PRICING RULES CAN MAKE OR BREAK RETAILERS

Christina Veiders

It's a simple formula, relatively speaking. If you lower prices to nearly cost or below, they will come, and you will win market share.

This formula is predicated on mass merchandising -- low markup, high volume. It's the discount store mentality that Wal-Mart Stores mastered and consequently won hordes of shoppers and market share over the years. After all, who doesn't like to get a bargain or the lowest prices in town?

As a result, the grocery industry has been forced to learn the pricing game or perish. It has become an often-repeated tale. Those retailers that don't have the inherent efficiencies of supply, distribution and capital backing to compete on price become victims to the giant discounters. The "Locked Out" feature story, referenced from Page 1, on the state of the commercial loan market as it impacts food retailers recalls the doom of overleveraged companies when the competitive environment suddenly changes and price becomes a big issue. Suddenly, the fish syndrome takes over. Big fish begin gobbling up little ones. The goal is to increase efficiencies, lower prices and gain market share through consolidation.

David Schoeder, principal, The Food Partners, a lending firm that specializes in the food sector, points to the demise of Furrs Supermarkets as a good example of what can happen when the big discounter enters. "Wal-Mart showed up and completely destroyed the marketplace for them and they were unable to service their debt."

He refers to Wal-Mart as an "irrational competitor," as opposed to other food chains, the "rational competitors." But follow this rationale: It takes $1 of invested capital to create $3 to $4 of sales at retail, according to Schoeder. Food retailers for years have operated at a 1% net profit on about a 24% gross profit margin. That is, for every $1 of sales the food retailer nets just over 1 cent. Food retailers have always run their business on paper-thin margins and high sales volume to recover invested capital and more. Wal-Mart, on the other hand, is said to make three times as much on about a 21% gross profit margin. Wal-Mart's better performance is attributed to cost efficiencies throughout its distribution system. Since the days of Efficient Consumer Response, the food industry has been seeking to catch up on the efficiency side in order to compete.

This brings us back to the pricing issue. Will low price always reign in determining the winner for consumer dollars? With formats such as Wal-Mart Supercenters, consumers have become extremely spoiled when it comes to getting what they want. They want low prices and everything else, said Sam Walton.

And even though shoppers think they are getting the best deal, more often than not they are conditioned to think that way. It's the perception of the lowest price. For example, a recent shopping trip for a digital camera revealed that Circuit City beat Costco on price for a Kodak DC 3400 by $40. The perception for this consumer was that Costco would be lower with its buying direct minus the middleman policy.

The barrage of lowest-price-in-town offers and the various pricing strategies used by all retailers can boggle the mind of even the most diehard bargain seeker. A backlash could be brewing. Consumers now set their own prices for goods and services via the Internet. Expect the eBay phenomenon to grow with new models, and Priceline isn't dead in the water.

While price will remain a driver, consumers will turn to real value, unique retail experience and product offerings, freshest and best tasting in town, information and education, superb customer service, convenience and more convenience. These are things, however, that often come with a price and it often isn't low.