How Technology Arms the Price War

The notion that pricing on “known value items” (KVIs) drives consumer decisions on where they shop is nothing new in the food retail business. But in an age of big data, bargain-hungry shoppers and private-label proliferation, retailers are finding the ABCs of KVIs are changing.

Specifically, sources say, the days of periodic, enterprise-wide and zoned decision-making on how to price those key items—which typically make up a tiny percentage of a retailer’s overall assortment but have an outsized effect on a store’s overall price perception—are coming to an end. Today, retailers are monitoring prices with exacting precision, right down to the store level.

“Grocery pricing strategies have become incredibly complex over the last two years,” says Ben Reich, founder and CEO of Datasembly, a Washington, D.C.-based firm that tracks real-time pricing data at the store level. “Our data show shrinking pricing zones, increasing price volatility and an overall proliferation of sophisticated pricing schemes. This trend is most prevalent with KVI items and private-label products.”

Technologies like those Datasembly offers now provide grocers the capability of manipulating prices and promotions with “surgical precision in order to tactically increase revenue and market share,” Reich says. “Responding quickly and hyper-locally to competitors’ price changes of KVI items and private-label products is especially critical.”

Related:Weis Gets Aggressive on Private Label Pricing

Writing in a recent blog post, Tim Ouimet, co-founder of Engage3, a Davis, Calif.-based consumer science firm, agreed. “Traditionally, retailers would evaluate KVIs one time a year. Over time it’s gotten to a more periodic basis where they’re doing it more often, but the market’s changing faster today than it’s ever changed before,” he said. “Things are getting localized, things are getting personalized, and with that the shopper’s price perceptions are being set more dynamically.

“All of these things mean that calculating KVIs based at the enterprise level is the wrong way to do it,” he continued. “The analysis needs to come down to the store level, down to the shopper level, down to the daily level, and have items coming in and out of the KVI list at those lower levels.”

A recent study published by Engage3 demonstrates the phenomenon in action. It compared prices for a basket of 50 items in a variety of markets in Texas: Houston and Dallas, which have a significant presence of hard discounter Aldi, and San Antonio and Austin, which do not. All four markets, however, have a heavy presence of Walmart Supercenters.

Pricing Disparity by Market

Item prices at Walmart varied based on the number of nearby Aldi stores.

Source: Engage3

In Austin, where there is only one Aldi store location (in Pflugerville), Walmart pricing for the basket of staples was 16.2% higher than in Dallas and 17.6% higher than it was in Houston, the study showed. And in San Antonio, where Aldi has no store presence, the Walmart basket was priced 21% to 22% higher than the exact basket in Dallas-Fort Worth and Houston, respectively.

While the average pricing differences in the four cities taken together were between 6% and 11%, some pricing disparity on items like such as butter and mac and cheese were significant, Engage3 showed. Peanut butter at a Walmart store in Dallas-Fort Worth priced at $1.18, while the same jar was priced at $2.18 in Austin—a whopping 54% difference. Mac and cheese, priced in the Dallas-Fort Worth stores at 34 cents, was double the price (68 cents) in Austin.

While Engage3 was careful to point out that the correlation of Aldi’s effect on pricing in those markets was “subjective,” similar patterns of a “hard discount effect” were trumpeted by Lidl in a separate study conducted a year ago on behalf of the German discounter. In that study, grocery retailers located near Lidl stores in the U.S. set prices on average 9.3% lower and up to 55% lower on key staple items such as milk, as compared to markets where Lidl is not present.

No More ‘White Flag’

Despite experiencing the kind of macroeconomic conditions that in the past might have supported a higher price and higher margin environment for grocers, retailers remain under considerable pressure to keep prices low, sources say.

The newly released Retailer Preference Index from Dunnhumby said, for example, that price—perceived to be both lower than competitors and “fair” on items on organic foods that tend to have higher rings—remains paramount for retailers that might seek to also win customers by pulling other levels of shopper preference, such as convenience, assortment and digital.

“Despite the wealth of commentary in the news committed to customer needs surrounding convenience, digital and having the most on-trend products, price remains more important to most shoppers—even those who have higher than average income,” its report read. “Few retailers secure superior customer preference and financial performance by waving the white flag on price and pursuing a quality-dominant focus, and price-only promises to demand more and more retailer attention in the future.”

The growing U.S. presence of Aldi and Lidl is having an outsized influence on this too, sources note, as the value proposition common in their home country of Germany—described by one observer as “rich people like to save money; poor people must”—takes hold. Those companies are increasingly competing on high-quality and trend-right products on top of market-leading prices supported by efficient operations and private brands.

Jose Luis Gomes, North American president for Dunnhumby, in an interview with WGB says keeping up with leaders on the price and quality front is likely to get more difficult this year as tariff issues and freight costs catch up with vendors and suppliers, who will have no choice but to pass along their increased costs to retailers.

“We’ve already started to see price increases coming from different suppliers and vendors,” Gomes says. “What retailers are going to deal with for the first time in a while this year is inflationary pressures from their supplier base. And with the strengths of Aldi and Trader Joe’s out there, it’s going to a really challenging juggling act. How do take some of those cost increases and pass them onto consumers, and which consumers do you pass them along to? It’s going to make for even tougher choices of how retailers invest in price.”

This phenomenon is already snaring some wholesalers, who report that suppliers are pulling back promotions in response to an unwillingness among retailers to accept price increases.

“There’s no price elasticity at retail,” Steven Spinner, CEO of wholesale distributor United Natural Foods Inc., Providence, R.I., told analysts in a conference call late last year. “In other words, the retailers are saying to the big manufacturers: Don’t you dare pass through any price increases because we can’t pass it through, which means we have to eat it. And that’s the biggest primary driver of the reduction in promotional spend, because if the manufacturers can’t pass through the price increases, then they’re just going to reduce the promo spend to make sure that they remain whole.”

Dunnhumby predicts that giants such as Amazon and Walmart will “flex their economies of scale” and undercut prices of the competition this year. “Given that Aldi can flex back with their own powerful and growing economies of scale, retailers who cannot engage in this back-and-forth must find their own ways to address price and value perception or become collateral damage,” the company said.

Pricing surveys conducted in December in the markets of Philadelphia, Washington, D.C. and Chicago conducted by Wolfe Research indicated slightly inflationary conditions in the former two cities and mixed results in the latter.

“Overall, sequential and year-over-year pricing throughout the U.S. appears to be largely deflationary, with a couple exceptions, signaling that the tough competitive environment of flat to falling prices and rising costs for operators is unlikely to ease anytime soon,” Wolfe analyst Scott Mushkin said in a note to clients.