Retailing in the Week Ahead, Week 25, 2018

In Week 24, two headlines caught our attention.

First, Costco France announced some statistics on their one-year birthday. They are worth repeating. Costco FR registered 73,500 household card holders for their one club in the first twelve months of operation.  Their average basket size of 130 Euros on weekdays 160 euros on weekends kills the notion that French shoppers only care about small baskets and high frequency shopping trips. They sold USD$900 million of products produced in France for sale to Costco global – said differently, Costco France is a net exporter.

Second, the World Cup kicked off and if you live in London it is hard to miss Lidl’s new relationship with brands. Lidl UK, the official supermarket of the England Football Team, has blitzed London with ads on hot World Cup snacking celebration items including beers, salty snacks, soft drinks, juices and more.  The difference: Almost all the ads are for branded products, not private label.  Of course, they are limited-time only ads and only good for as long as stocks last.

So why are these two headlines so interesting? The answer is that these further demonstrate how traditional pricing is being eroded by new models of price communication. At Kantar Consulting we think these trends will continue to reduce the power of EDLP and hi-lo models and may force more retailers to learn new ways to do pricing using new technologies and more agile order-and-supply cycles.

New Pricing Models that Consumers Love

Three new pricing models are putting extreme pressure on traditional retail pricing models.  Let’s have a look at each model, briefly.

  • Personalized Pricing. Some retailers are using the ‘airline’ pricing model or the ‘Uber model’ where prices can move/down based on what they know about you and what is happening with other consumers.  When a product is in hot demand the price goes up.  When it has been sitting around for too long without much traffic the price falls.  Consumers that shop loyally get extra incentives.  Consumers that pay for a membership (like Costco) get additional savings.  This was once the arena of digital retail and startups only but has now begun to expand into bricks & mortar with both Alibaba and Amazon experimenting with these dynamic prices in physical retail.  One year after Amazon bought Whole Foods shows some big changes in pricing with some Whole Foods stores listing 10% discounts on fruits and veg for Prime members.  Is this a niche or is it the future?
  • OPP Retailers (“OPP” = Opening price points). Other retailers are using a combination of limited assortment, limited stock, and rapid rotation to create extremely low-price points. This differs from an EDLP retailer based on the length of time that item is at a low price point.  For EDLP, the average retailer drops prices on an item for several weeks up to 12 weeks in Walmart’s classic Rollback program.  An OPP retailer normally has price drops of either one day, three days, or six days.  They rarely have the items on a low price for more than a week.  This allows them to appear to have assortment in new categories at amazing prices, particularly for price sensitive consumers.  A great example would be sports nutrition where the prices are normally very high, the consumer is extremely price sensitive, and the individual is not extremely flavor or brand loyal and simply wants the nutritional benefits of something like a protein bar.  Taking this example further, the average supermarket might charge $2.00 for a smoothie, a sports bar, a protein ball etc.  An EDLP retailer might do a Rollback on these items and offer the for 15-20% below the supermarket price at say $1.69.  The supermarket might counter the EDLP retailer by doing a hi-lo promotion for 2 weeks where the promotional price goes down to $1.50. The OPP retailer takes a different approach.  They tell consumers that every week that they will have one surprise item for sale at $1.00 to establish a 30-50% price image versus the EDLP price.  So, if normal retail is $2.00 but on promo for $1.50, the OPP is 33% better priced and the consumer stays happy when the retailer rotates items in/out at the $1.00 price point while then switching consumers to private label on a wider range of items that are still below the $1.50 price floor in Hi-Lo retailing and well below the $1.69 in EDLP retailing.
  • Price match policies. Both EDLP and hi-lo retailers have felt ‘beaten’ by OPP retailers and Personalized Pricing retailers.  The response has been to blame suppliers for the problem and then make a promise to consumers that the supplier needs to fund.  This consumer promise is what we call Price Match or Brand Match.  The way it works is very simple but does very little to convince consumers that the retailer is doing good work on pricing.  Here’s how it works:  Retailer says to consumer, we check prices against our competitors and when our competitor drops price we drop it to match.  They also say that if any consumer finds a lower price they will match it.  They then go to back to suppliers when it is time to pay invoices and state that they will not pay the full amount of the invoice because of the monies they have had to spend to get the consumer the lower price that was available on the same item at a competitor.  These price match programs are spreading to more countries, with more retailers, and have generally eroded EBIT for both retailers and suppliers as the only tangible and visible result where they have been implemented.  The retailers that use them typically have flat to falling market share while they put price match in place and they have rapidly declining EBIT.  Gross margins remain stable and even increase in some instances but operational complexity, lost inventory, poor delivery efficiencies and soured relationships with suppliers are generally the direct outputs of these programs.

Implications for Suppliers

Many suppliers still segment their customers based on a very binary pricing classification.  They have “hi-lo” customers and “EDLP” customers.  This classification system appears overdue for an upgrade.

Additionally, most suppliers still only look at margin in relationship with their customers.  Very few are able to develop a complete Customer P&L.  It may be time to get teams to do their best job at completing an estimate for a P&L for major customers, even if it is more than 50% estimation.  The problem is that the formats and customers that are winning market share are often more agile when it comes to supply-chain, product rotation, and pricing.  If suppliers are going to win with the winners they need to become more agile at supply-chain, product rotation, and pricing too.  This means finding time to free-up resources to agile work as opposed to debating invoices that look at retail from a rear-view mirror. 

Question:  If you spend 3 days fighting with a customer over a rejected invoice from 90 days ago, how much time are you spending thinking about agile supply-chain in the next three weeks based on weather, new promotions, and other activities that impact where consumers are going to shop?

Please share your thoughts on ‘Pricing’ or any other topic.  Good luck in the week ahead.

Regards,

Ray Gaul – Ray.Gaul@KantarConsulting.com and @KantarConsulting or @RayGaul on Twitter plus LinkedIn.

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