It didn't come as a surprise that a good portion of yesterday's FMI SPEAKS 2010 session on industry trends was focused on the "changing consumer" and their mission to find value (aka save money). As was made clear by various members of the panel, the grocery industry has come through the "Great Recession" understanding that shoppers are much more deliberate in their shopping: creating lists that they stick to once they get to the store, making greater use of coupons (print, online and, increasingly, mobile) and purchasing store brands that allow them to buy a similar volume of goods, but at a lower ring.
Leslie Sarasin, president and chief executive officer of the Food Marketing Institute, said, "The psychology of the shopper has changed. These economic times have been unsettling for customers and companies alike. We're now at a point of separating myth from the reality about about how the recession will affect consumer behavior."
Ms. Sarasin went on to ask, "How long will consumers be cautious? Without question, people are becoming more accustomed to being more frugal. Now one knows where or how people will undo that sense of caution ... You will see unmistakable signs that the economic downturn has caused new shopping and eating behaviors. Everyone has been affected. Price is a key value driver today."
While preliminary findings of the SPEAKS research were generally well-presented on the pricing front, we came away thinking that there were some important things not being said. The "elephant in the room" was the lack of discussion on what makes supermarkets generally more expensive than competitors in other channels, specifically dollar stores, limited assortment grocers, club operators, mass merchandisers and supercenters. That in a nutshell is a (grocery) business model that is focused on making money in buying goods versus selling them.
As Jamie Tenser, principal of VSN Strategies and a RetailWire Braintrust panelist, pointed out in a conversation (Note: Jamie was ball-parking to make a point so let's not quibble over the precise number), supermarkets are expecting to lose one percent on the sale of actual products in their stores with the expectation that various upfront fees will generate a positive two percent bump to let stores arrive at their roughly one percent (give or take) net profit.
So why the rehash of what we already know? Isn't it time that supermarkets become more price competitive across-the-board on an everyday basis by switching to net pricing?
We know of a couple of cases where chains, in cooperation with price optimization firms, are testing net pricing in key categories to determine if it works. At least in one instance that we are aware of, initial results are promising, particularly because they are in categories where weekly promotions are the rule.
As one hi-lo retailer involved in one of these tests that focused on everyday prices recently told us, nearly 70 percent of total sales were on promotion before the test. That number was cut by something like 60 percent with an actual increase in units moved. Perhaps it's time for grocers to understand that to get to the low price that their shoppers are looking for requires something other than hot deals run one week while prices jump up on other items to cover margins. Maybe it's time for grocers to stop complaining about others, such as Wal-Mart, that are selling goods at everyday prices below what they can offer at a promoted price and question how they're going to market. Perhaps it's time for a whole new approach to buying and selling goods. Maybe, the time to start is now.
Discussion Questions: Is it time for grocers to change from a business model that focuses on making money from manufacturer funds to a net pricing model? Should industry associations engage in an intervention of sorts and try to get members that are hooked on upfront fees off the habit?