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[16 comments]

Should more grocers shift to hi-lo pricing?

April 7, 2014

Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.

Most grocery operators use a blend of hi-lo and EDLP, but based on a reader survey, we're seeing slight shifts in some corners to more hi-lo. This is largely a competitive reaction to dollar stores and other low-price channels that are beefing up their sales in frozen and dairy foods.

According to the Frozen & Refrigerated Buyer grocery outlook for 2014, independents seem to be feeling more heat than chains and are moving in this direction more rapidly. But as one major chain put it with a telling choice of phrase, "We're being more judicious, and can't promote everything at hot prices. To protect margins, we get into pseudo-EDLP programs."

It's also possible we'll see more hi-lo promotion in areas of the country where baby boomers are retiring on fixed incomes. Their numbers are huge and they'll be looking for deals. That will be good news for Aldi and similar low-price retailers. With the tough business environment, retailers report some amazingly deep deals coming out at random times, but overall there hasn't been much change in promotion depth or frequency.

Both retailers and vendors are focusing more attention on where promotion money goes and how effective it is in producing a return. There's perhaps as much debate on promotion efficiency as there is over total dollars spent.

Commodity price fluctuation is a factor here, especially this year in some dairy categories. When ingredient prices go up, some manufacturers pull back on promotion rather than take a price increase. But for whatever reason, some retailers expect tighter promotion budgets from manufacturers this year.

"Manufacturers can become more profitable by raising prices or by cutting expenses, people or promotion funding," says a major wholesaler. "To my experience, I see manufacturers cutting funding first, and until a brand manager sees a dip in sales, he won't do anything about it."

And a West coast retailer noted that, "Some manufacturers are cutting back because a financial person has gotten control of promotion. They seem to think it's not really necessary to sell product."

Discussion Questions:

Is a hi-lo or "pseudo-EDLP" pricing strategy the right way for grocers to compete with dollar stores and other low-price channels? Will slotting allowances, promotional funds, etc. hinder traditional grocers from competing with low-price channels?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Which is the best pricing strategy for most conventional supermarkets today?

Comments:

If you can't compete on EDLP and shoppers are price sensitive, you need to give them a reason to shop at your store. Hi-lo is one reason for a shopper to go to your store. Variety and service are other reasons, and shouldn't be neglected.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

You can spend your whole day looking at what the other guy is doing. You can manipulate prices to seem like EDLP. You can spend big bucks on big data telling you what customers did in your store.

But if you want to compete grocers, it is still about the customer experience. 55% of revenue comes from the race track around the outside - meat, deli, bakery, etc. You need to be engaged and actively creating different experiences for your customers each day, each week.

You can't compete on how your Tide is 2 cents cheaper. There's always someone cheaper....

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Bob Phibbs, President/CEO, The Retail Doctor

As a consumer and retail analyst, I've watched the price wars here in Huntsville, AL, among WMT, Publix and Kroger with interest. Kroger, in particular, is using hi-lo in my area to compete, but the results have been mixed. Yesterday, I was shocked at how many deep discounts there were in non-food consumables, while in food, I noticed significant out-of-stocks on sale items. While I took advantage of detergent sales (unplanned purchase), I was rather annoyed that I couldn't purchase the food sale items on my list because of the OOS.

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Kelly Tackett, Research Director, Planet Retail

To paraphrase Sam Walton, "In order to compete with Walmart, do something we don't." It is interesting that the Walmart of today is now finding it necessary to apply Sam's logic to dollar stores which often have cheaper prices.

The best way for grocers to compete with dollar stores is by offering something other than lowest price. Using promotional funds to essentially lower prices even further might be quick fix to drive some temporary sales, but it is a zero sum game, long term.

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Chris Petersen, PhD, President, Integrated Marketing Solutions

Grocers have to analyze their card data or POS data to determine the most effective way to price. In some cases it will vary down to individual stores based on the competitive landscape. The best way for conventional grocers to compete is to differentiate themselves in areas like meat, produce, deli etc. and in being creative about giving their customers a positive shopping experience. The top conventional retailers (everyone knows who they are) find something in addition to competitive price to set them apart!

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J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

The first successful EDLP operators held firmly to their margin formulae. Costco and a few others do this today, but the math is not the same. Most traditional grocers have muddied their pricing strategy reputation and as a result, are stuck with the hi-lo technique. Costco has protected their reputation, which is one key factor to their success. It's pretty tough to move from hi-lo to EDLP; easy to move the other way; very tough to move back.

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Dan Raftery, President, Raftery Resource Network Inc.

Pricing strategies are a huge waste of time and money. The resources spent on monkeying with pricing are unbelievable. Hasn't the success of Costco, Aldi, Save-A-Lot, etc. taught the industry anything? If retailers would spend the money and resources on working with manufacturers/suppliers to deliver best prices to the consumer, all would be better off.

It is better for all if product turns. It would seem that the current hi/lo systems employed by most of the failing retailers insures that product doesn't flow smoothly, that OOS conditions increase, that employees can't deal with customers properly because they are always behind, trying to fill holes. Ask you suppliers how Walmart can sell Coke and Pepsi 2L for $1.35 every day but you have to sell it for $1.99!

Ed Dennis, Sales, Dennis Enterprises

Always seeking the "best pricing strategy" for your store is like choosing a coffin with both ends knocked out. You can get mighty chilly laying in that rut.

If you decide that most of your needed consumers are now demanding dollar store pricing, find the way to give it to them ... or else determine what you really are, what you are offering, then everlastingly promote that process to enhance your philosophy.

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Gene Hoffman, President/CEO, Corporate Strategies International

Ed Dennis is right -- EDLP is the rational answer, and EDLP players have been rewarded. The problem is: if you aren't EDLP already, and if it isn't deeply embedded in your customers' monds that you are EDLP, can you ever really get there? I mean this partially from a supply chain perspective, as some are noting here. But even more from a shopper standpoint. Shoppers have a hard time believing hi-lo players will ever change their stripes.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

EDLP is clearly the sanest, most rational approach. However, shoppers are not strictly sane/rational. They still go to Vegas, right? Because you MIGHT win!!! Same with hi-lo pricing. Some bouncing around of prices is fine, to add some spice. For the very same reason there is no such thing as the "perfect" or "ideal" store. The month you opened such a store, within weeks the shoppers would like to see a bit of change. Same thing with see-sawing prices.

The fundamental problem is that if anything works in moderation, most retailers will overdo it, until its effectiveness is obliterated by its obnoxiousness. Sprinkle hundreds of noisy price promotions across a store and it just becomes more noisy SPAM.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

Few grocers have maintained EDLP with zero promotional discounts successfully. People want to see a tangible savings number on the shelf price sign. I don't think this is anything new. For decades excitement has been generated at store level with promotional pricing. Some retailers in both food and non-food have gone EDLP only to return to hi-lo.

For the foreseeable future, shoppers continue to demand visible savings on promoted items. The impact tends to be diluted, however, when the shelves have nothing but yellow tags with promotional pricing. Don't go to an overkill model. Also, don't confuse regular discounts with frequent shopper card discounts. They should not be the same promotions. Frequent shopper discounts should drive loyalty, whereas most card discounts are currently mass, untargeted discounts.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

Loblaws has the best strategy IMO: Hi-med-lo pricing and all based on private label. That way you still dictate margins as much as possible and lean less on cash from the manufacturer. (Love the 'no-brand' packaging! Great way to do the lo-end.)

Other than that, pricing is really a brand issue. You're either hi or lo in the consumer's mind. And if you've never been an EDLP brand, good luck trying to shift mid-stream.

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Lee Peterson, EVP Creative Services, WD Partners

I'm in furniture retailing, but began my working life in supermarkets. For all you experts I have this question: What about Wegmans? The ultimate food shopping experience for those lucky enough to live in their market area - the Northeast. We don't buy everything at Wegmans, but we shop there every week because of the experience and the EDLP on specific "Club" items - like the best strip steaks anywhere. When it comes to those transactional purchases it's Costco, but for the relational side, it's Wegmans.

Joe Capillo, Owner, Top Line Strategies

I can forgive the foolishness of editors, but haven't retailers learned what a waste of time and labor it is to manage hi-lo? I can prove (prove mind you, using actual numbers, not just claim or state-as-fact, but prove) that across the gamut, retailers with hi-lo grow slower than hybrids, and hybrids grow slower than EDLP. Shoppers want to buy at an outlet where prices are reliable and fair. Period.

Some things are inherently volatile - produce and meat most clearly in food, seasonal clothing in soft goods. But remember the last time you tried to buy an air conditioner in a heat wave or a snow blower in a blizzard? Multiply that feeling by 50 products per week times 52 weeks.

That doesn't build brand trust, that builds resentment.

John Rand, Senior Vice President, Kantar Retail

There's no universal answer to this question that will apply to all retailers. The reality is that each retailer has their own customers who have distinct needs. Customers don't only shop based on price; there are multiple factors that are involved in determining where and why a customer shops where they do. When customers are buying predominantly on price they buy some products based on everyday price and some products based on promotions but this will vary from retailer to retailer and even within a retailer from store to store.

Understanding the right products to sell on EDLP, which to sell on Hi-Lo and which to sell based on non-price factors will enable retailers to satisfy customer needs better than the competition, while also managing to stay in business in a financially sustainable manner.

Graeme McVie, General Manager, LoyaltyOne

There is no one way to fight the dollar stores. Pricing strategy should be governed by overall store strategy. Do I want to be seen as a great customer experience destination? Do I want to be seen as a grocer with varied assortment? Who are my target customers? What kind of demand do I want to cater to?

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AmolRatna Srivastav, Asst. General Manager, Analytics and Insights, Tata Consultancy Services

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