PRICING OP PUTS RETAILERS IN DRIVER'S SEAT

LUCIA MOSES

SAN FRANCISCO - As supermarkets adopt pricing optimization to plan promotions, the nature of the retailer-vendor relationship will change, says researcher Scott Langdoc.

"Now all of a sudden, the retailer can turn the model around: 'Here's what we see inside our business,'" he said. "That's the way we're going to negotiate deals."

Vendors who used to play a handholding role in promotional planning will find these retailer trading partners becoming less dependent on them for data and more demanding in negotiations, Langdoc said during Information Resources Inc.'s Reinventing CPG & Retail Summit 2006 here recently when he was vice president and general manager at AMR Research. He has since left AMR and is joining Fujitsu Transaction Solutions as chief technology officer next week.

"They're not going to be as reliant on you for demand intelligence," he said, addressing the manufacturers in the audience. "They're going to be looking at market basket and cross-category effects more. You're going to have more back and forth in light of the fact they're doing more directed analysis. They're going to negotiate more on individual deals."

Retailers have been slow to adopt these price-setting tools. Langdoc estimated only 10%-15% of food retailers use pricing optimization programs, which use internal and competitive sales data and sales trend information to help set the optimal price for an item, whether it's a base, promotion or markdown price.

He listed a number of reasons for the slow pace. Early solutions weren't user-friendly. Retailer-driven promotions buck a tradition of suppliers influencing selection of promoted items. Sales data were incomplete or flawed, resulting in poor pricing recommendations.

Albertsons' decision to invest in pricing optimization in 2003 led to a spurt in interest by other retailers. Still, many operators resist changing their traditional category management practices. They ask how they would integrate such an application into their existing systems, and if it can be adapted to fit their company's size, Langdoc said.

The benefits are demonstrable, though. Langdoc shared a case study of an unidentified retailer that experienced a 2%-7% margin improvement, depending on the optimized category, and a 9% improvement in the sales lift from optimized promotions vs. nonoptimized promotions.

Applying pricing optimization to promotions let the retailer reduce by 25% the time it took to execute a promotion, he said.

Vendors stand to gain, too. By getting more accurate demand and predictive sales levels, they can better plan their supply chain and minimize out-of-stocks.

Langdoc sees continued adoption of pricing optimization as inevitable as trading partners face increased pressure to measure the effectiveness of their promotional spending and keep up with changing consumer behavior.

"This is a fundamental technology investment that will need to be made," he said.

He stressed that successfully optimizing prices relies less on the investment and more on changing the retailer culture, though. Top managers need to be committed to the program, the organization needs to embrace a fundamental change in how categories are managed, and advertising and merchandising departments need to collaborate on promotions, he said.