Lowest Prices Come Down to Consumer Legwork
By George Anderson
It is generally assumed that Wal-Mart has the lowest prices on grocery products but that’s not true, according to Michael Berberick of “The Grocery Advantage” web site.
According to a report on WCPO.com, Mr. Berberick analyzed the price of groceries in three Ohio markets (Cincinnati, Columbus and Cleveland) for close to a year and found
consumers can actually spend less shopping in supermarkets such as Kroger than in “Always Low Prices” Wal-Mart.
The key, said Mr. Berberick, is to find the weekly specials in stores and buy those while waiting for promotional deals on other items.
Using this method, consumers can get “20 to 25 percent savings over Wal-Mart’s everyday low prices,” said Mr. Berberick, “and that’s a big number.”
Moderator’s Comment: Is one method of pricing/marketing better than the other — Hi-Lo or EDLP? Are the products that Hi-Lo operators are discounting
the right ones to establish a low price image? How does a Hi-Lo operator establish that it is price competitive with operators such as Wal-Mart, Target and others around?
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George Anderson – Moderator
Consumers are pretty darn smart and the ones who care know how to find the best deal. For the shopper who can plan their time and is flexible about what is being served when, a combination of EDLP and Hi-Lo can be manipulated to serve them well. If, however, a shopper, for whatever reason, has to serve chicken tonight, unless they happen upon a sale, they are better off shopping at an EDLP retailer for that item.
For promotional reasons, EDLP is easier and simpler to promote. However, as Pavlov demonstrated, when people are randomly rewarded, they will more often come back looking for reward; once they become accustomed to reward, they expect it and it loses its ability to motivate. So Hi-Lo probably works best with more consumers over the long haul. Personally, I would combine the two, and be sure to offer surprises.
Both of these pricing structures have a place in today’s retailing environment. When your core strengths are built upon a supply chain base, like Wal-Mart, EDLP makes more sense than Hi-Lo pricing. However, smart retailers like Target and Best Buy are proving that a Hi-Lo retailing structure can build traffic, create good margins and develop a model which is very profitable. Even Wal-Mart is acknowledging this as a they develop different concept stores which emphasize more premium brands and cater to a different target market. Product differentiation through target market segmentation is the Hi-Lo mantra which can work, even on a mass merchandise scale. Consumers should be smart when they shop, and not become fixated on a “one-stop” shopping solution. Shopping advertised specials and then filling their remaining needs at an EDLP merchant is the best way to do this. This will enable consumers to maximize their spending dollars while taking full advantage of both of these retailing models.
Just today, the former head of the UK Office of Fair Trading faulted Hi-Lo policies on the basis that they simply serve to confuse customers. He described them as masking devices that made it impossible for people to know which supermarket was the cheapest. His comments were made within the context of investigating, yet again, possibly unfair practices by the top four supermarkets, particularly Tesco. Many consumers, in both the US and the UK, have complained in the past few years that shopping is too confusing. Retailers and manufacturers insist that they are responding to demand and ensuring that there is a plethora of choice. They also defend themselves with the ubiquitous whinge about how if people don’t like things, they don’t have to buy them. All the while doing their best and spending vast amounts of money to persuade them that they should. As far as I can see, the best and only solution is a simple one – transparency. Which would make EDLP fairer and more honest than luring people in with loss leaders and making up the difference with high prices on other items. When shopping baskets are compared between the big four over here (trade magazine, The Grocer, does it regularly) there really isn’t all that much difference. Swings and roundabouts as the Brits say. Heaven perhaps for cherry pickers anything but for everyone else.
Some of us need to get reconnected to real, actual, grocery shopping. The fact is that many, many smart shoppers use the following method: Pick one or two nearby hi-lo stores that appeal to you regarding selection, quality, service, and ambience. Shop the weekly specials and have the imagination to make meals out of them. When “must have” household-preferred staples are on sale, stock up. That’s it. No wasting gas driving all over the place. No dealing with store facilities and conditions that make you uncomfortable. No wondering if you’re getting the best price (sale prices generally trump EDL prices).
Hi-lo will always be the best grocery retail system because it appeals to the hunter-gatherer in us. It also allows us to have our cake and eat it, too – stores we like with price savings. Hi-lo operators need to compare their specials to the same EDLP items at WM (or other big-boxers). Do this consistently, and shoppers who go to WM for the prices but hate the facilities will notice.
It’s clear from the range of comments here that both pricing schemes can work. Nobody would argue with EDLP given the success of retailers like Wal-Mart and HEB, and Hi-Lo is by no means dead, either. The key is, with EDLP, what exactly is Low? Similarly, in Hi-Lo, what is High and what is Low? And, do those rules apply to all items? Just Key Value Items? Some combination? Wal-Mart’s 850? Further, price gaps within demand groups can have a dramatic effect on volume and profitability. By better understanding and managing these areas, you can nickel and dime your way to long term viability and profitability.
Mark is right – professional cherry pickers will get the lowest prices. However, most of us would have to spend more on gas than what we would save. Wal-Mart puts out a well publicized list of 850 items they will not be beat on. They typically stick to it pretty well.
Frankly, I think this “study” is suspect. My personal experience is that Wal-Mart has the Hi-Lo competitor’s price on an everyday basis. And I think there’s a lot of research that supports that.
Even if we assume that the Hi-Lo retailer is the better deal, the study doesn’t account for the extra work that Hi-Lo shopping causes. EDLP means the shopper doesn’t have to seek out the sales and monitor their home inventory, stocking up during promotions.
But we shouldn’t forget that the Hi-Lo model was preferred by shoppers in almost every market until Wal-Mart’s EDLP became as low as the Hi-Lo’s promoted price. There are basic supply chain inefficiencies caused by the Hi-Lo model. The vision of the Demand Driven Supply Network would overcome these inefficiencies. That means the Hi-Lo model could make a comeback.
Professional cherry pickers will always get the lowest prices because so many supermarkets run multiple loss leaders every week. If a shopper is flexible about her diet, there are usually loss leaders in every category. The shopper can find fresh meat, fresh vegetables, breakfast items, etc. every week that are being given away. People who stick to a strict shopping list, particularly if they stick to certain brands, won’t find enough loss leaders each week, so they benefit from EDLP. If a retailer wants to publicize EDLP, they could post the competitor’s price for each item as part of the shelf marking system. Electronic shelf marking makes this particularly easy. Of course, they’d be asked to match the competition’s loss leaders. From the retailer’s point of view, the best thing about EDLP is the waste reduction from reduced ad spending, reduced supply chain disruption, reduced store labor making weekly displays, and reduced cashier error.
A number of years ago, a money-losing hi-lo supermarket chain client of mine simply found the lowest EDLP local chain and copied their prices for every item every week, using handheld tape recorders. The client went from a loss to a modest profit within 90 days and stayed there for a very long time. They didn’t name the competitor or tell the public how they set their prices. They simply ran modest ads for EDLP and matched the loss leaders from everyone else’s ads, when requested by individual customers who brought in the ads.
Consumers form their attitudes from the information that is salient to them. Those who hear the “Always Low Prices, Always” slogan from Wal-Mart and find it reinforcing their own experience or previous attitudes, will conclude that Wal-Mart has lowest prices. Those who actually keep track of prices on an overall basket of goods each week over a long time, like the study reported here, will believe that Kroger has lower prices. Those who keep track of prices over a long period of time only on the products they purchase, will believe that whichever retailer has the lowest prices on what they actually buy has the lowest prices. Keeping track of prices over a long period of time, as was reported here, requires quite a long term commitment from consumers. A short hand version of this process for consumers is to pick a particular week, track prices, and generalize on which retailer has lowest prices. Consumers’ perceptions are formed in various ways and create their positioning of retailers’ on the issue of price. However, not all consumers use the same methodology.
EDLP is a more intelligent, more efficient, more practical pricing philosophy but eliminates proven methods to create traffic such as sales, aggressive price ads, loss leaders, etc. Hi-Lo forces companies to focus on the best deals as opposed to the best product and is a major reason for the struggles of the supermarket and department stores industries. The best method…..everyday fair prices merged with everyday great products and periodic major super sale events.