AN AIRLINE LOOKS TO FOOD RETAIL TO PERCEIVE THE OBVIOUS

David Merrefield

The shoe is on the other foot now.

For many years, the supermarket industry and other high-volume channels have been accused of lifting a page from airlines' manual of frequent-flyer programs as inspiration for frequent-shopper programs and the like.

Now, an airline executive, Jerry Grinstein, Delta's chief executive officer, has acknowledged with alarming candor that he is modeling that company's strategic direction on the practices of a food and nonfood retailer. His newly discovered strategy involves the offer of a simpler and lower-priced fare structure. Most of the airline industry is following, which means this has the potential to totally change that industry.

Let's consider this excerpt from a news article on the matter:

"It was only last month that Delta's Grinstein stood before a group of airline professionals in New York and predicted imminent change in the financially troubled industry.

"The reason the major airlines have been losing market share to low-cost competitors such as Southwest ... is because travelers no longer think they're getting a good deal from the big carriers.

"I recently came across the mission statement for Costco, the membership warehouse company," Grinstein said, according to a transcript of his prepared remarks. "Their goal is to 'continually provide our members quality goods and services at the lowest possible prices.'

"The failure of major airlines to meet that standard caused us to lose the trust of our customers," Grinstein continued. "Passengers no longer believed they were receiving the highest quality at the lowest possible price. And they were right.

"As a result, customers shifted their trust and affiliation to [low-cost] carriers. Southwest succeeded so well that [it prevails] even when Southwest's prices are higher than other carriers. [Travelers] simply trust Southwest to be the best value around." (Source: Washington Post, Jan. 9, 2005)

Let's be charitable for a moment. Delta's chief was on target to take a clue from a well-run company such as Costco. He was also correct in drawing the implied parallel between the value proposition of Southwest and Costco. Another of Costco's self-described attributes is that it has "pricing and value authority." That means customers trust Costco to be their agent. That's why, for instance, Costco shoppers see its slim stockkeeping-unit count as a convenience, not as a liability. They trust that product offered has withstood rigorous scrutiny to survive as the representation of the highest value for their money available in the marketplace, even if not at the lowest price point. Any company would do well to be in that position.

But there is something peculiar about all this, namely: Isn't this very obvious? It's more than passing strange that Delta's chief should find the pricing tactics of Costco to be so inspirational. The fact is that even casual observers of the competitive dynamics of food retailing know the workings of the price-value balance, and have for years. They might also point out that Costco succeeds as a low-price provider because it's a low-cost operator. We'll see how long high-cost providers such as Delta and other legacy airlines can sustain a low-price approach.