With razor-thin margins and constant promotional efforts, supermarkets are increasingly looking to price optimization technologies as a core merchandising tool. According to RSS News, a growing number of supermarkets are working with vendors such as Revionics, DemandTec (a RetailWire sponsor), and KSS Retail to help category management teams and pricing analysts make timely pricing decisions.
Using complex algorithms, optimal prices are computed based on factors such as historical price variations; cost and competitive data; purchase behavior; temporary price reductions; multiple geographical, pricing and demographic market zones.
Overall, the use of PO technologies appears to be on the rise among grocers. According to RSS News, grocers now working with Revionics include Hollister Supermarkets, C&K Markets, Supervalu, C&S Grocers, Grand Union Family Markets, Scolari's, Fresh Encounter and Boyer's Food Markets. DemandTec's PO clients include The Brookshire Grocery Co. and BI-LO. KSS Retail works with Ball's Price Chopper, Raley's Supermarkets, ABC Fine Wine and Spirits, and Gigante Supermarkets in the area.
Hollister Supermarkets, an independent supermarket chain in California's Central Valley region, implemented Revionics' pricing system last year. Revionics system taps into competitive pricing, price changes from vendors and item movement.
The latter, said Chang So, Hollister's general manager, is "the most important part of the equation." It also outputs suggested retails and integrates special pricing for categories that are highly price sensitive.
"We can now charge more for certain items while maintaining velocity," said Mr. So. "We can reduce pricing on others while increasing velocity by 50 percent or more. We're experiencing higher margins throughout our stores and increased sales, due in large part to this system. Pricing optimization technology helps when competing with large grocery chains as well as mom and pops."
Ball's Price Chopper grocery stores went live with KSS in May 2007. Mike Beal, CFO for Ball's, said the solution helps the chain "ensure we are offering the best value." The application offers insight into how consumers perceive Ball's pricing and promotions, providing the ability to improve its competitive positioning.
Pat Walsh, VP of industry and trade development for the Food Marketing Institute (FMI), told RSS News that pricing remains critical for the supermarket trade class, where earnings before interest and taxes are roughly 4 percent.
"Unlike in the apparel segment, where more profit is built into products, grocery items that typically generate just four cents on the dollar bring pricing thresholds directly into play," said Mr. Walsh. "If I take the price too high or too low, what have I lost? There's a small window where supermarkets can find pricing comfort while maintaining their marketing strategies and pricing image in terms of acquiring and retaining customers."
Discussion Question: What impact is price optimization technology having on the supermarket business? What do you see as the opportunities and challenges of implementing PO technologies?