Should more grocers shift to hi-lo pricing?
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."
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?