The High Cost of Pricing Mistakes in This Economy

It's tempting to say “it's the economy's fault” in describing shortfalls in retail financial results. But recently, both Supervalu and A&P took at least partial blame for errors in pricing that hurt performance. It was further proof that a lot of things can go wrong in this economy if you don't get strategies exactly right. Ironically, both situations involved pricing programs at acquired entities, in the case of Supervalu its Albertsons stores, and in the case of A&P its Pathmark units.

“We cannot blame external forces alone for our results,” said Jeff Noddle, Supervalu's chairman and CEO, during a financial analyst conference call about second-quarter results. “We did not execute well on several fronts….”

Noddle was speaking after Supervalu reported a same-store sales decline resulting partly from lack of success of certain price promotions. This in turn pressured margins and net income. The company is now cutting costs and moving forward with a new direct-marketing effort to build sales. Noddle told analysts that early third-quarter readings indicate the price promotions may yet bear fruit.

Still, analysts expressed concern that it will be even more difficult to turn around Supervalu's acquired Albertsons stores in this difficult economic environment. One analyst said: “We think the issue could turn increasingly problematic if the industry begins to lose pricing power in a slowing economy.”

A&P's second quarter report also hinged partly on pricing issues. In a period of high cost inflation, A&P waited too long to pass along higher prices to customers at its recently acquired Pathmark stores. That was among problems that hurt Pathmark's margins and contributed to A&P's quarterly loss.

Supervalu and A&P aren't the only big chains trying to fine-tune pricing approaches. Safeway's ongoing cost-cutting program enabled the retailer to invest money in lowering prices, all of which helped grow sales, the company said. This is good news for the chain because many observers believe Safeway's upscale lifestyle store approach has made it harder for the retailer to gain a reputation of sharp pricing.

Even Kroger, which seems to have mastered everything about this economy, has to work to stay nimble based on changing developments, said David Dillon, chairman and CEO. “I know things are going to be unpredictable for a while,” he said. “We are going to have to be light on our feet.”

Unpredictable is the right word. Supervalu didn't predict, as Noddle pointed out, that strapped consumers around Labor Day weekend would spend on necessities such as school supplies and fuel instead of summer barbecue items. No one can predict whether inflationary pressures will indeed ease later this year, as many anticipate.

Retailers would do well to flexibly react with pricing strategies and promotions, but also to focus on things more within their control. For example, Supervalu is moving forward with customer-focused marketing initiatives that aim to build long-term loyalty by leveraging data and local marketing.

It's commendable that retailers are thinking about the long term and not just the quarter. It's easy to forget that if you don't look further down the road, it could lead to a collision later on.