Commentary by Bill Bishop - BrainTrust
Price continues to be an important element in the shopper's value equation, but it's not always clear what this means in today's retail environment.
One competitor in every market can grab the low-price image, and those remaining must find other ways to differentiate themselves that will yield a sustainable market share.
It's becoming increasingly clear that to win a meaningful share of the business, you can't be overpriced, regardless of your basis of differentiation within the total value equation. This is a real challenge for most companies. One step in meeting that challenge is to better understand the importance of not being seen as overpriced, specifically as it relates to current household income.
Looking at the most recent U.S. Census information, the median household income in real terms dropped 2.2 percent from 2000 to 2001 to a level of $42,228. This is no great surprise given the current recession, but it's somewhat startling to realize that this translates into the $102 billion that's no longer available for spending in the economy.
While these facts help explain the current big picture, another interesting image appears when we look at change in income among household segments over the longer term. (Visit www.bishopconsulting.com/WBC16.cfm for more details.)
Focusing on the change from 1971 to 2000 for the lowest and highest 20 percent income households in the U.S. population, we find that:
- The lowest 20 percent experienced a growth in total income of 107 percent.
- The highest 20 percent experienced an increase in total income of 170 percent.
So, it's clear that income growth has been strongest among the highest-earning households. As a result, the highest 20 percent earning households now capture 45 percent of total household income.
What's important to consider for pricing strategies is that 80 percent of the households in the U.S. experienced a drop in their share of income. This big group is likely to be more focused on price than they used to be as they maintain their standard of living.
What does this mean to companies that are not the low-price leaders in a given market?
- You can't afford to be seen as being overpriced because at least four out
of five households are probably focusing now more than ever on price. While
these shoppers may not be motivated exclusively by price, they will likely
be less attracted to products they see as overpriced, regardless of other
product features.
- Only one in five U.S. households have experienced above-average income growth, but many of them will be more price-sensitive than they used to be because of the drop in the stock market. Who wants to pay "full price" when your personal wealth is declining?
The growing popularity of dollar stores, limited-assortment grocery stores, and supercenters speaks to the advantage and appeal of not being overpriced. Traditional supermarket retailers and manufacturers will need to develop similarly meaningful responses to sustain business growth in the years to come.
Moderator's Comment: How do food/drug combo store operators remain price competitive in a market that includes dollar stores, limited-assortment grocery, supercenters and warehouse clubs?
Generally speaking, they don't and probably won't.
Personal wealth is declining and food/drug combo stores continue with a purchasing system that adds costs through a variety of upfront money schemes. At the same time, competitors are focused on keeping the buying process simple and getting the lowest bottom line cost so they can sell for less. [George Anderson - Moderator]