Planning for Pricing: Retailers Embrace Optimization

Given that food retailers make just pennies on the dollar, it’s probably not surprising that a software tool like price optimization would catch on as it has.

Price optimization, at its most basic, gives retailers a way to squeeze out a little more margin, or drive a little more volume, by appropriately tweaking their price points up or down. Not only that, but it predicts what the outcome is likely to be before the price change is even made. Overall, the tool helps retailers navigate the treacherous waters of a still-recovering economy, rampant price competition and wild swings in commodity pricing.

As a result, numerous retailers, large and small — from K-VA-T and Bashas’ to Rouses and Fairway — have been signing on with price optimization vendors in recent months, in some cases for software-as-a-service rather than in-house systems. The two most active vendors have been Revionics and KSS Retail, but others have also staked a claim in food retailing, notably DemandTec and SAS.

“In the beginning price optimization was so expensive that only the largest retailers used it, but now regional players are, too,” said Nikki Baird, managing partner, Retail Systems Research, Miami, noting that less expensive, cloud-based applications are now available. “And retailers are not worried about whether the science is real. They are past that.”

One retailer that is in the midst of a multi-year journey to improve its command of pricing, assortment and category management through the use of technology is Winn-Dixie Stores, Jacksonville, Fla. At the National Retail Federation’s 100th annual convention in January 2011, the chain announced an agreement with SAS, Cary, N.C., to implement a variety of corporate merchandising applications over a five-year period, including price (revenue) optimization, merchandise financial planning, merchandise assortment planning and space management. Winn-Dixie will also use several of SAS’s marketing applications, such as campaign management, marketing automation, marketing optimization and customer insights.

Another retailer that is leveraging price and promotion optimization along with assortment optimization is Target, Minneapolis, which is using tools from DemandTec, San Mateo, Calif. (recently acquired by IBM).

“Pricing should just be a component of an entire business planning process and not a silo unto itself,” said Chris Vukich, Winn-Dixie’s vice president of business optimization and pricing, during a session last month at the NRF’s 101st annual convention in New York, where he detailed the chain’s approach to pricing. 

Over the course of the past year, Winn-Dixie has been laying the groundwork for price optimization. Last month, the chain finally launched a pilot in about 80 stores covering three categories — cereal, frozen dinners and packaged salads — with plans to add another 14 categories over the next few months. Vukich declined to provide any results from the pilot.

What may complicate the rollout plan is Winn-Dixie’s planned merger with 207-store Bi-Lo, Mauldin, S.C., which was announced in December. “As a result of [the merger], we are evaluating the rollout timeline of the price optimization system,” said Vukich. Integration of the two companies will be the priority IT assignment leading up to the merger, expected in March or April, as well as post-merger, he said.