When It's Not All About Price
Most retailers know the power of pricing in driving consumer behavior.
Consistently low prices can lure shoppers away from a neighborhood location to stock up at a Walmart or Costco miles from their home. And Walmart has been emphasizing its everyday low price positioning in highly competitive ads that compare its prices on specific items with those of a nearby traditional supermarket. Even Whole Foods Market, which picked up the nickname "whole paycheck" because of its lofty prices, is reducing price tags throughout its stores as it strives to expand its reach, and it's testing a new lower-priced format in Detroit.
But experts say an overemphasis on price also can lead to a race to the bottom, which is a lose-lose proposition for retailers and CPGs alike. An emphasis on value, however, can spur improved financials over the long term.
"Consumers want better quality. It's a matter of whether you are charging the right price for what you are providing," says Susan Lee, partner at Simon-Kucher & Partners, a Cambridge, Mass.-based global marketing and strategy consulting firm.
While retailers' advertising and marketing efforts often revolve around the price of particular items, the larger goal should be simply winning the consumer's shopping trip. "At the end of the day, all the retailers are competing for these trips. If you lose that trip to other channels, you need to find that hook to get the consumer in the store," Lee says.
Winning back customers is the task at hand for many traditional supermarket chains that have seen their market share erode since the recession spurred the development of less-expensive alternative formats. Conventional supermarkets face competing formats "that have a much more advantageous cost structure," often due to secondary real-estate locations, says Tom Compernolle, principal in the retail practice at Deloitte. "Cost management is really important. That's at the base of the capacity you have to be price competitive. If you don't have your costs in line, then you are at the mercy of someone who does," Compernolle says.
"Cost management is really important. That's at the base of the capacity you have to be price competitive. If you don't have your costs in line, then you are at the mercy of someone who does."
Boosting prices in a difficult climate can be tricky. When CPG manufacturers tried to increase prices in 2010 as the economy recovered, sales volumes declined. At the same time, retailers faced growing competition from lower-priced alternate channels, such as dollar stores.
Everyday low pricing is gaining favor among some supermarkets and CPGs. Kroger is eliminating double coupons, a longtime crowd pleaser, in some banners in favor of lower prices throughout the store, while PepsiCo says it will pull back on promotional pricing that trains consumers to stock up when the soft drinks are on sale and put off buying when they're not.
But Walmart's everyday low pricing strategy doesn't work for all players. Research from Stanford University's Graduate School of Business examining revenue and price-format decisions for U.S. supermarkets and Walmart from 1994 to 2000 suggests for the median store, a promotional pricing strategy generated $6.2 million more in revenue than everyday low pricing did. Further, when Walmart entered a competitor's market, the incumbent supermarket using everyday low pricing suffered a loss of $1.7 million in annual revenue, compared with a loss of $690,000 a year for stores using promotional pricing.
The research indicated supermarkets that maintained a promotional pricing strategy were more resilient to competition from Walmart than those that switched to everyday low pricing for lower fixed costs. Moving from promotional pricing to everyday low pricing cost about $15.6 million over a four-year period, about six times as much as the $2.6 million required to switch from everyday low pricing to promotional pricing. Many of the costs involved re-educating consumers and channel partners about the retailers' new positioning. When Wegmans moved to everyday low pricing, its marketing program included 1 million videos explaining the benefits of the new strategy, according to the Stanford research.
"Switching from one segment of consumer to another takes time and is incredibly difficult," Lee says. The challenge is adjusting the back end of the business. While Walmart has the clout to impact its suppliers' pricing, other chains might not be as successful.
Changing Consumers' Perceptions
Changing consumers' perception of your value proposition won't happen overnight. "Consumers have a perception in mind. Changing that perception fundamentally takes time," Lee says. Consumers get in the habit of grocery shopping at a certain store and develop expectations about that shopping experience. Many appreciate being able to find everything they need in one place.
Retailers also need to consider that different segments of shoppers are looking for different types of products and experiences when they shop. Understanding what your target market looks like and values is crucial to serving their needs. "Given that information, your communication strategy around it is extremely important," Lee says.
Yoke's Fresh Markets, based in Spokane, Wash., with 11 locations in the area, competes on high quality and high service, says Joe Hanson, senior vice president of operations. "I don't think anybody perceives us as the cheapest," Hanson says.
But Yoke's Fresh Fridays promotions, which are advertised on television, radio and through its in-store circular, also draw shoppers into its stores. The company is partnering with VisibleBrands on a test of a new on-shelf digital couponing system that will allow the retailer to offer custom promotions based on the shoppers' path through the store.
More retailers are "spending a lot of their research dollars understanding value-price optimization. They want to understand exactly how the consumer defines value and how that depends on which product or retailer they're shopping," says Carrie Shea, president of AMG Strategic Advisors in Jacksonville, Fla.
Convenience stores succeed with products at a higher price point than many supermarkets by being in the right place at the right time for consumers, and many have found emphasizing cleanliness, friendliness and quality food and service can draw repeat customers. According to a May consumer survey by Market Force information in Louisville, Colo., 28 percent of respondents said they would pass up a competing store to shop at their preferred convenience store. And prices weren't a determining factor, says Janet Eden-Harris, chief marketing officer and senior vice president of strategy at the market research firm. When consumers were asked to think about 11 attributes at their favorite convenience store, merchandise prices received the lowest scores, Eden-Harris says.
Larger grocery retailers can communicate value through a distinct in-store experience, such as at Trader Joe's, where staff wear Hawaiian shirts to keep the atmosphere light-hearted, proprietary products offer distinction and product sampling is common.
Retailers focusing on the customer experience often can maintain higher margins than price-driven competitors. A value approach takes into account benefits as well as price. "Forty-six percent of the U.S. population still makes under $45,000 a year, so every dollar counts, every penny counts. They're looking for a good deal. But some consumers really understand the value of benefits," Shea says.
"Forty-six percent of the U.S. population still makes under $45,000 a year, so every dollar counts, every penny counts. They're looking for a good deal. But some consumers really understand the value of benefits."
AMG Strategic Advisors
Walmart is striving to address consumers' growing demand for freshness with plans to speed delivery of produce by working directly with local growers, the company said June 3. The retailer also launched a money-back guarantee for consumers, while increasing training for its associates on product freshness.
If successful, Walmart stands to encroach on what has been a point of differentiation for many of its competitors who don't have sufficient size to compete with Walmart on price. "What [competing supermarkets] have to decide are, what are the key missions driving people into the store? Where can they charge a premium because they have better assortment, more depth or better experience?" Shea says.
At Yoke's Fresh Markets, shoppers come for the fresh produce, Hanson says. "Our produce operation is exceptional because we have relationships with growers and people who have shared values with us – their objective is to produce the very best," Hanson says.
On the manufacturers' side of the business, 43 percent of all items purchased were on promotion in 2012, representing a peak, according to AMG Strategic Advisors' November 2012 trade promotions report. Some categories, such as ice cream and soft drinks, sold about 60 percent of merchandise on promotion in 2012.
But the sales lift generated by promotions declined in 2012 from the previous year in 70 percent of 127 categories reviewed, indicating shopper fatigue, AMG Strategic Advisors says. Overall, the average price point across the store has increased to $2.95 from $2.65 at the start of 2008, while the average price of products on promotion has increased to $2.37 from $2.11 in 2008, the AMG report says.
The most successful retailers – those that are luring more shoppers, gaining larger basket size and increasing market share – have been offering 45 percent of units on promotion compared with 25 percent of those that have lost market share, the AMG report says.
Simon-Kucher & Partners
"The easiest thing to do and the fastest thing to do is increase the level of promotion in the stores. [But] long term, I think it's a dangerous game," Lee says. Without intending to, retailers can encourage consumers to become more price- sensitive by overemphasizing price in their communications. "As soon as you tell them your key value proposition is price, that's what's going to stay in their mind," she says.
Over time, a price-oriented communication strategy can train consumers to be "cherry pickers" or "price seekers," Lee says. What's more, discounting and other price-oriented promotions aren't a sophisticated strategy. "It's easy to do and easy to copy. When one retailer starts to promote more, another can easily follow. And then it's a downward spiral," Lee says.
Publix Super Markets has met Walmart's low-price advertising campaign with its own store signage that shows lower Publix prices than Walmart's on a list of products. "Some chains want the price impression so badly, they'll preemptively go out and survey the competition," Compernolle says. Other retailers will commit to beating competitors' prices on a few destination categories, such as milk, cereal and everyday items. "The important thing is not necessarily low prices throughout the store. It's low prices for those destination items people will typically compare," he says.
Pricing should go hand in hand with a retailer's go-to-market strategy, which might be promotional pricing, everyday low price, or quality- or service-oriented. "Fundamentally it still goes back to the value relationship you're providing to consumers," Lee says. "Value doesn't have to mean lower prices or more aggressive discounts. We know that consumers see value not just as a number. It's combined with quality. It's combined with the whole commercial strategy, not just with a price."
What Shoppers Value
Before determining a price-value proposition or switching from one pricing strategy to another, know your target audience.
While 37 percent of consumers make purchases on the basis of price, convenience is the top influencer for 28 percent of shoppers, according to PricewaterhouseCooper's Experience Radar 2013 report.
For most, convenience means short checkout lines, but many also consider overall service. In general, shoppers are willing to pay more to shop at stores with attendant checkout, knowledgeable staff throughout the store, a loyalty program that provides points or storewide discounts, eco-friendly packaging using recyclable materials and locally produced items, according to the PricewaterhouseCoopers report.
About 20 percent choose stores based on product breadth, which increasingly means local and organic foods. About 46 percent of consumers seek out organic products, often paying a premium for them. Consumers also appreciate product labels that clearly identify healthy attributes, and they like in-store product sampling of new products. The availability of an online shopping option is a lesser consideration, as 98 percent of consumers shop in brick-and-mortar stores.
But younger, digitally-oriented shoppers want mobile coupons, smartphone checkout and digital meal planning and delivery. What's more, 40 percent of this cohort won't return to a store after a bad experience compared with 20 percent of shoppers overall, the PwC report says.
What turns off consumers? Rude employees account for 28 percent of reported "bad memorable experiences," the report says. While many consumers will tell their friends and relatives when they have had a positive experience at a grocery store, younger digitally-inclined shoppers will spread the word about a negative experience to their social networks, potentially increasing the impact.
Shoppers don't always share negative feedback with grocers. The PricewaterhouseCoopers report suggests 46 percent of customers don't tell their grocers about a bad experience, but they will tell others. Retailers can address this communication gap by offering incentives for customers to provide feedback and by listening to social media feedback. Retailers who promote their return policies and emphasize customer satisfaction are more likely to have the opportunity to resolve problems.