TENDING TOWARD THE MIDDLE

ELLIOT ZWIEBACH

High-low or everyday low?

As high-low operators seek to reflect the savings from cost-cutting measures back to customers and everyday low-pricing companies become more promotional, the pricing and philosophical differences that once set them apart seem to be narrowing.

According to Mike Julian, president and chief executive officer of Jitney Jungle Stores of America, Jackson, Miss. -- a high-low operator with a handful of EDLP stores -- "At one time, EDLP operators were priced 6% to 8% below high-low retailers, but that gap has closed, with high-low not as high as it once was and EDLP operators using sales and hot specials to create more excitement."

An EDLP retailer told SN, "The take-home price to customers who shop an EDLP supermarket that runs hot ads is probably about the same as the take-home price from a high-low chain with a loyalty-card program."

With the mix of high-low to EDLP operators at about 60% to 40%, the consensus among a variety of operators, securities analysts and other industry observers is that promotions-oriented high-low pricing formats -- high regular shelf prices with low-priced advertised specials -- seems to be the industry's format of choice at the moment, though some believe EDLP may once again have its day.

EDLP operators include Albertson's, Boise, Idaho; Edwards Super Food Stores, Windsor Locks, Conn.; Food Lion, Salisbury, N.C.; Fred Meyer Inc., Portland, Ore.; Hannaford Bros., Scarborough, Maine; Lucky Stores, Dublin, Calif.; Smith's Food & Drug Centers, Salt Lake City; Winn-Dixie Stores, Jacksonville, Fla.; and most recently, Super G, the northern division of Giant Food, Landover, Md., which remains a high-low operator.

Gary Giblen, managing director of Smith Barney, New York, said there is no on-off switch for separating EDLP from high-low. "It's all part of a continuum, with pure EDLP at one extreme and pure high-low at the other. And until a few years ago, companies were more clearly lined up around one polarity or the other. But most EDLP operators today are quasi-promotional, and all are total hybrids."

Jonathan Ziegler, a securities analyst with the San Francisco office of Salomon Bros., New York, said most companies practicing everyday low pricing were all purer EDLP operators in the past than they are today, "But everything is changing as we speak, with most of the shifts coming in the last six months as vendors have flooded distribution channels with promotional merchandise.

"Consumers want special deals to entice them to come into a store, and it's clear that great promotions draw traffic -- and vendors today are making it easy to become more promotional with so many deals. The result is that the industry is moving away from EDLP and toward a more promotional environment."

However, EDLP is still a very viable pricing format, Jon Hauptman, a consultant with Willard Bishop Associates, Barrington, Ill., told SN. "While Wal-Mart is not strictly EDLP because it has strong specials, it shows that with enough critical mass, an EDLP operator can be quite effective in driving costs out of the system and passing the savings on to consumers," he said.

Ed Comeau, a vice president of equities research at Donaldson, Lufkin & Jenrette, New York, also said EDLP remains a potent option. "The industry in general has grown away from EDLP as a pure strategy and gone more down the spectrum of promotions, service and excitement," he told SN.

However, there could be a shift back the other way, Comeau said -- if high-low operators begin to cut back on the level of promotions.

"For high-low operators, using promotions and electronic marketing programs to lure consumers away from EDLP retailers may be easy," Comeau said. "The challenge may come when they gradually reduce the number of promotions and try to retain the customers they won over from EDLP operators."

Marking a possible shift in the trend away from EDLP was the conversion in late May of nine Super G stores in New Jersey, Delaware and Pennsylvania to EDLP by Giant Food. The move came in response to competitive pressures from better-established retailers in the region, signaling the chain's effort to differentiate itself from that competition, observers told SN.

"For a company like Giant Food, which is one of the traditional high-low operators, to convert stores to EDLP is unprecedented, and it may signal a rebirth of the EDLP concept," one Northeast retailer said.

According to observers, the issues motivating companies to choose one format or the other include the following:

Aggressive promotions by high-low operators, which have made it harder for some retailers to maintain a strict EDLP approach to marketing.

The advent of frequent-shopper cards and other electronic marketing programs, which have made it more difficult for some EDLP operators to resist some form of promotion.

Tougher competitive activity, which has prompted some operators to adopt EDLP pricing in selected geographic areas.

Changes in ownership, which have caused some operators to reposition acquired companies under EDLP banners.

"To run an EDLP operation, you have to have very strong control of expenses, and that kind of discipline doesn't exist in all companies," an EDLP retailer told SN. "For companies without strict disciplines and labor standards, EDLP is not the way to go." EDLP has been around for decades, but appears to have achieved its widest popularity in the supermarket industry in late 1980's, as retailers sought to cut costs and reflect the savings to consumers in a clearly demonstrable way.

Providing impetus for the move to EDLP -- and, almost simultaneously, moving the pricing format farther from its roots, observers said -- was the advent of warehouse stores, followed by club stores and, most recently, loyalty cards. "With each new competitive challenge, EDLP operators had to come out with something else to attract customers, and the most obvious choice was stronger ads," the retailer told SN. According to Hauptman, EDLP is one way for a company to improve its price reputation, "though by definition, EDLP leaves a company vulnerable to a high-low operator because EDLP prices can only go so low on key items, so a high-low operator can target those key items with periodic hot specials that really can make EDLP operators look bad. "That encourages EDLP operators to react by creating more excitement with specials." According to Julian, "EDLP is not exciting enough to drive business. When there were more high-low operators and some companies began switching to EDLP, the 6% to 8% price gap that resulted was exciting unto itself.

"But the gap has narrowed, and there are few companies that are 8% lower than the rest of the marketplace. And without that gap, EDLP needs more excitement to get customers to come back week after week. That's why EDLP retailers have come up with more promotional programs, including frequent-shopper cards, to make the shopping experience more exciting."

Giblen also underscored the need for creating promotional excitement. "Food shopping needs to create impulse and traffic, and when there's not enough differentiation between chains, you need something exciting to draw customers -- and EDLP is boring."

He said the most successful food retailers the last few years have been high-low operators -- companies like Safeway, Pleasanton, Calif.; Vons Cos., Arcadia, Calif. (now a Safeway division); and Kroger Co., Cincinnati.

Comeau said Food Lion was the purest EDLP operator in the 1980's, yet today it offers a frequent-shopper card, "and it's doing more promotional spending in the stores than ever before.

"And though Albertson's remains more EDLP-oriented than most, it is more promotional as well. Albertson's sales problems during the last two years have resulted from its inability to recapture a lot of customers lost to competition, and it can get that business back -- but only with a combination of everyday low prices and aggressive promotions." Food Lion officials declined comment for this story.

Jenny Enochson, a spokeswoman for Albertson's, said the chain "truly is an EDLP operator. But we do run promotions -- what we like to call 'romancing the customer' -- in addition to our EDLP program, and we give store directors a certain amount of leeway to create a local flavor for their stores."

According to Ziegler, Smith's Food & Drug Centers has opted to "ease up on" EDLP with the introduction of its Fresh Value frequent-shopper card in Arizona, "and while American Stores Co., [Salt Lake City], says Lucky is an EDLP company, that doesn't seem to be the case with its 'Big Book of Values' coupon promotion."

Al Rowland, president and chief operating officer of Smith's, told SN, "We continue to be an EDLP operator, although in some areas, such as Phoenix, we are somewhat more promotional."

Officials at Lucky Stores declined comment.

Perhaps even more challenging today than running an EDLP operation is switching from a high-low to an EDLP format.

According to the Northeast retailer, operators that make the switch have to be patient, noting that when Zaandam, Netherlands-based Ahold acquired Melmarkets in Long Island, N.Y., and switched to everyday low pricing in 1995, it lost considerable sales "that are only now beginning to come back."

He said Ahold is now encountering a similar problem in northern New Jersey, where the conversion of Mayfair Markets to Edwards Super Food Stores, with its EDLP format, is hurting sales.

Officials of Ahold USA, Atlanta, could not be reached for comment.

Giblen said Edwards is a very disciplined EDLP operator. "They believe in EDLP, and Ahold has been willing to suffer the fallout of sales in the short term, first by switching the high-low format at Finast [Friendly Markets, Maple Heights, Ohio,] to EDLP and more recently doing the same at Mel's and Mayfair.

"It's come at a grievous up-front cost, but the company claims the numbers have been worth it. Ahold says Mayfair is now coming out of the hole caused by the shock of switching to EDLP, and the company says shoppers are accepting it and sales have picked up sharply."

But sometimes even Edwards departs from its discipline, one competitor said, pointing out that when competition heated up in Long Island, Edwards ran double coupons -- "something no EDLP operator has ever done," the competitor said, sounding incredulous.

A major ongoing challenge for EDLP operators is overcoming the promotional power of frequent-shopper programs launched by high-low operators. "And if card programs are done properly, they hit customers with savings directly, more so than promotions of the past -- which definitely has a negative impact on EDLP operators who don't offer loyalty cards," Comeau said.

Electronic marketing is likely to make it tougher for EDLP operators to resist making some adjustments, Comeau said, noting that chains that hold out against frequent-shopper cards could be in trouble.

"Without a card, there is a penalty. If the industry continues to move toward frequent-shopper cards, as the airlines have, and the EDLP operators continue to tell consumers the cards will cost them money, those operators are going to be penalized by consumers, and the EDLP operator is going to lose customers.

"And without a refined promotional strategy, he will lack the tools to recapture the customers he loses," Comeau added.

However, there is a certain irony as some EDLP companies like Food Lion move aggressively into electronic marketing, Giblen said, "because an EDLP retailer who implements electronic marketing actually strengthens his operation by forcing him to depart from EDLP. Food Lion provides the best example. As it's aggressively marketed its MVP card, there's definitely been a trend to more price offerings based on volume." According to one EDLP operator, "When everyone is offering a loyalty card, the cards will become just like trading stamps, with a lot of built-in costs, and the companies that get too deep into the cards may be on thin ice when consumers decide they are no longer of sufficient value."

Still another challenge for EDLP operators is the large number of vendor deals available. These are apparently providing a major impetus for many EDLP operators to become more promotional, observers said. "There are more deals available than there have been in a long time," Ziegler said, "and when retailers try to figure out the returns for staying purely EDLP and not making large investments in inventory vs. taking the deals and generating certain returns, taking the deals turns out to be more favorable.

"Retailers say they applaud Efficient Consumer Response, and if everything were rational, then everyday low pricing and everyday low cost would be the way to go in a true ECR environment. But in a more realistic environment, where you make money with promotions and deals, high-low seems to be the right way for most operators to go."

According to Comeau, "Every retailer has his own pricing strategy, but it can't be a single strategy of either EDLP or high-low because consumers are driven by a combination of things -- they want the opportunity to get special deals and still get everyday low shelf prices -- plus service, quality, cleanliness and all the other virtues.

"So to the extent that a retailer can deliver the impression of fair and reasonable prices plus the other factors, that gives him a much more powerful package than just offering the lowest prices everyday.

"The formula for retailers in all industries in the 1980's was to achieve the lowest cost structure, which resulted in lower prices for customers. But for supermarket retailers, the best prices alone are not enough to win consumers. And the EDLP strategy doesn't include the right ammunition to get people back in.

''You have to do more to create excitement, and the retailer that says he doesn't have specials or promotions, but has everyday low shelf prices, leaves himself vulnerable to competitors to take his business away because he won't be able to fully satisfy the needs of all his customers."

Perhaps the most enjoyable aspect of being an EDLP operator is the right to claim the competition is playing catchup. One retailer pointed out that when Pathmark Stores, Woodbridge, N.J., reduced 5,000 prices, Edwards responded that it already offers reduced prices on 30,000 items everyday; and when ShopRite Supermarkets, Elizabeth, N.J., had a half-price sale, Edwards said its prices were already at that level.

In the long run, the ability to show day-in, day-out sharp pricing may prove to be a major weapon in the EDLP arsenal.