Should sales guide pricing decisions?
Through a special arrangement, presented here for discussion is a summary of a current article from the Mark Heckman Consulting blog.
A recent Supermarket News article rightly touted the remarkable 50 consecutive quarters of positive same-store sales comps (without fuel) achieved by Kroger.
In the article, Andrew Wolf, a food retailing sector analyst, recalled a conversation he had with then Kroger CEO, David Dillon, which explains the simple but rare approach behind the supermarket’s success.
“I had a meeting with him 10 years ago or so and he told me they were never going to make a sales or earnings number again by moving the pencil, i.e. raising prices, as long as he was CEO,” said Mr. Wolf. “So I think he had remarkable courage and a strong spine.”
Mr. Dillon demanded that, despite likely short-term hits to their stock price and profitability, Kroger was to keep their eye on the prize: growth.
As a battered veteran of many Monday morning retail meetings, I can tell you that while sales growth is almost always discussed, it is seldom given the prominence of profit and hitting a near term EBITDA number. It would be foolish to infer that profit and margin metrics are not critical numbers to track, but the question should be asked, which number drives the other? My point is that tracking EBITDA as the lead metric often results in tweaking margin rates up with the false notion that there will be little or no impact on same store sales or longer term market share.
While his competitors were mired in P&L calculations, Mr. Dillon understood that his sales-driven approach would produce acceptable, if not pleasing, profitability. That is exactly what happened.
Certainly, other factors play in Kroger’s success. For starters, their store and service improvement programs, coupled with their strategic investment in customer segmentation intelligence, have been key. None of those initiatives however, would be nearly as effective without a cogent pricing strategy with an objective of constant sales growth.
Competitors of Kroger should take note. Short term paper profit gains often morph into longer-term negative comparable store sales and all the woes that condition carries.
- It Matters What You Measure – Mark Heckman Consulting
- Kroger’s 50 quarters of positive ID sales visualized – Supermarket News
DISCUSSIONS QUESTIONS: Do you agree that retailers, particularly grocers, too often emphasize earnings as a goal metric to the detriment of sales growth? What do you see as the most important determinant of pricing in order to achieve long-term growth objectives?