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Retailers beat back Bentonville with DBM: precise price adjustment helps grocers stay profitable and competitive.

Retailers have made measurable progress in the last two years using demand based management (DBM) price and promotion optimization as a counterattack against Wal-Mart's everyday low prices. DBM has enabled retailers to forecast the financial impact of merchandizing strategies before implementing price changes on store shelves. As a result, many have ceased hostilities of full-scale price wars with the Bentonville, Ark-based operator and are wielding DBM as a precision instrument to adjust prices selectively.

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Wal-Mart is a key factor in this industry's understanding of consumer demand. The chain's enormous presence and cost-reducing muscle have created an environment in which manufacturers and retailers can no longer raise prices to keep pace with inflation. The world's largest retailer has effectively deregulated the industry, which means the old rules no longer apply.

The first rule retailers need to forget is the Bentonville strategy of lowering prices across the board as the only way to gain market share, and the belief that gaining market share is the only way to grow profits. More than one national retail chain has publicly reversed its strategy of matching Wal-Mart prices because that plan failed. DBM has shown it is far healthier to slightly adjust prices deep into the category and to balance pricing rules with sound financial metrics for profitability. It's a matter of precision over brute force.

DBM provides this surgical precision by mapping out the variances in consumer demand by item, category, loyalty cards and zone. It harvests data warehouses, legacy systems and spreadsheets for all internal rules, data, costs and competitive information, as well as years of point-of-sale data for price history. DBM then determines the price elasticity of every product and the cross-elasticity effects of every complementary, substitutive and competitive item. It accounts for seasonality, out-of-stocks, cannibalization and halo effects. The result is a cleansed and highly relevant data pool coupled with competitive prices, increased market share and vendor costs that allow merchants to analyze the financial impact of merchandizing rules and pricing scenarios.

Retailers are using this robust forecasting and decision-support environment to analyze multiple iterations of pricing rules and get to the bottom line of their merchandizing tactics. They're formulating basic and specific scenarios, asking questions like: How much does a given rule cost in absolute dollars? What happens to sales and profits when a rule, or combination of rules, is turned on or off? When should a vendor cost increase be passed along?

One retailer used DBM to identify the items that should be lowered in price to grow market share, as well as prices that could be slightly raised to maintain gross margins. DBM provided a way to reconcile internal rules and competitive pricing with long-term financial objectives for creating stockholder value.

It appears the first step retailers are taking with DBM is to replace the faith and intuition traditionally used in merchandizing strategies with sound quantitative data. Category managers want financial projections to help them negotiate better deals with vendors. Store managers want to know which demographics they should cater to when it comes to merchandising specific items and why. Executives want to measure the effectiveness and competency of their merchandizing strategies by category, zone and item. DBM is providing the dynamic segmentation that empowers decision making at every level.

The possibilities of DBM are immense. Once retailers have reconciled their internal rules to long-term financial objectives and have used price and promotion optimization to strike a balance of sales, profits and market share, they might couple DBM with the supply chain to virtually automate replenishment. They'll certainly be able to improve assortment, placement and customer satisfaction.

This takes us back to Wal-Mart, the primary culprit behind the shift toward understanding consumer demand. The way to win the battle of Bentonville is to outmaneuver the competition and take Sam Walton's advice to "Do what we don't do" to compete. To this end, DBM is helping retailers reclaim their precision and ingenuity. It reinforces the basic marketing principle that the more retailers know about their customers, the better they can leverage their own merchandizing expertise to sell to them. And now, more than ever, is the time to sell to them.

Dan Fishback is CEO of DemandTec in San Carlos, Calif. He can be reached at (650) 226-4600 or info@demandtec.com.

Tech Forum is an opinion column designed to open discussion on industry issues. Submissions may be e-mailed to Jane Jeffries at jjeffries@groceryheadquarters.com.
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Title Annotation:Tech Forum
Author:Fishback, Dan
Publication:Grocery Headquarters
Date:Jan 1, 2004
Words:739
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