A Price and Promotion Pandemic

The coronavirus pandemic is delivering billions in new sales for U.S. food retailers, but they need to accept that bounty delicately, sources say, keeping an eye on the effects of rising costs, changes in consumer buying behavior and their near- and longer-term perception in the marketplace.

With thousands of alternative venues shut down, demands on the supply chain playing havoc with availability and prices, and safety measures altering operations and the typical margin mix, the nature of promotion has abruptly changed from transactional to emotional. This has presented a golden opportunity for supermarkets to embrace their role as community nourishers and build long-term loyalty—advantages they’ll likely need to absorb the soaring costs of doing business and navigate the uncertain economic landscape that’s in front of them. They also need to keep an eye on the perception that they are taking advantage of these extraordinary circumstances, in some cases, fighting back gouging allegations from traumatized shoppers by taking losses on their booming sales.

“Demand has gone up so much that the costs for retailers have gone up as well, and right now, many of them, if not all of them, are incurring those costs,” said Edris Bemanian, CEO of Engage3, a Davis, Calif.-based pricing strategy firm. “And they’re just looking for the right time to be able to pass them on to consumers, because they are also being really sensitive to the perception of price gouging, because not everyone necessarily knows that retailers’ costs are also going up. … It’s a challenge for them.”

In the current environment, price promotions typically designed to draw traffic to stores are decreasing in importance but haven’t necessarily been unwound. That’s because many are typically set weeks in advance—and because retailers need to be ready to pivot in the event circumstances change again and a race to retain their market share gained during this crisis begins. High demand and a choked supply chain, in the meantime, have also heightened the possibility that retailers won’t have the stock to honor their offered prices.

Some chains, notably H-E-B, Hy-Vee and Sprouts Farmers Market, have discontinued printed weekly flyers as part of their response to the crisis, and dozens more have suspended “rain checks” on out-of-stock promoted items. CPG companies and retailers are also working together to trim or modify their current plans, with an eye on availability and changes in consumer behavior. This is an advantage for big brands with capacity at the cost of “long tail” smaller brands, though at the same time, an influx of items from nontraditional suppliers have taken over empty spaces on shelves. Grocery Outlet officials said this week they were hearing offers from distributors of health and nutrition food products normally absorbed by gyms and health clubs, for example. And Rouses Markets in Louisiana was selling meals from local restaurants.

“Most of these organizations plan circulars 12 weeks in advance. ... So, for example, the promotions for this week were planned 12 weeks ago. The prices and items were locked in 10 or 11 weeks ago. So, it’s a pipeline of activity that happened over the course of weeks and then the button is pressed. It’s not a trivial experience [to undo that],” said Kevin Sterneckert, chief marketing officer of Symphony RetailAI, a Dallas-based retail decision-making platform.

“What I predict is that many of the retailers in the U.S. will continue to have some form of promotion vehicle. They will be watching to determine if they need to stop that 12-week pipeline or modify it or continue it. Because let’s say that the stimulus package happens and the infectious rate and the mortality rate plummets this week—that means more normal shopping behaviors will begin next week. And these grocers do not want to be left in the marketplace without incentives to attract consumers. If they cut it off now, and don’t do anything for the future three months from now, they’ll be in the marketplace hanging in the wind without any promotions to attract customers.”

Ken Wyker, president of Charlotte, N.C.-based promotional analytics company Circular Logic, said the current phenomenon is prompting retailers to eschew the transactional nature of the communication with shoppers in favor of an emotional one that acknowledges the deep anxieties of shoppers: The onset of the virus has not only made millions of consumers fear for their health, but has cost them their jobs and liberty as well.

‘The Wrong Time To Be Trying to Sell Stuff’

“It feels like the wrong time to be trying to sell stuff,” Wyker said. “The consumer feels like, you know, ‘Who are you to be trying to promote things? I’m just trying to feed my family [while being told] I can’t leave my house.’

“What I believe is happening, you have the transactional side of the relationship with consumers, which is, we sell products and they come to purchase them. I want you to buy an Oreo cookie, here’s 50 cents off,” he continued. “The other side of that relationship is the emotional one: That it’s your local store. You know the cashier. It’s a part of your day. You take your kids there. And if you look at what most grocery retailers are doing today, the message isn’t ‘Hurry to our store, we’ve got wonderful deals.’ Instead, it’s ‘We’re all in this together. We’re here to help you in this difficult time.’ ”

For retailers that can get this message right, Wyker believes, the trauma of the pandemic is an opportunity to win loyalty they’ll need when the crisis subsides. “This is a fine line retailers need to walk,” he said. “I don’t want to tell you about this promotion I have, because I’m going to run out of it. I don’t have enough of it. And yet if I don’t communicate why and how, then I’m vulnerable to those customers who are going to be saying, ‘We have a little crisis here. I don’t have a job, and you’re taking away all your deals.’ So what’s valuable right now are the people who understand how to communicate well with customers. It’s the people who can word a message such that those who feel fearful and concerned can feel comforted.”

Retailers for the most part are rising to this challenge. Many are tying the challenges of depleted supply from hoarding shoppers to food insecurity concerns.

The Giant Co. CEO Nick Bertram, for example, this week had letters to the editor published in newspapers across Pennsylvania delivering that message and starting a #MoreForAll campaign in stores and on social media.

Photograph courtesy of Giant

Others are taking on consumer concerns more directly, with Walmart, Amazon and Trader Joe’s expressly taking on gouging concerns for items on online or secondary marketplaces. El Paso, Texas, supermarket chain Food City this week issued a statement addressing consumer concerns about its own pricing, acknowledging it was taking a loss on items such as eggs and meat that have seen prices skyrocket, but also highlighting the affordability of newly bought items in surplus.

“It is important to understand that during this time, there are shortages on many items as well as increased costs to retailers on many products, including but limited to eggs, meat products, produce and beans. We take accusations of price gouging very seriously, and we ask our customers to understand the situation before posting false information on price gouging. Accusations and falsehoods are a dangerous thing without the facts and create more panic in these uncertain times,” the message read in part.

Food City added that its egg costs had risen by 212% over the past two weeks, but prices increased by less than that. At the same time, the company added, loose potatoes obtained from a restaurant supplier were priced at 3 pounds for $1.

Consumers themselves have been buying differently than they normally do during the crisis, sources note—a result both of the supply challenges and of economic concerns.

Sterneckert noted, for example, that switching behaviors have been “abnormal” with less shopper sensitivity to prices, attributes and ingredients.

“For example, in salad dressing, [consumer decisions] might be, you know, is it oil-based or a cream-based? What brand? What size? That might be the decision process. However, today all that's out the window and it's like, ‘I need salad dressing. Whatever is available, I'll buy it.’

“In this period of time, the retailer should be encouraged that [customers] buy whatever they can get their hands on. So if they’re feeling like, 'Oh, I need to buy these brands and I need to get these things and they’re not available,' it’s okay to get something that serves the purpose, but isn’t a normal substitution for the customer. The merchants should be thinking about the purpose: Do I have something that serves the purpose?”

Preparing for the New Normal

Wyker noted that the heightened awareness of grocery stores that has come along the pandemic bodes well for the longer term, noting the opportunity to burnish their images as trusted partners in times of distress, but also to potentially win new shoppers in a time of disruption.

While the tenor of their messaging inside has changed, open rates on emails from grocers have jumped by 10 points or more during the crisis, he noted.

“That’s an opportunity for retailers because the dynamics of emails are, people are just [accepting] that 25% or 35% of the people never open them. What’s happening now is that those lighter customers are now opening those emails they normally could care less about. That’s an opportunity with those people who probably don’t shop you all the time—it’s like a swing vote in an election. They’re the ones deciding between you and your competitor down the street,” Wyker said.

Bemanian of Engage3 said retailers should also be preparing now to fight to retain the loyalty of their new and more frequent shoppers in the months that the crisis subsides. The virus scare could bring some $28 billion of incremental revenue into the food-at-home sector over the next three to four months, analyst Scott Mushkin of R5 Capital said in a research report this week—a hefty prize to fight for.

“If you look at that, and look at the current results, you might have a lot of retailers sitting there and feeling pretty good about the fact that they’re way over forecast in sales, and that they’re doing well in this current environment,” Bemanian said. “But if you’re too complacent with those results, you also have to recognize that customers have already pantry-loaded. They’ve already bought a bunch of products. They’re going to start shifting their sales over to restaurants, entertainment, travel and elsewhere.”

Jose Gomes, president of North America for dunnhumby, said retailers will benefit through what he refers to now as the “insecurity phase” and confront macroeconomic challenges ahead as comps come under pressure in the “transition” phase once the worst of the crisis is behind them.

“No one needs toilet paper, mayonnaise or tuna in the near future and so hoarding will go down,” Gomes said. “What I’m telling my clients is, don’t worry about the categories. Everything now is a mess, because people bought everything they could find and they don’t know what the new normal is going to be. The big things that will drive consumer behavior is the macroeconomic stuff—the recessions and consumer confidence.”

“Retailers have to be thinking now about how they’re going to retain the loyalty of their customer,” Bemanian added. “They have to think, ‘What is my price image now? What is the loyalty I have now? And how am I going to manage that and my strategies as my competitors start implementing broad price reductions across the market to retain the customer and the market share?’ Almost everyone is gaining net market share today. But we’re going to be looking at a net negative in many cases if people are not taking steps today to plan around strategies beyond the crisis.”