By Dave Hunter
Price has always been one of the top priorities for retailers as highlighted in the enduring mantra of “product, price, place, promotion.” It is not sufficient to just have the best products, brands/stores today have to be even more sensitive to the competitiveness of their initial, promotional and end of life pricing strategies.
Grocers, like most retailers, have had to think differently about their business over the last few years. Conventional grocery brands, specifically, continue to be impacted by inflation, energy costs, weather/seasonal inventory flux, price gouging, CPG shrinkflation tactics and the growth of hard discount competitors like Aldi, Lidl, and Walmart Superstores. While consumers understand that grocers need to respond to economic pressures, they are more informed than ever and have a greater density of options available to them to better navigate the pricing wars between competitors.
One key issue with grocers is the actual governance of their rules-based pricing methods. In its simplest form, rules-based pricing is a grocers cost plus the profit they need to make. Easy, right? Not really. There are many variables built into this definition, like what is the actual cost of a product? Is the cost used gross, gross less landed, net, dead net, are shipping fees/transportation costs included, is the product a commodity that varies with the market, is it seasonal, is its shelf-life stable or limited, is it proprietary to your brand or widely distributed, is it location sensitive (regionally/ethnicity-driven like kosher items in Jewish markets), is it a high shrinkage item, how much shelf space does it need/take, etc. The answers to all will vary by item. And for stores that carry thousands of SKUs, the pricing model can become unmanageable.
Traditional grocers offer a fresher assortment, more costly services, a broader inventory, better merchandising/displays and more national brands. Hard discounters, however, focus more on narrow selections, have less overhead/staff and limit their fresh offering assortments. Hard discounters have less complexity and an overall pricing advantage. During these inflationary times, it is easy to see why the consumer is embracing the continued emergence of discount grocers, even with the limitations in services and assortments. Traditional grocers have had the location advantage—great real estate locations within population dense markets. However, the industry pivot to online shopping has continued to make equally, if not better locations available as brands level-set their portfolios and forfeit good locations in favor of balancing their unified commerce strategy. Hence, the playing field is becoming even more level.
So how can traditional grocers maintain their competitiveness in today’s marketplace?
1. PRICE MANAGEMENT
One disadvantage of mainstream grocery brands is the continued use of legacy systems. This is endemic within this industry segment since they emerged from family-owned business models. Most grocers from the mid-20th century started on a local level, leveraging internal/generational talent and building on the pillars from which they were founded. The need for more sophisticated systems and business plans has only recently become more compelling with the onset of covid (frictionless shopping/fulfillment) and the emergence of larger, chainwide competitors. Most main street players are behind the curve in having the sophistication to manage their business at a category level—which is now an imperative to being price competitive, maintaining market share and being profitable overall. The need for a well-built, well-informed pricing system is now a primary focus for grocers. Being able to identify which items/categories are price-resistant (organics, premium, seasonal) and which are vulnerable to price competition (pantry items and basics) can be the difference in being profitable and maintaining long-term success. This is where private label development can become a critical piece of the modern grocer business model. Knowing how consumers are converting, what their brand loyalties are by category and what the actual costs are for brands vs proprietary labels will protect the bottom line more consistently and efficiently.
2. PRIMARY TRADE AREA
Adding to the complexity of category management is the need for knowledge of the core trade area. Pricing can be more surgically managed to maximize profit if a brand is aware of who the competition is by consumer segment and location. For instance, are there other traditional grocers in the market? Are there current or emerging hard discount grocers? Is your market reliant on a drivable or walk-able consumer? Is the population mainly comprised of homeowners or apartment dwellers (who have less freezer space and are less bulk-driven)? Is the market multi-cultural? Affluent? Younger? All of which variables will impact which products/categories are most sought after, which are destination brands and which are commodities. Knowing what your customers need, when they need it and which assortments command more penetration in the overall product mix will enhance margins, reduce waste and ensure higher conversions and AOVs.
3. VALUE BENEFIT
Not unlike any other brand or retailer, traditional grocers can no longer rely on just being convenient or desirable, they must identify themselves to the consumer with specific value benefits to meet consumer expectations. Are you promising to be fast and accessible (C-stores)? Are you catering to “foodies” with the best, most selective assortments (Whole Foods)? Are you providing exceptional customer service-Trader Joes (which requires more focus on labor management)? Do you want to be inspirational with seasonal displays, catering, demonstration areas and elevated merchandising? Or are you a pantry /bulk destination? If you are in an affluent market of suburban stay at home parents who are seeking the latest tick tock trends and ultimate dinner party menus, then your store assortment and staff need to be equipped to address those needs. Similarly, in high service-demand markets, the push to automation and lower staffing models, self-checkout/self-price checks, grab and go counters may not be the right strategies to compete and can ultimately be more destructive to building customer loyalty. The true paradigm here is that the solution to creating a brand value or proposition is not always easy and not always as simple as a tagline/motto. In fact, it is often a careful balance of both product-price-people, tipping the scale on the key market motivational factor but not forfeiting the others completely.
How to move forward.
Given the economic impacts, market flux, consumer shifts, population/competition changes and climate/geographic influences, it is no wonder grocers are at an inflection point. The old ways of working off of Excel spreadsheets are creating limitations to being more resilient and agile. Pricing models, staffing systems, supply chain visibility and new omni-channel needs (apps, website, delivery services, curbside) all coupled with emerging technologies, are driving the requirement to deliver profit at a more granular level. Core to this view are location, competition, seasonality, market population and category management. Knowing which 20% of the assortment is driving 80% of the sales and having a firm, consistent understanding of base costs are no longer deemed to be a luxury. They are imperatives for maintaining market share and driving profit. Category and pricing are both complex and critical. KVIs (key value items) are a good place to start (milk, eggs, chicken, bananas, lean beef, hot dogs, etc.) but the need for more intelligent retail systems that can process an enormous amount of market data and begin to leverage AI/ML are now the future of the industry.
Many grocers are finding all of this evolution and innovation hard to digest, that is why consulting with an expert to conduct an audit and build a roadmap with priorities is the right next step as not to bite off more than the business can chew.
ABOUT DAVE HUNTER
Dave Hunter has over 25 years of experience in the North American retail sector with expertise in merchandising, pricing and store operations; specifically in the grocery sector. He is recognized as a knowledgeable leader with strengths in business processes design, defining continuous improvement, facilitating brainstorming sessions, building stakeholder consensus, and enabling powerful teams to overcome any obstacles. Dave is currently a consultant for Columbus Consulting and a managing partner for Crossroads Retail Solutions.
ABOUT COLUMBUS CONSULTING
Columbus Consulting delivers solutions that drive true value and have been transforming the retail and CPG industries for over two decades. We are a retail consulting company of industry experts. Our approach is simple, if you do it, we do it. We are more than consultants; we are experienced practitioners who actually sat in our clients’ seats. We understand the challenges, know what questions to ask and deliver the right solutions. Columbus offers a unique, consumer-centric approach with an end-to-end perspective that bridges functional & organization silos from strategy to execution. Our specialties include: unified commerce, merchandising & category management, planning & inventory management, sourcing & supply chain, data & analytics, accounting, finance & operations, people & organization and information technology. Let us know how we can help you. To learn more, visit COLUMBUSCONSULTING.COM