Roundy’s Sees ROI in Price Optimization

NEW YORK — Roundy’s Supermarkets has found “significant ROI” in the corporate price optimization system it has employed over the past two years for base price changes at its 165 stores, said Jason Benish, vice president of pricing and strategic initiatives for Milwaukee-based Roundy’s Supermarkets.

In a study of price optimization’s effect on 10 categories at test and control stores, the chain found “the [trend] lines diverged” for year-over-year gross profit dollars, said Benish at a session here last week at the National Retail Federation’s Annual Convention. “If I could make that kind of return on my [personal] money, I would probably not be here right now.”

In particular, the candy category was able to achieve a “trifecta” in which the system boosted gross margin, dollar sales and unit sales.

Roundy’s applies the system — provided on a software-as-a-service basis by Revionics, Roseville, Calif. — to all categories, except for perishables. It does not require investment in servers that the retailer would have to host itself, something that appealed to Roundy’s. “We wanted speed to benefit,” he said, adding that the system is easy to integrate, use and understand. It required three months for set up and yielded results in the first year, he added.

But the system requires retailers to establish an up-front strategy that identifies which categories should drive profits and which should drive traffic, for example. The price optimization system is “only as good as the pricing strategy behind it,” he cautioned.

Roundy’s receives price recommendations from Revionics on a weekly basis, enabling it to remain current with changes in consumers and the business climate. The retailer does reviews of categories at least twice a year.

Roundy’s decision to employ price optimization was influenced by its competition with Wal-Mart Stores. “It was important to have a strong pricing strategy to combat supercenters and conventional grocers,” said Benish.

Previously, Roundy’s used a spreadsheet loaded with costs and competitive data to come up with pricing changes on an item-by-item basis. “It was not efficient and we were not using science or customer insights,” said Benish. “We wanted to make more fact-based decisions about prices that we did in the past.”

Those decisions are supported by the system’s ability to forecast the effect of price changes on customer demand. “We had not done a good job with that,” he said.

Benish noted that Roundy’s chief executive officer, Robert Mariano, is strongly behind the use of price optimization, which helps him persuade skeptical merchandisers to buy into it.

Low-Hanging Fruit

Among its other benefits, price optimization helps Benish navigate’s Roundy’s 50,000 SKUs to identify “low-hanging fruit” that could easily yield margin improvements but would otherwise be hard to identify. “If you move the retail price of those items five to 20 cents, even though they don’t do a huge volume, it just goes to your gross margin,” he said.

At the same time, the system allows Roundy’s to do KVI (key value item) analysis and to set prices by individual store clusters that have similar customers, based on two years of store data.

“We had historically priced by geography, so all 20 stores in Milwaukee would have the same prices,” Benish said. “But we want stores to be clustered by ‘like customers’ vs. simply geography.” Clustering – one of the system’s “more rewarding pieces,” he said – has reduced the number of pricing zones by 30%.

The system’s more accurate treatment of prices has eliminated situations in which a larger size is more expensive than a smaller size on a unit basis – something that would prompt angry calls from customers, Benish noted.

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Next up for price optimization are perishable categories, starting with produce items that have relatively steady costs such as bagged salads, dressings, mushrooms, apples, lemons and limes. Revionics is also helping Roundy’s look at the price elasticity of promoted items in order to maximize sales lifts.”We want to make fact-based decisions on promotions,” Benish said.

Some products, like bananas, milk and eggs, Roundy’s will not subject to price optimization. Those “uber KVIs” are micromanaged on a market-by-market basis to ensure they are priced right vs. the competition, Benish said.

Asked whether Roundy’s would consider installing electronic shelf labels as a way of expediting price changes suggested by the Revionics system, Benish replied that he couldn’t justify the cost of an ESL system. “The labor to make tags and the printing costs don’t come close to the cost of outfitting a store with ESLs,” he said.

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