Pricing for grocery profits
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine. A long-time Harris Teeter executive, Mr. Harris is a former chairman of the National Frozen & Refrigerated Foods Association and a member of the Refrigerated Foods Hall of Fame.
Pricing can be a real pain in the butt. If you want to stay out of trouble, the most important thing is to get a clear understanding from top management of what they want in the way of pricing strategies and tactics.
They may tell you, "This item is to be priced the same as the competition." But you’d best find out right away whether they mean Competitor A, B or C. Then they may say you can’t be more than X percent above the rest of the competition.
It can get messy pretty quickly. Do yourself a favor and learn all you can about what your objectives are supposed to be. (At least for this month.) Naturally, you always have to be competitive when it comes to milk, bread and eggs and such.
Broad price-cutting takes some finesse, and sometimes lowering prices against a new competitor isn’t worth it. Some people are willing to pay a bit more because they like a store’s service and selection. Cutting prices with a new competitive entry in those circumstances is just giving away profit — you’re probably not going to be losing customers to the new competitor anyway. This isn’t always true, but people don’t take it into consideration enough.
Besides having good communication with your top management, it’s also wise to work closely with the pricing department. I might sit with a vendor and negotiate a lower cost or a better deal and commit to keeping an item at an agreed-upon price point. But a few weeks later, the pricing department may jack the price up by 30 cents and all hell breaks loose with the vendor. When you make deals like that, be sure to tell the pricing department and remind them if necessary.
I love temporary price reductions — they’ll often work when an ad doesn’t. There are plenty of items not worth running ads on because there’s no lift. But some folks just like pocketing vendor money.
For private label, I always started at around 10 percent lower than national brands in most categories. But don’t go too low — if a customer sees a Velveeta knockoff that is $2 below Velveeta, they’ll think the quality isn’t there.
Lots of times, I’d shield my private label against the brands. I might have been making 35 percent to 50 percent on my private label but only 10 percent on the brand, so there’s room to promote there.
Discussion Questions
What advice do you have for grocery category managers around pricing? What specific pricing strategies are more effective in today’s market?
We often see in our research that retailers are leaving money on the table because they don’t know enough about how pricing affects shoppers. Do research, or get research done for you, on category pricing. We do a lot of studies for retailers funded by the vendors in the category. Quite often we find that we can raise the private label prices and not impact sales, so we generate more profits. We also find price tiering to be a good way to differentiate levels of product quality (when there is clear product differentiation).
My advice is always the same — consistent fair and honest pricing wins the day — and, more importantly, the loyal, high-value customer.
I’m still a big fan of transparent EDLP with occasional “hot” specials, since I believe there isn’t a lot of logic in trying to attract price-only shoppers.
The approach described in this article will not work because an essential element is missing – a consumer perspective! It is critical to know what management’s goal is and what competitors want. However, what is important to consumers? If convenience is most important, pricing of products needs to be balanced with the number of checkout lanes at busy times. The actual price of the product is only one part of a consumer’s decision to visit a particular retailer and purchase a particular product.
Management’s goal can be achieved in more than one way. Too narrow a focus is a dangerous road to take.
For the past six to eight years we have been watching the fall of many well known and established retail giants. A look at how quickly the demise of these companies happened relative to this discussion might suggest there was some sleepwalking going on in the executive suites.
The economy we are settling into for the long haul has dictated a high priority in any and all pricing strategies. Another high priority which has largely fallen to the wayside is product relevance versus turn rate. Pricing, out-of-stocks and availability are the biggest reasons for abandoned carts and lowering floor traffic volumes within the present day dwindling opportunities. A look at departmental autonomy for reasons of logistics and organization design are, in many cases, dangerously overdue.
I am in the process of re-working our center aisle pricing, as these sales have been suffering for a couple of years. In our area, price is KING, and unless I am willing to adjust downward, the trend will continue. A Dollar General shares my building next door, with about the same square footage as my place, and has been killing me by a thousand cuts, and I have decided to get involved on center store pricing.
We are concentrating on all top sellers, and seasonal items, and have pretty much matched them, and have eliminated the slow movers thru clearance sections. Deal to deal purchasing is now the norm, and we will try to buy enough ahead, until the next deal cycle kicks in. This is not what I wanted to do, but too bad for me, as these Dollar Stores are very sharp on these goods, due to lower labor costs, and national buying power.
This experiment is going to take a few months to weed out the dead wood, and expand on key foods to maintain or hopefully regain my lost sales. Yes I am sacrificing profits, but 30% of nothing = nothing, so I have to rethink how I run my business. The days of making good margins off of key items are gone, and the perishables will have to provide the profits needed to keep us going.
A poor economy here is not going to change for decades, and I would like to stick around in this community for 10-15 more years. Low, low prices are here to stay, and anyone who is in this business must be sharp on pricing, or they will not succeed in the future.
One note… This does not apply to perishables, as the margins are still quite good, nor does this apply to higher income areas, as consumers are more flexible in their spending.
The bottom line is that pricing both tells the shopper what they will pay for this item, but possibly of greater significance, what this item is WORTH! Shoppers (the non predatory kind) have a very poor knowledge of prices, before or after the purchase, although they do have a “feel” for the weekly total. We have seen plenty of cases where increasing prices INCREASED SALES. See: “Mind Your Pricing Cues – Harvard Business Review.“
Step one: Take the “gut feel” out of this process. Period. If there is any area of our business to rely upon technology, pricing is it. Whether your store has 500, 50,000 or more SKUs, the people you employ to make pricing decisions are spending way too much time on a process that software can do better. No question. I have seen 90-day ROI’s for this stuff. It is simply the right thing to do.
When I worked out in the field visiting scores of grocery stores, one of the tell-tale signs of a struggling store was wildly fluctuating prices on core products. Lack of consistency in pricing appears as an act of desperation and confuses customers. Pricing should be strategic and consistent. No one store has the lowest prices on everything. Many consumers are savvy shoppers and know when to stock up during promotions. However, price is not the only factor in choosing a store.
Customer service, selection and convenience also play a large part in why people shop at a certain location or locations. Who your competitors are and where they are located in relation to your store will be aspects. However, chain stores don’t have the ability to customize pricing based on location. It’s done on a regional basis. Independents have more flexibility, but need to take a long-term look rather than making knee-jerk reactions. Customers want simplicity and consistency in order to feel that a store and its prices are reliable.
Agree with Ralph Jacobsen and others. Too many retailers are unaware of the real impact of promotions on category profits because they don’t have the visibility provided by advanced analytics tools. Doesn’t sound to me like the author has the information he needs to effectively forecast promotional impact during vendor negotiations, which could hurt profitability. Further, I agree that retailers should optimize prices based on customer behavior, particularly customized across different zones or banners. Retailers also need to rationalize promotions – running too many SKUs on promo can create confusion for shoppers.
Full disclosure: I work for a company that provides sophisticated pricing and assortment intelligence services for large retailers in 15 different categories of service, such as footwear, groceries, office supplies, toys, department store, pet supplies, etc.
To be honest and save time, I observe that both the article and the responses are all over the map, bringing up more than a dozen different issues and concerns regarding pricing and competition — all while trying to ascertain what to do about it. Most of the BrainTrust responders have an opinion, but for this one you’ve really got to be in the pricing solution trenches to understand and tease out all the issues that are being raised and that need to be dealt with every day in real-time situations. Also, there’s an obvious need for technology to make these efforts and decisions feasible.
There are a few companies like ours that provide sophisticated pricing and assortment intelligence services — to know what the competition is charging, track, benchmark, report, price dynamically (in real-time), see if competitors are meeting the manufacturer’s advertised price (legal) commitments. The solutions also allow you to write your own pricing “rules” to tell your automated service when to change prices, how much, automatically, or when you want to play a part in the decision.
Price competition is an interesting topic. It covers a lot of ground, but it’s dead serious when it comes to pricing thousands and thousands of products, in real-time, and not leaving any money on the table, by pricing right.
While the debate rages on between private label and national brands, the reality is that private label is entrenched in grocery and represents far too much upside for category managers to ignore. Absolutely agree with the comment that consumers’ perception of private label quality is directly related to the price charged, especially in relation to a national brand equivalent. Going beyond this, what is the consumer’s appetite for a premium priced private label offering in an upscale chain? Is it foreseeable that the national brand will become the generic?
Separately, one of the largest unanswered questions in this post for North American grocery category managers is what to do with price as grocery shopping moves online. Based on other markets, grocery is unique from other categories in that the online price frequently remains higher than the offline price over time. While “time is money,” will this same pattern hold true across the U.S. market? As well, how or do grocers plan to reconcile zone-based pricing strategies as their category goes online?
There are some very flexible and robust pricing solutions that enable the grocery retailer to create the pricing strategy and pricing execution that fits their business model, or allows them to adjust the model and try alternatives. Simply using an old process under the “that’s the way we always did it” will not lead to success. Pricing, promotion strategy, store location, and a score of other variables make it impossible to simply do pricing on a spreadsheet.
Grocery category managers have or need to begin preparing for an era of dynamic pricing as grocery begins to move online.
My experience in working with retailers across other categories has revealed that many retailers have been caught unprepared to deal with the new era of dynamic pricing. It’s a complex problem and the answers are not easy, and technology alone will not solve the problem. Dynamic pricing in today’s retail world requires strategic thinking and decision-making. Many retailers understand price optimization for brick-and-mortar stores, yet they automatically match their online prices with their in-store prices—which could be a very flawed strategy.
Price matching in any form is universally viewed as a victory for the consumer. For retailers, though, it’s at best a cosmetic bandage that ignores deep wounds below the surface. For that matter, if they’re selling products online and in the store at the same price, they’re issuing hundreds or thousands of price changes in the store every day. There’s no retailer on the planet that has labor enough to manage hundreds or thousands of price changes every day, so there will always be a difference between online and offline pricing—at least until networked electronic shelf labels become ubiquitous. Even if they could match prices, the question remains: Should they?
Retailers will need to first arrive at getting answers to their pricing strategy and then follow that up with the implementation of new dynamic pricing systems.
Strategy first—come to a common understanding of what is the pricing strategy your organization wants to pursue.
Follow that up with deep investment in analytics and consumer data.
Retailers who know their customers’ preferences, spending history, tastes and desires can establish the right price for them instead of reflexively matching competitors’ prices—which is always a losing race to the bottom.