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Can Dynamic Pricing Reduce Food Waste at Grocers?
Dynamic pricing of groceries, or reducing prices as perishable items approach their expiration date, could reduce food waste from grocery retailers by 21% or more, a study from UC San Diego’s Rady School of Management found.
Globally, food waste releases up to 10% of worldwide annual greenhouse gas emissions.
The study, to be published in Marketing Science, evaluates two programs meant to divert waste from landfills: organic waste bans, which have been introduced in nine U.S. states — including California — and dynamic pricing, which is more popular outside the U.S. Grocers also donate many of their perishables.
“Oddly enough, fewer than 25% of U.S. grocery retailers offer any kind of dynamic pricing at all, while most hotels and airlines will discount rooms and seats when they have a surplus,” said the paper’s author, Robert Sanders, an assistant professor of marketing and analytics at the Rady School, in a release. “However, this research shows that the increased price flexibility of discounting food that is about to expire significantly reduces food waste and increases profit margins among retailers.”
Using dynamic pricing, grocers could adjust prices multiple times a day depending on their inventory and expiration date.
Sanders’ analysis found dynamic pricing reduces waste by 21% on average while increasing grocery chains’ gross margins by 3%. In comparison, an organic waste ban, simulated by a tenfold increase in disposal costs, reduces waste by only 4% and decreases gross margins by around 1%.
An added benefit of dynamic pricing is that it makes perishables more affordable, while organic waste bans slightly harm consumers by reducing retailers’ inventories, the study found.
An article in FoodPrint notes that the transition to two-dimensional QR barcodes may be necessary to drive dynamic pricing since the standard UPC code doesn’t include sell-by dates. Markdowns are also seen as more effective sales drivers for certain perishables, such as chicken, rather than lower-value products like bread, and messaging around food waste may be necessary to drive success.
Discussion Questions
DISCUSSION QUESTIONS: What do you think of the potential for grocers using dynamic pricing to keep perishables out of landfills? What are the obvious and less obvious challenges of using variable pricing to better influence purchasing to avoid food waste?
Poll
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Mark Ryski
Founder, CEO & Author, HeadCount Corporation
David Weinand
Chief Customer Officer, Incisiv
Most grocers already discount products that are near to their expiry or sell-by dates in an attempt to clear them – often marked by a yellow price sticker. However, more nuanced dynamic pricing is quite complex to implement in grocery. On any given shelf or display, there are usually items with multiple expiry dates; changing the shelf-edge price would impact all products – newer and older. It might work for daily produced items, such as freshly baked bread, with prices changing throughout the day. But even here implementation is an issue with multiple signs and POS systems needing to be updated, which is labor intensive. So, this sounds like an interesting idea in theory, but it does not seem practicable.
Anything that can be done to reduce waste and environmental impact should be considered – this one is a no-brainer for grocery retailers. The evidence is clear: we throw away too much good food. And yet, people go hungry. While this initiative won’t solve ‘world hunger’, it will reduce waste AND help with retailers’ profitability. And while this idea has great merit, many grocery retailers will need to invest in technology to enable dynamic pricing and update their entire mark-down processes and implementation. The cost of this appears to be well worth the investment.
Dynamic pricing for perishables is a smart strategy, but as Neil stated, it is challenging to execute. This would be an additional use case benefit of electronic shelf labels that could be triggered by time/date. Consumers that are price sensitive would also benefit from the lower prices as perishable items are closer to their expiration date, but still good enough to eat.
In the era of massive food inflation, if a consumer can get lower-priced perishables with the understanding that they need to eat them quickly, it’s a win-win. While I like Publix for a lot of reasons, their fruit/vegetables need to be checked closely and many are on their last legs AND they are expensive. If they instituted dynamic pricing, I’m sure they could improve margins and benefit their shoppers.
In China, 200 Freshhippo (Hema) stores provide the technology and information necessary for dynamic pricing. The price tags are actually internet-connected “e-ink” tags that allow pricing to change dynamically depending on supply and demand.
Pick your product, scan the barcode, and the supermarket app instantly provides a rundown on where it came from, when it was sourced and even a digital certificate proving it was organically farmed.
There is no question this is possible. The question is, “What would it take to implement it in the U.S.” The Freshhippo chain developed the process from scratch. In the U.S., legacy assets will get in the way.
Food waste is a huge issue in North America and Europe, both from an economic and an emissions perspective. And there is a massive wave of innovation underway to try to impact the problem at different stages of the value chain, including at retail.
As Neil notes, it can be labor intensive to update signage and systems, but solution providers like Whywaste, Wasteless, and others are emerging to simplify the problem. There are also surplus food marketplaces like Too Good to Go and Flashfood, both of which operate as a layer on top of a grocer’s systems. And then there are companies like Spoiler Alert and Freshflow, which help reduce waste on the buy side vs. the sell side.
If retailers can help offset inflation while reducing waste and recovering margin, I think we’ll see much more along these lines in the coming years.
I love this application of dynamic pricing to time sensitive inventory. For years, I used weeks of supply (WOS) to talk about apparel inventory. During my time in China, the faster turn in that scenario had us talking in terms of days of inventory (DOI). Now we’re down to hours of inventory (HOI). Gotta love it. It is a time honored way of recognizing shelf life and value. But it’s probably a lot harder to implement and manage in fresh food than it is in apparel. Still, it’s absolutely worth implementing. The enhanced margins for the retailer can be meaningful. And maybe, with more attention being paid to aging inventory, more unsold products can end up in food banks rather than landfills.
In the olden days, we would have called this redlining. It reminds me of the Monty Python scene in LIFE OF BRIAN where the haggler gets frustrated when his customer wants to pay full price. It just doesn’t seem right. So, yes, grocers should have the tech that enables them to do this, along with the smart strategy that doesn’t leave money on the produce display. The barcode is certainly an issue unless the product is RE-coded in today’s UPC environment. RFID might work for high-priced meats, and most fruit and vegetables are PLU by weight. Lots of challenges to make this work, but it’s far from impossible. Dynamic pricing for grocers reduces gross margins and food waste, so the only thing stopping grocers from doing his is making it a priority and figuring out how to make it work for their business.
Throughout this discussion, including upcoming additional comments, we must keep dynamic pricing, which is quite achievable, separate from dynamic pricing associated with expiry dates, which is not simple to implement. One day, we may see a customer app that enables the customer to scan a bunch of QR codes (then containing the expiry information) and the customer can select the older or already-expired product when the app indicates it has found the lower-priced product. This is not going to happen in short order but wasting food is not an option for the long term.
Not “one day”, Bob. Today in China.
Good idea, “Yes”. Difficult to implement correctly, “Yes”. I like Neil Sanders comments regarding fresh food & dynamic pricing. Working in the Data Management plumbing of quite a few large grocers, most large grocery chains struggle with posting the correct daily/weekly sales & inventory numbers reporting process (let along real time dynamic pricing). Dynamic Pricing would have to be delivered by a purpose built application that could be automated in such a manner that it works around the challenges of dragging data & numbers through the maze of a typically challenging data estate.
The old-school operating model for grocers, which is still n place today, is to have their associates scan the fruits, meats, seafood, and other fresh and perishable items for their expiration dates, then apply a 25 – 50% discount to the items to clear out the inventory. There are also value-centric customers always looking for a good deal on an item that is still fresh yet, close to or at its expiration date.
While this operating model has been relatively effective, considering that the capabilities are out there, applying some predictive analytics, science, and algorithms and leveraging the power of dynamic pricing is a win-win for both the grocers and customers. With the power of automated dynamic pricing capabilities, grocers will remove costs from the labor-intensive manual work and take advantage of the immediate results, as consumers will seamlessly benefit from the lower prices.
In an inflation-fueled economy, and with the rise of value-seeking consumers, dynamic pricing is one of the emerging capabilities due to take off significantly. The added benefit, from a sustainability perspective, is the potential significant reduction of waste that comes from expired products.
I’ve been wondering forever why more grocers don’t use dynamic pricing. I know it’s been an issue of determining implementation and having the proper technology, but I do believe we’re at a point where this can be mainstream practice.
Uhm… what?? There’s nothing new about cutting prices to clear out merchandise. I suppose the failure to do so (more often) could be due to logistics issues – identifying and repricing the items – but I think much of it is just a reluctance to lower prices until it’s obvious something isn’t going to sell; and of course by then it’s approaching “too late.”
I’ve nothing against the idea, but I’m skeptical the industry has had some kind of epihany on the issue….or will soon
If grocers could afford the technology for dynamic pricing, it would be beneficial for them and their customers.
In theory, sounds good, but has implications to grocers brand perception and market share. Grocery shoppers buy several times per week, often with store options and food abundance, unlike airlines or hotels, which are occasional purchases, and can reach limited capacity.
For low price grocery operators, this can work because they live and die by price sensitivity. That’s how their shoppers are motivated.
For quality/upscale, or middle of the road grocers, they are selling a promise of something better, whether quality/taste, standards or variety/selection. Giving up margin late in the day ultimately trains their customers to ignore those promises and just shop at night to save, and not buy at the retail value. The shift in financials doesn’t pencil well.
Margins are already tight at the retail/grocery store level. The technology that would require dynamic pricing would be very costly. Yet, if it’s to succeed, I think it would be a necessary spend given the labor supply issues facing most grocery and retail outlets today. Items are already marked down today. It would be great if this could be more efficient and could happen easily, but I see this dynamic pricing to be very costly and I’m not sure it would lead to much less waste.