Pencils Sharpened, Large Grocers Ready to Compete

Discussion
Aug 12, 2009

By George Anderson

Price competition is heating up in the grocery channel. The
rationale, RetailWire has
been told, is that while most supermarkets expect to lose some share to Wal-Mart
Stores and other discounters, they want to try and grab as much of the market
away from other grocery chains and independents as possible.

Delhaize, which operates Food Lion, Hannford and Sweetbay, recently
said it was looking for competition to intensify as rivals including Ahold,
Safeway and Supervalu trimmed prices across the store, according to a Dow
Jones Newswire
report.

A vice president of a regional grocery chain who asked not to
be identified told RetailWire, “The
real battle is being waged in everyday prices. Consumers know that there
are going to be deals on some hot items every week and they go from one store
to another cherry-picking those deals. Where the battle is going to be won
or lost is how much non-promoted product they will buy. To achieve that,
you need to lower your everyday retails on the national brands and promote
the heck out of your store brands.”

Safeway’s Eastern Division announced yesterday that it was dropping
prices as much as 25 percent on thousands of items in its stores. The chain
will identify the products with lower prices with yellow tags on the shelf.

“In this tough economy, as we gathered
consumer insight, people are telling us they’re looking for more value
in their shopping experience,” Steve Neibergall, Safeway Eastern Division
president, told The Baltimore Sun. “They’re
trying to stretch their dollars further.”

Back in June, price
cuts at Ahold’s Giant Food division were given credit along with store
remodels as being behind the chain achieving its first share gain
in the Baltimore market in six years.

Discussion Questions:
Will price competition increase in the grocery channel in the months/year
ahead? Can supermarkets engage in a lower everyday price initiative while
simultaneously protecting margins?

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20 Comments on "Pencils Sharpened, Large Grocers Ready to Compete"


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Ryan Mathews
Guest
11 years 9 months ago

I guess I feel that price competition is one of the givens of this business, it just accelerates at certain times, but it never really goes away. As to the second part of the question–if your fixed costs stay constant or rise, and your retail prices drop, that’s pretty much the textbook definition of margin erosion.

Max Goldberg
Guest
11 years 9 months ago

We have always seen some price competition across grocery stores. It is not new. The recession simply focused consumer attention on price. Grocers realized that in order to compete, they had to feature lower prices. Lower prices mean lower margins. To compensate, grocers are emphasizing private label, areas of the store that offer consumers convenience while delivering higher margins, and are squeezing manufacturers more than ever before.

There is significant opportunity to build customer loyalty, although most grocers only use a fraction of the consumer data that they gather every day. Loyalty can and should be based on more than price. Building loyalty can counteract consumers that shop solely for price.

Steve Montgomery
Guest
11 years 9 months ago

Price competition will continue to increase as long as retailers find that it allows to gain and/or protect share and increase or maintain profits.

Many of the non-traditional grocers were based on a low price model (mostly either because it fit their image or because they had to be to gain customers). They have been “beating that drum” for some time and it has had an impact on traditional grocers’ share. That coupled with the effect on the customer’s mindset with the downturn in the economy means value is “cool” and it is likely to stay that way for some time. The traditional grocer is not likely to be able to lower prices and protect margins unless they find a way to persuade consumers to add longer margin items to their baskets.

Gene Hoffman
Guest
Gene Hoffman
11 years 9 months ago

Grocery retailers are in an ever-continuing struggle to be the fittest. “Thanks” to the economy and Walmart entering the game, some food chains will experience the thrill of victory, others the agony of defeat. Lower prices and incremental pricing will weed out those least efficient, least innovative, least flexible and those least financially powerful to withstand the continuing pain of plunder.

Peter Milic
Guest
Peter Milic
11 years 9 months ago

Retailers don’t like a price war. By and large a price war in grocery is a reactive rather than a proactive marketing practice and tends to be regionalized. Poor performance for a store or set of stores in a region will prompt a banner to reduce pricing to reverse poor performance.

The initial force that is responsible for poor performance can relate to one of several factors – new competitors; competitors focused on improving share in a region; lousy economic conditions due to local plant closures, etc. The incidence of price wars is likely to remain correlated with an economic metric such as the unemployment rate.

Doron Levy
Guest
Doron Levy
11 years 9 months ago

Just yesterday on CTV, there was a news report that Loblaws has drawn a first strike in the price war. They have reduced prices (not sale prices) on thousands of items. Even the circulars are getting very aggressive. I’m seeing more one, two and three day sale blow-outs than ever before. Finally consumers will benefit from the current economic environment. Let’s just hope Canadian consumers buy into it. On-the-street interviews during this report indicated a positive to almost excited response to this price war.

Chuck Palmer
Guest
11 years 9 months ago

At first glance, this feels like a win for consumers. Retailers are listening intently and acting fast. It will be incumbent on the retailers to clearly communicate the benefits of these deals and maintain trust and reassurance with their customers – their customers who will continue to compare and cross-shop.

My big concern here is the erosion of choice for consumers. Eighty linear feet of yogurt looks good, but if it is two brands–one of which is the store brand–it doesn’t offer much choice. It will be important for the CPG companies to understand the consumer’s rational and emotional motivations here and work with retailers to offer reasonable, reliable pricing and true choice.

Len Lewis
Guest
Len Lewis
11 years 9 months ago

Competition already began a year ago with chains taking across the board price cuts and TPRs on thousands of items. Even Aldi, the quintessential EDLP player, has kicked around new pricing programs.

I think the issue now is what constitutes a price war. Let’s hope that doesn’t happen because that’s a scenario in which no one wins.

Warren Thayer
Guest
11 years 9 months ago

Wal-Mart is doing lots of things to consolidate vendors, streamline the supply chain and increase turns, all in an effort to take out costs. I’m seeing many other retailers follow suit, and hearing about it regularly from vendors who have been cut, or pushed into producing private label at the expense of their brands. This will continue pretty much unchecked until certain retailers discover they can differentiate themselves, profitably, with the 2nd-tier and local brands that have been cut by the big boys. Then the pendulum will swing back in the other direction for awhile. No question that we’re heading into a particularly difficult time.

Lee Peterson
Guest
11 years 9 months ago

The consumer-side question starts to become, “is any of this price yelling believable?” And, from a marketing perspective, how long can you just scream “cheap!” before you realize that it’s the EXACT same note everyone else is yelling? Not sure where it’s all going or how far it’ll go until someone other than Whole Foods realizes that to find the proverbial “Blue Ocean,” you’re going to have to say something else. I don’t know, like, quality?

And from the creative side, beating the heck out of price every day is the most boring, un-inspiring brand portrayal you could take. Walmart got it right from the beginning in that their brand just IS price…they’ve been so good at price for so long, they don’t even really have to say it anymore.

Camille P. Schuster, Ph.D.
Guest
11 years 9 months ago

Price competition creates the environment for more cherry-picking but not loyalty. It works as a short term solution until someone else has a lower price or when the lower price on another item lures consumers away. It does, however, promote disloyalty.

Jonathan Marek
Guest
11 years 9 months ago

It’s always dangerous to make predictions, but I think we’ll see the current level of price competition remain in place or even wane a tiny bit in the next year. There is a limit to how much price competition retailers and vendors can bear.

If you look at casual dining restaurants, I think we’ve seen this cycle play out already in past 10-12 months–the rapid turn to price, market and media excitement about discounting, the negative economic aftermath, the media coverage of the economic aftermath, and now the (slight) movement away from price as the only lever to focus on. It feels to me like the same thing is playing out in grocery, just a little later.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
11 years 9 months ago
Yes, competition is going to continue to heat up. Stop & Shop and other major retailers have been very aggressive with EDLP strategies and they have been working for them. That said, it is tough to depend on just having low price to drive business and profits. When a retailer selects an every-day-low-price strategy, they are limiting the local promotional funds that are available to their chain since everything is being applied to low price. Wal-Mart is going to be tough to beat on price every day, but they are very vulnerable when retailers create programs that include their Private Label brands. Creating high quality, competitively priced Private Label brands creates a natural barrier to Wal-Mart and other competitors. These brands are also some of the most profitable for the retailer which directly impacts the bottom line. Some ideas as retailers move forward and work to gain/protect market share and profits: Although it might sound counter intuitive for manufacturers and retailers, I would encourage retailers to find ways to promote national brands with their private… Read more »
Doug Stephens
Guest
Doug Stephens
11 years 9 months ago

I think what we’re seeing at grocery is simply the thin edge of a more pervasive trend–the elimination of middle-ground positioning. Regardless of category, retailers need to firmly declare who they are and the basis on which they compete.

If there is nothing very remarkable about your grocery store, your products, or your staff, then the unfortunate reality is that you have no choice but to participate in the price war or “food-fight” as it were. If you’re charging 1.50 for canned corn that’s $1.00 down the street, then there better be more to your value proposition. You need something else to drive value…something intangibly unique. Something that’s hard to put a price on.

John Rand
Guest
John Rand
11 years 9 months ago

At MVI we’ve been talking for some time about two similar (but not identical) trends:
1. there is a definite channel move away from high-low toward hybrid or even everyday pricing strategies.
2. retailers with pre-recession reputations for price/value are doing and continue to do better than retailers who stressed anything else, even those retailers who have started to change their strategy.

Both trends are easy enough to prove. Last year the high-low approach became a minority strategy for the first time. Makes sense–there is no example anywhere of a retailer gaining sustainable share against WMT using high low in the last 25 years. Retailers finally noticed.

As for the second, also easy to understand, but quite impressive when you database the channel as a whole, one retailer at a time. So when a Safeway lowers price, its nice, but it takes a couple of years to implement and secure consumer buy-in and trust for the new strategy.

Overall, a basic lesson–stable competitive pricing is more important than low weekly pricing. Period.

David Livingston
Guest
11 years 9 months ago

Price competition will continue and get worse for the conventional supermarkets. The only grocers expanding and adding a significant amount of new square footage are the price operators such as Wal-Mart and Aldi. Conventional grocers are pretty much rearranging the deck chairs by remodeling or consolidating.

Can supermarkets engage in lower everyday prices and protect margins? No. We will continue to see ineffectual grocers go bankrupt and close stores.

I don’t think consumers are more price conscious because of the recession. They are simply becoming better-educated consumers. No one likes to be poked fun of by their neighbors for being stupid and shopping at a conventional store except to cherry pick. That would be like paying sticker price for a car. Nowadays, people like to brag about how cheap they bought their groceries. Unless you are a top-notch conventional store with a cult following, its going to very rough.

Mark Burr
Guest
11 years 9 months ago

Its never a win-win for everyone once a price ‘war’ begins or price becomes the only factor in the competitive market. Retailers cut prices, reduce costs, lower service, lower their ability to execute, etc, etc, etc, until they can’t execute–period. This type of environment typically causes shake out. In the end, no one–especially the consumer–wins in the long run.

Beating or even remaining alive against Wal-Mart or others will never be done by price alone and it’s simply foolish to think otherwise.

Winning will take skill, expert execution, and innovation upon innovation upon innovation. Milk for ninety-nine cents a gallon will only get you so far. Sooner or later, it’s unsustainable and you’ll have to do something different or get out. Why not try something different to start with?

It’s hard to believe that the discussion always comes back to price. It certainly makes one question if anything else really matters even when taking the economic position out of the equation.

Justin Time
Guest
11 years 9 months ago

While we won’t see price wars like those of the early 1980’s and the turkey price wars in the late 1990’s and early 2000’s, price point competition is definitely heating up.

Great A&P and others are now accepting competitive coupons, reducing pricing on thousands of center store and other items via red tags, promoting their own private label brands, and offering other promotions such as free milk.

This is a big deal as supermarkets find that customers are hurting financially, and are trying to win them over and lure them into their stores with bonus buys and promotions.

EDLP formats are growing in store count, almost weekly, such as Food Basics, and Lidl’s anticipated arrival on the East Coast in the next several years will only heat up the competition.

Tony Orlando
Guest
11 years 9 months ago
It’s interesting to read about the “nobody likes to be poked fun at by their neighbors for shopping at a local supermarket, because it is about the great deals they got on groceries” Who do these same neighbors look to for a free handout everytime they have another fundraiser for their school band, or football programs? These are the same folks who really need to wake up, because the local independents are getting tired of the daily requests for handouts from folks who do not support them, except for the occasional gallon of milk they buy. That being said, it is our job to communicate better with our neighbors, and start asking for the business, by being better than the superstore down the road. Partner up with the school boosters, and offer a deal for the sub sales, and rigatoni dinners. You’d be suprised at the response, and if your store is really competitive, especially on the perimeter, the neighbors will take notice, and start talking about YOUR STORE. It’s not easy but over time… Read more »
Dennis Borsina
Guest
Dennis Borsina
11 years 9 months ago

I’m sure you’d agree that most businesses in today’s economy must offer some type of incentive to retain and/or attract new customers. But the question arises: what type of incentive is best for you and what do your customers really want?

Marketing researcher, Dr. Flint McGlaughlin labels the cash discount as the worst incentive one can offer because offering $100 off is a straight cash loss to the business. And since many customers believe that you simply raised the price of the item or service and then offered the discount, they don’t feel as if they are really saving anything at all. Remember, Perceived Value Is Reality to your customer.

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