices," he said.
Setting prices requires continual updating and experimenting, a process that optimization tools can only facilitate.
Laurel constantly analyzes the categories in which it's lowered prices to ensure it hasn't hurt profit margins unnecessarily or stripped stores of promotional excitement. "It is a delicate balance, because we never want to get away from advertising," Kirch said. Lowring prices on lots of items, and signing them, helps.
Elements other than item price also impact a retailer's price identity. A high-quality perishables department that leads shoppers to spend more at the store, or endcaps surrounded by expensive items might make a store look expensive, he said. Those things can change, though. Stern recalled a client that improved its price image by changing its endcaps and tweaking the price ratios between branded and private-label products.
Monitoring customers' reactions to changes is tricky, as shoppers are slow to pick up on price changes than design alternations, experts said. For that reason, collecting customer feedback, whether via surveys, focus groups or conversations in the aisle, can help retailers determine whether their efforts are working, or being noticed at all, said Greg Buzek, who is president of IHL Consulting Group, Franklin, Tenn., and tracks the retail software market.
"Having the voice of the consumer is probably a worthwhile thing to do, if for no other reason than it provides a sanity check," Hertel said.
Giant Eagle understands the value of that. It meshes consumer research with the software's determination of key items to identify categories that are price-sensitive. Because the baby category isn't as big as others, the software might have missed its significance to shoppers.
"But consumer research tells us it's one of the most important places to have good prices," White said.