R&FF Retailer: As Costs Rise, What About Your Pricing?
Through a special arrangement, what follows are excerpts of a current article from Refrigerated & Frozen Foods Retailer magazine, presented here for discussion.
Yes, private label and less expensive lines can be expected to outperform their counterparts in inflationary times, but – all else being equal – this shouldn’t lead you to significantly change your product mix or dive into deep promotions. There’s a temptation at times like this to try to make up for slower sales by abandoning an everyday low price program in favor of a hi-low or hybrid program to bring more shoppers into the store. You may succeed in getting more transactions but eventually this strategy will lead to reduced profitability, said Hoss Tabrizi, SVP of advanced analytics at Information Resources, Inc., Chicago.
Promotion and schematics must be thought out carefully, with consideration also given to package downsizing that many vendors institute instead of price increases. Some vendors – afraid of the share impact of a price hike – put through aggressive deal discounts at the same time to ease the pain, he notes.
“They may be afraid of losing share right after a base price increase and therefore they try to do a BOGO immediately after a price increase to gain back some of the lost base volume,” he explained. “It’s a bad idea. On one hand, the consumer sees prices going up, and on the other hand there is a major incentive to purchase at a low price point. It’s a destructive sequence because it conditions the consumer to buy primarily on deal in order to escape the inflation cycle.”
Promotions such as this tend to attract cherry pickers who are not profitable customers, Mr. Tabrizi explained. Further, deep discounting in an inflationary environment confuses shoppers, cuts margins and only delays consumer reaction to new pricing realities, he added. Mr. Tabrizi said the temptation to act hastily with deep discounts is easy to understand, since shoppers – when first faced with substantial price hikes – tend to go into shock mode and dramatically reduce their purchases.
But this reaction tends to abate as consumers realize that an inflationary price increase is going to be around for a while and that they have to live with it, he noted. To speed up this process, some retailers are taking a price increase on an entire category as soon as the category leader does. This practice may prove highly effective as it eliminates the incentive for consumers to purchase low-margin deal items, Mr. Tabrizi said. “The retailer is telling shoppers, in essence, ‘You have to get used to this. It’s not a single brand, but across the board.’ The only downside here would be if consumers feel you aren’t being sensitive to their needs, forcing them to shop the lower-end channels. You have to be careful, because every category is different.”
Discussion Questions: How should retailers using EDLP strategies adjust to the coming inflationary cycle, especially in categories that have seen long deflationary periods? Should they become noticeably more promotional? How do they transition to higher prices without rattling their consumers?
The issues to consider are quite variable, and cut across categories. Changing from EDLP to Hi-Lo is not a viable option for retailers, and suppliers can expect retailers to continue to press for low costs and more promotional and slotting $$ to help keep profits at acceptable levels.
Retailers will more readily accept downsized items vs. “justified high cost increases,” and shoppers will be more accepting of this strategy as well.
Shoppers are in a penny pinch mode; they only have a certain amount to spend and will turn to lower sizes that cost less than National Brands while increasingly turning to P/L items. Retailers will “Drive” P/L with superior shelf placement and will aggressively promote their brand to the shopper, and will use this as leverage with National Brand suppliers who have to keep their sales up to hold shelf placement. The critical need for retailer profits will help reinforce this strategy, especially in center store sales.
EDLP retailers should be devising promotions that emphasize everyday pricing, creative meal solutions and, in some cases, competitive price comparisons. A strong store-brands merchandising plan can be implemented to demonstrate value to the customers. A true EDLP retailer will still be lower everyday on items than the hi-lo retailer. This is the time to reinforce your message to your customers.
We encourage retailers and their manufacturer suppliers not to give in to the temptation to drive radical price promotions to woo recession-wary shoppers. Yes, price and VALUE are more important than ever, but they are two different things. All need to drive costs out of the system and showcase lower price-point items. However, many EDLP operators gain significant efficiencies from a more consistent demand that enables them to lower costs. The challenge is to communicate these benefits in a simple and believable way to shoppers.
It’s surprising to see an article making suggestions to EDLP retailers. There are so few of them, and those few certainly aren’t listening to pricing advice from trade magazines. Almost all American retailers are hi-low, and almost every American shopper over the age of 12 knows it. As for the “raise the price of everything in the category when the leader does it,” see what happens when your competition doesn’t do that.
Business may be soft, but the basic premise for mass marketers hasn’t changed: focus on fear and greed. Loyalty to brand diminishes as dollars evaporate. It is a prime opportunity to find new customers. An EDLP strategy does not negate the excitement a customer will feel when she finds a “special priced” product on your floor.
Promoting in the luxury market tends to be a little different. My clients are finding collaborations with other brands of the same ilk are powerful and driving traffic.
Regardless of your positioning, whatever you did last year won’t be effective this year. Creative marketing and merchandising has never been more important than it is right now.
Food inflation can be expected to be with us for the next two years. EDLP has been viewed as a company–not category–approach to pricing. Advertising is for the company, not the category or item. This in turn is why it is such a poor merchandising tool except for the leader. To implement promotions on top of EDLP will only result in losing the consumer trust.
Some retailers have both Hi-Lo and EDLP for different categories or departments. This provides the option to run inflation fighter promotions on the Hi-Lo and still bring attention to the store.
The best idea I have seen of late is to increase the prices for a complete category at one time–when the category leader raises their price. What is good here is that it does not continually confuse the consumer by having them see frequent price increases.
“It conditions the consumer to buy primarily on deal.” Du-oh! (It’s a Simpsons reference.) As if! (It’s a vapid teenager reference, from the same genus and species of “whatever.”) As if consumers haven”t always sought to buy on deal. Package downsizing–we used to call them “cheater packs”–fool consumers only briefly. It’s a bad move to bank on your customers’ stupidity, especially on matters of the stomach. Plus, there’s a significant cost associated with throwing out old packaging materials and creating new. Tabrizi decries cherry pickers. Perhaps he’s visiting from a parallel universe.
Shoppers don’t get Tabrizi’s “You have to get used to this, it’s across the board” (uncustomarily higher inflation). Especially when they see Blu-Ray prices plummeting, home rental prices dropping, and car dealers dealing.
Communication seems always to be a valid strategy. “Here’s the price today, and here’s the price tomorrow–come in soon.” That’s the trick, helping shoppers understand future pricing. They’ve been conditioned to believe that by waiting they can get stuff cheaper somewhere down the road. If that reality has changed, then retailers stand to benefit most by helping their shoppers understand. It’s up to Costco and other membership shopping clubs to begin this process of enlightenment via communication, or not.