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The price is righter.

Too many supermarkets still price by the seat of their pants. But an appreciable number are refining their pricing strategies.

Supermarkets have entered the year 2000, but many are still pricing as if it was 1950.

However, observers agree that the industry on the cusp of change that will revolutionize pricing and make it a more scientifically based strategic weapon.

A number of factors are fueling the fires of change, principally the rise of electronic commerce, widespread use of loyalty programs, industry consolidation, reaction to the power retailers such as Wal-Mart, and new relationships between distributors and suppliers.

The next five years will bring tremendous changes resulting from the adoption of Internet-based communications between buyers and sellers, says Ron Lunde, a Chicago-based consultant and former retailer, who cites such elements as online order fulfillment, shipping instructions and, most importantly, promotional and marketing problems.

"Scan-based trading (SBT) will have a significant impact on the cost and promotional structure of the business as we know it," he says. Pay for performance changes how profits are figured, according to Lunde. "It used to be that we took deal dollars and put them in a pot to use for markdowns, which affected the gross. The more we sold, the lower the margins. But we didn't know the figures until we went back and took inventory. Scan data enables you to set up a base price," he says.

"Traditionally, if you sold something for $1 that cost 75 cents, you had a 25% margin. If I get money off-invoice and mark the item down to 75 cents, I now have to sell five units, so I need a 25% increase in unit sales to stay at the same margin. As a store manager, I have no margin, so I don't want to sell sale items."

With SBT, the 25 cents comes directly from the manufacturer, as though it was a coupon, and the item can be rung up for $1, Lunde points out. "Now you can go back to heavy buyers of the deal item and reward them. The heaviest buyers would get it free, the next group would get 50 cents off, and the next 25 cents, based on scanning."

Even without SBT, observers see changes in the supplier/distributor equation that affect pricing. Inefficient operators will get less and less promotional money from suppliers, says one manufacturer. "We have to identify what we have to pay customers to move our products, and then get on with life. Operators such as Wal-Mart that don't change prices are challenging the old rules. High-low is still going on, but that mentality is nuts," Lunde says. "Even though retailers can make money, and manufacturers can move product, it is on the way out. The New World is about giving consumers what they want; they don't want to go from store to store to shop."

There is more consistency in supplier deals, in the opinion of Jack Brown, chairman and president, Stater Bros., Colton, Calif. "They have gone from high-low to middle of the road," Brown says. "From two free with four, they have gone to one free with five. That's good because when you go over a 20% price differential, customers get suspicious. Having an item on special four times a year is great, but you can't do it every month."

John Hauptman, a director of Willard Bishop Consulting, Barrington, Ill., agrees. "Most retailers are all over the board--too high in some areas and too low in others," he says. "As a result, they send a mixed message to consumers. If the store's price is high, consumers remember. But if it is too low, they think it's a temporary aberration."

Hauptman feels that retailers are continuing to face unprecedented pricing pressures in an increasingly competitive pricing environment, fueled by power retailers, such as Wal-Mart and the clubs. "Consumers are more educated about price. They know they have to pay premiums in some stores to get total value. They don't have to be lower than competitors, just have a lower perceived value. It is not necessarily a matter of raw prices," he says.

He is not alone in voicing that opinion. "There has been more refining of marketing practices. You don't see price and promotion as the primary weapon. Rather, there is some kind of total value offering: good perishables, front end, service, quality and reasonable prices," says Ed Comeau, research analyst for Donaldson, Lufkin & Jenrette, New York.

Price is still important for Dave Skogen, president of Skogen's IGA Foodliners, Onalaska, Wis., operator of four Festival stores, but there are other important factors. A few years ago, Skogen became more competitive with health and beauty care in response to competition from mass merchandisers. The company took margins down from 25% to 16% and got a 12% to 15% sales increase.

At the same time, competitive pricing is not the be-all and end-all, Skogen says. The firm has cur back on specials and does limited price-item print ads, with 10 to 12 items and one big feature. Some competitors have reverted to "big laundry lists," Skogen says, but he does big seasonal ads only about four times a year. For Skogen, "the main thing is our people and the service they give. Our people have a passion for what they are doing," he says.

In ethnic areas, people are still looking for value, which is one reason sales are up for lax Markets, says Bill MacAloney, president of the Anaheim, Calif., multi-unit independent. MacAloney, whose stores basically are in Latino areas in Southern California, says numerous changes in the market have had a significant impact on the pricing structure. Even more changes are coming, largely as a result of two big mergers: Albertson's purchase of American Stores, which owned Lucky in the market, and Kroger's acquisition of Fred Meyer, which owned Ralphs and the former Hughes stores.

To get government approval of the American Stores acquisition, Albertson's had to divest a number of stores, some to K.V. Mart, which increased its size materially with the addition of 11 units, and the bulk to Stater Bros. Starer was considered the price leader, but its main strength before the purchase was in Riverside and San Bernardino counties.

In addition, MacAloney says, the majors are trying to reduce costs, primarily to cut back on their huge debts. "My costs have gone up 2% to 3% in the past five years," he says. That doesn't mean that competition has become less intense. "Since the acquisition, Albertson's has been very aggressive in pricing," he notes.

One observer insists that the big publicly held chains price on the basis of their earnings per share. "Their stocks have been hammered and shelf prices have gone up," he says.

Jax Markets' MacAloney adds, "There is not much EDLP in the market. I've tried it because that is where I think I have to be."

Just as change has affected the Southern California market, so has it had an impact on pricing in other areas such as New Jersey, where competition has become tougher than ever. One observer notes that the Wakefern Food Corp., based in Elizabeth, has become even more aggressive in pricing for its ShopRite stores. The co-op was trying to get business away from Pathmark, which was in limbo last December as it awaited Federal Trade Commission approval of the chain's acquisition by Ahold USA. The deal was since aborted.

Joe Pagano, president of Pagano's IGA, Bayonne, N.J., doesn't necessarily trace more aggressive pricing to ShopRite, but agrees that competition as become fiercer. "Consumers are getting tremendous buys," Pagano says. is also a factor. "People are bidding $1.50 for a gallon of milk and getting it," he says. Some people doubt that Priceline is doing well. But early in January the company said it had enrolled more than 100,000 members who were pricing about 500,000 grocery items each week in the New York City area.

Meantime, pricing is getting stronger in meat and deli, as well as in grocery, Pagano says. He notes that prices are lowering on the entire marketbasket, rather than on individual items. Mergers by giant companies have had a negative effect on the market, he feels, citing Ahold, which bought the former Mayfair stores in New Jersey and Melmarkets on Long Island; A&P, long controlled by Tengelmann, the German chain; and Albertson's, which now owns Acme through its purchase of American Stores.

To compete, Pagano depends on the personal touch, as well as on competitive pricing. "With all the mergers, guess who stays around: the independent, if he keeps his store clean and takes care of customers," Pagano says. He feels pricing in the area is a blend of EDLP and high-low. "Even if they claim to be, nobody is strictly high-low. Edwards [Ahold] tried EDLP in New Jersey, but got knocked out by the price leader. In some markets, where there is true highlow, EDLP can work for one retailer," he says.

Hauptman of Willard Bishop Consulting notes that most retailers lack focus on advertising, with no well-defined strategy. "They just follow their competitor across the street and they leave dollars on the table, and as a result, price too low in some categories and too high in others." Category management complicates the picture because the category manager's responsibility is the bottom line, and he sets prices accordingly, but the store manager may want a different price image.

On the positive side, Hauptman sees retailers beginning to strengthen their offerings in major categories, regardless of brand, to compete effectively against clubs, supercenters and limited assortment stores, all of which are increasing food market share. One way they are doing that is to enhance private label, and another is to bring in larger sizes. This doesn't necessarily mean dub packs, just something somewhat bigger than standard sizes, he says.

Supermarkets also are beginning to compete better in categories, Hauptman says. "Most consumers are specification buyers in some categories. As a result, supermarkets need something priced attractively in every category across the store. They don't have to go head-to-head," he says.

Another suggestion is a better focus on known-value items, according to Hauptman. "Historically, supermarkets have had a key item list with about 200 items that they price most aggressively. But those are generally heavy on soft drinks, snack foods and other DSD items," he says. "Now, progressive grocers are re-examining their key items. They are looking at the top one or two items in each category across the store, and sharpening prices on top sellers. This enhances their price reputation."

Finally, Hauptman says, supermarket operators are putting more emphasis on price communication to consumers, particularly in-store, with shelf signs and other signs highlighting best values and more price comparisons of private label to national brands. "Supermarkets don't have to lower prices, just highlight those they have," he says.

Before retailers can think about pricing, we tell them to get their costs in line, particularly if they are competing against Wal-Mart supercenters," says Bill Lancaster, vice president, corporate sales, Associated Wholesale Grocers (AWG), Kansas City, Kan. "Wal-Mart has a 16% blended margin on food, and an overall store margin of 21%," Lancaster says. "That gives them a phenomenal advantage. They can measure everything and make adjustments, as well as adjustments to the adjustments."

For independent operators, management reports are key in order to avoid carrying dead items, Lancaster says. "Then, if they get their costs down, they can stay close to Wal-Mart on prices. But they can't do it unless they make adjustments in their inventory. Wal-Mart calls another play every day. Supermarkets have to be on top of things or they will lose the whole ballgame."

Other competitive weapons AWG stresses include a loyalty program, nonfoods, perishables and store brands.

Electronic commerce is another factor that will affect supermarket pricing and every other aspect of operations, according to Lancaster. "The decade of the '90s was one of alternative formats. This one will be e-commerce, and it will change retailing dramatically," he says, noting that WalMart has begun selling 600,000 items on the Net.

Loyalty programs also have had a tremendous effect on pricing. Dorothy Lane Markets, a two-store operation in Dayton, Ohio, ran its last newspaper ad in October 1995. "Everything changed when we went to a loyalty program, says Norman Mayne, president. "We're giving hotter deals to our better customers. We're out of the cherry picking rat race. It is better for them and for us," Mayne says.

One example was a local milk price war. A gallon was wholesaling between $1.70 and $1.80, and the normal retail was $1.99. The price got down to 99 cents. "We kept our regular price, but sent our best milk customers coupons good for 5 gallons a week for 49 cents a gallon. We're taking care of the customers who take care of us. Nothing on pricing happens generally; everything is customized, and it works well for us, Mayne says.

The majority of retailers using electronic marketing are putting temporary price reductions on their cards, says Barry Kotek, managing partner of Retail Systems Consulting, Naples, Fla. The next level is doing consumer-specific marketing, with different price offers to different households. Very few retailers are doing that, observers agree, and independents are generally ahead of chains in that regard.

To do consumer-specific marketing, it is necessary to determine the price sensitivity of the best customers, and that depends on the category. Consumers know prices in some categories, but not in others, according to Kotek. "Mrs. Jones may be really price sensitive in the cola category. The question is whether she gets coupons from kiosks, the Internet, FSIs or Catalina Marketing, or whether she buys at list price. Why throw money away on a consumer who is not price sensitive in a particular category?" he asks.

The answer is to send price offers only to your best customers who also are price sensitive. "With consumer-specific marketing, retailers are using a stealth approach because the competition doesn't know what they are doing. They can go further and do analysis to see what consumers are buying in a competitive store, and see how you can price against them," Kotek says.

One retailer that was in the forefront of consumer-specific marketing has cut back a bit. That is Brodbeck Enterprises, Platteville, Wis., operator of eight Dick's supermarkets. The cutback is only temporary, until the company gets a vehicle to deliver its own offers, emphasizes Ken Robb, senior vice president-marketing.

Brodbeck had been using Relationship Marketing Group, Fairfield, Conn., to get a shopping list consisting of manufacturer and store coupons, with space for consumers to fill out the balance of the list. Relationship Marketing has been sold and the new owner is redesigning the program, Robb says.

Not by price alone

The future of Internet grocery shopping is not price, says Dan Ariely, assistant professor of management at MIT's Sloan School of Management. Many electronic commerce companies are putting too much emphasis on price competition with traditional retailers, he says.

People are shopping via the Internet for value, not to save money, in Ariely's opinion. The Internet provides an excellent opportunity to provide consumers with valuable product information, such as content of fat or amino acids. "If companies did that, people would pay more. And it can be differentiated. Individual diets can be analyzed," he says. "Someone could be told they are consuming too many carbohydrates and might want to get more fiber. If you learn how customers think and what they want, they will pay more and buy more," he says.

There are a number of things that can be done to enhance the shopping experience, both in traditional and online retailing, that don't involve price, according to Ariely. One method of cost reduction in online shopping is being tested in Europe, where employees of a company can order online and get delivery at their workplace before they leave for home at the end of the day. Traditional retailers can do the same sort of thing. Or people can order online and pick up their merchandise at the store at a particular time.

Ariely also predicts that supermarkets will begin to concentrate more on the shopping experience than on price, providing tastings, music, coffee shops, restaurants and advice.

Ariely feels that although online food shopping will be a major factor, traditional retailing will not be threatened. "There always will be people who want to streamline the process, and people who want to touch the cans," he says.
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Author:Weinstein, Steve
Publication:Progressive Grocer
Article Type:Statistical Data Included
Geographic Code:1USA
Date:May 1, 2000
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