Grocers: The Price is Right in Center Store
By George Anderson
The Wall Street Journal reports that a number of supermarket operators, including Raley’s, Giant Eagle, Fresh Brands and Wegman’s, have cut the number and frequency of promotions of center store items and, instead, lowered regular prices on popular products to compete day-in and day-out with discount rivals, from Costco to Wal-Mart.
According to the report, supermarkets aren’t looking to compete on price on every item in the store but are targeting products in categories, from ready-to-eat cereal to toothpaste, where consumers show a willingness to go outside traditional grocery to make purchases.
Willard Bishop Consulting estimates that shoppers can save an average of five to seven percent on shopping trips as a result of this pricing strategy shift on the part of some grocers. Some families could save a few hundred dollars a year as a result.
Bill Coyne, president and chief executive of Raley’s, said that customers at his chain were getting tired of having to shop at multiple outlets to find the lowest price and many complained that “deals” had them stocking up on products that ultimately were never used.
Louis Stinebaugh, president and chief operating officer of Fresh Brands, said lowering everyday prices on popular goods plays to the consumer’s desire to make their lives less complicated.
“People aren’t just cherry-picking as much as they used to,” he said.
Moderator’s Comment: Is an EDLP approach to popular center store items reducing the amount of cherry picking done by consumers? What are you seeing in
terms of grocery store operators altering promotional activity and pricing strategies to compete with discounters? What grocers have been most/least successful taking this approach?
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George Anderson – Moderator
Years of my own research have convinced me that EDLP is the most effective strategy for central store. Consumers have been conditioned over the decades to regard high/low prices as somehow questionable and exploitable (at best), and duplicitous and exploitive (at worst).
The EDLP – hi-lo pricing issue is still very segmented based on geography. EDLP is clearly the approach preferred by shoppers in big swaths of the country running from the south across to Texas and from the upper midwest rural areas to parts of the southwest. In the urban areas of the northeast, midwest, northwest and southwest, shoppers prefer buying from deal to deal, so hi-lo works best. As an example, when Pathmark announced it was moving to EDLP for most of its non-foods lines a few years ago, it was a big yawn — customers just didn’t care. A few years before that, Stop & Shop got hammered when they entered the New Jersey market using EDLP as their primary differentiator. The retailer quickly reverted to hi-lo pricing.
Cherry-picking is alive and well. It was never practiced by everyone, but it has always been popular, and the Internet use makes it easier.
Supermarket cherry-picking is practiced by at least 2 major types:
a. Those who do it for sport, since they feel better about themselves for being “smarter shoppers.”
b. Certain low-income people who are time-rich but cash-poor. They have the time and the incentive to go from store to store. Just think about the proportion of food stamp sales volume to a supermarket’s total volume. Food stamps don’t just feed the poor, they also feed supermarket executives!
Some people, particularly certain retired folks, fit both profiles.
I agree with Ryan that EDLP is a better long-term play. And although shoppers may (as Ryan puts it) find the practice questionable and exploitive, they still plunge in and fill their cart, perhaps with a nod and a wink.
If every operator was EDLP, then clear winners would emerge as the low price leader. But as long as some operators stay high/low, there will always be cherry-pickers and bargain hunters who shop those specials.
As an independent, I love the EDLP concept, except for one huge problem. If you can’t buy it right, you can’t sell it right. Wal-Mart owns their own distribution system, and passes the deals on at store level. A grocery warehouse relies on the buy-ins to shore-up their profit margins, thus [eliminating our] chance to compete. This is reality, not whining, because over the years, many of the big companies have given up on the independents and sell incredible deals to the mass merchants… and are very strong on warehouse clubs. I can buy most of the top sellers at Coscto and resell them by the single unit cheaper than I can buy them for supposedly “wholesale” through my warehouse. I have complained to the major companies at the NGA shows, and they have no answers. So,,,,,, if you want to compete, go out and find deals, with a large van, and bring them back to your store like I do and hope for the best. The real money is in perishables, where I have a huge advantage over the big stores. A lot of price gouging goes on in those stores, in meats, deli, bakery, and produce, and I have taken advantage of that trend as well. Put more meat in your store and less groceries, and you’ll probably be more profitable.
Several times a year, almost every major grocery manufacturer offers “deal” pricing at the wholesale level. If a retailer doesn’t give the savings to the customer, he/she will look bad, compared to retailers that run “specials.” And if the “deal” savings are given to the retailer’s customers, it looks like everyday low pricing is a sham. How does a retailer solve this conundrum?
Changing pricing strategies is much easier than changing a “price image.” Those value retailers, like Wal-Mart, Sav-A-Lot, etc., that are now camped in the price position, have achieved their price image over time with a variety of advertising and marketing tools. Beyond the actual price of products, more critical to getting consumers to believe you have “New Low Prices” is the overall shopping environment itself. If your store is too nice, with too much service….it’s difficult to convince shoppers you are suddenly the place for “cheap groceries”…no matter what the actual price points are.
Consequently, those former “Hi-Lo” operators that reduce promotions in favor of EDLP strategies, may see their “price image” actually get worse than better, at least in the short run, as shoppers will sense the impact of a less potent circular, but not necessarily believe the retailer concurrently has cut prices. If the retailer has a card program that has solidified their Hi-lo image even further, transitioning to EDLP without dumping the card program adds another level of complexity.
I think we can all agree that the worst possible position for a retailer to be in is having low prices (with lower margins) with a “high price” image. Transitioning retailers beware; neither Rome or a price image was built in a day!
The EDLP, Hi-Lo debate really comes down to the retailers’ marketing strategies and store branding. If you offer them (the customer) something more — great produce and meat, bakery, upscale, ethnic and the like — having to offer a Hi-Lo “strategy” (which really is a lack of strategy) becomes more likely. Offer that shopper something that attracts them, along with a decent EDLP program (it doesn’t have to match Wal-Mart), and they will shop your stores. Examples: Whole Foods (the natural experience), Trader Joe’s (specialty central), Publix (Super Supermarket), Food-4-Less (no frills) and numerous other retailers in the U.S. and elsewhere.
The key point: in most cases Hi-Lo is an excuse for lack of strategy. The solution: branding your stores; find a niche and work it to the maximum and pricing will become much less significant (within reason of course).