Race to the Bottom on Price May Lead to Disappointing Results

In a highly competitive environment, retailers should avoid the so-called race to the bottom by offering customers value instead of competing strictly on price, experts said.

Promotional activity continues to run high, despite the negative impact on profits, said Paula Rosenblum, managing partner at Retail Systems Research in Miami. The firm's new 2012 pricing report indicates three-quarters of retailers are increasing the number of price changes they send to stores. Besides the lost revenue from below-market pricing, retailers who constantly change promotions must shell out for shelf-label changes and the labor involved in switching signs. And despite the effort and resources expended, there's no guarantee that a retailer will have the lowest price.

"Nobody wins a race to the bottom. There are executives who will tell you they win, but the recession taught us it wasn't their time. It was dollar stores' time," Rosenblum said.

Retailers are engaging in promotional pricing because they perceive consumers to be highly price-sensitive. In fact, the survey indicated two-thirds of respondents cited consumer price sensitivity as one of their top three challenges, compared with 46 percent who identified it that way in 2010.

Yet most retailers aren't working to change the situation through differentiation, Rosenblum said. Instead, it appears the industry is headed for more of the same.

Price Transparency on the Rise
Given growing transparency in pricing from smartphone apps and Internet sites that allow consumers to find the lowest prices in their area, many retailers said their highest investment priorities for the coming year include markdown planning and forecasting solutions, followed by pricing lifecycle management, the report said.

But even when retailers own the tools, they often don't know how to use them to properly analyze data. "Retailers are reporting it's hard to measure the impact of their pricing decisions," Rosenblum said.

Often, retailers don't take a long-term view of what happens in the future after a shopper takes advantage of a promotion today, she said. For example, a buy-one-get-one free offer may encourage shoppers to fill their pantries, but generally that means lower sales of the item in the future.

"The question for me is, does the supermarket industry in general have the tools available to look not just at the immediate lift, but the sustained lift," she said. While the data is available, the analysis requires forecasting. "It requires a level of complexity that retailers don't have the patience for."

Building Basket Size
Instead of the industry's current infatuation with short-term sales through promotions, retailers should focus on building basket size and frequency, Rosenblum said.

They also should find a way to differentiate themselves from competitors apart from pricing. By luring repeat shoppers through quality merchandise or customer service, retailers can break the cycle of lowest-price promotions.

By working to create a satisfactory experience for customers, retailers are more likely to over-perform. "What we tend to find in general is those who underperform are looking at either inside or the competition, while those who over-perform are looking at the customer," Rosenblum said.

For example, Publix is rated as a customer favorite because of its strong product assortment. "They have the right products in the right stores all the time," she said.

Whole Foods Market has succeeded in growing sales and margins through careful product selection and an emphasis on customer service.

At Whole Foods, consumers "can trust that the quality is what they want," Rosenblum said. "There is some level of trust in what happens between a really good retailer and its customer."