What is the optimal pricing strategy?

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 Industry
Overview
 Major Players
 Primary Pricing Strategies
 Secondary Pricing Strategies
 Ithaca Market: Case Study
 Recommendations
Market Share
15.8%
8.2%
69.4%
6.6%
Kroger
Safeway
Supervalu
Other
IBISWorld


HHI= 360.44
Four Firm Concentration =
30.6
Monopolistic
Competition  very
fragmented based
on the high number
of ‘others’ in the
market
Very low
concentration
Market share is on
the rise
Shift in
establishment size
IBISWorld
Revenue Growth Rate
Revenue
IBISWorld
Gen Y
81-92
Gen X
65-80
Boomer
s 46-64
Matures
<45
Full Time Employment
19%
55%
50%
6%
Part-Time Employment
22%
12%
11%
8%
Avg Family Size
3.5
3.2
2.6
2
Avg weekly grocery spending
$85.20
$100.90
$95.90
$84.00
Avg. wkly groc spd @ primary
store
$70.10
$80.20
$73.80
$63.10
% primary store compared total
spend
82%
80%
77%
75%
Avg # of trips / week
2.1
1.9
1.9
2
Avg # trips to primary store
1.6
1.4
1.4
1.4
Avg # of meals away from
home/week
1.7
1.4
1.1
1.1
Very concerned about nutrition
35%
38%
46%
47%
Low prices primary factor store
choice
31%
47%
28%
16%
Value exciting store
environment
19%
16%
19%
14%
Source: Food Marketing Institute’s U.S. Grocery Shopper Trends, 2007
IBISWorld
 Contracting
in size
 Intense
competition
 Rising costs
 Trading down
 Consolidation
 Exit altogether
IBISWorld
 Cashing
in on lifestyle trends
 Competition
in the market
 Keeping
it private
 Keeping
it real
 Keeping
it in the neighborhood
 Credit
and debit card costs
IBISWorld
 Medium
 Increasing
 Existing
level of competition is high
 Major
barriers: economies of scale, capital
intensity, product differentiation,
distribution network and licenses
IBISWorld


Level of technological
change = medium
Significant
technological
advancements

Self checkout systems

Electronic data
interchange (EDI)

Smart carts

Internet
IBISWorld

Competition is high and increasing in this
industry

Grocery retailers compete primarily on price and
service

Price competition is caused by the number of
competitors, their proximity, quality, seasonality,
promotions, and degree of product
differentiation
IBISWorld
Proximity to key markets
 Access to multi-skilled and
flexible workforce
 Ability to control stock on
hand
 Close monitoring of
competition
 Access to latest available
and most efficient
technology

IBISWorld
Kroger
Safeway
Supervalu
*Founded 1883
*2300 stores across 32 states
*Initiated the first move toward private label
branding
*Differentiation sets them apart
*Major mergers along the way to help their growth
* 2010 projected NI: $70 million
http://www.thekrogerco.com/corpnews/corpnewsinfo_history.htm
Operates under 16 banner names
http://www.thekrogerco.com/corpnews/corpnewsinfo_history.htm
*Founded in 1915
*Introduced produce pricing by the pound
*Centered upon keeping low profit margins
*1775 Safeway stores across the US and Canada
*Extensive private label programs including premium brand
options
*Upgrading stores to “lifestyle” stores
*2009 NI: ($-1,097.5 million)
http://www.safeway.com/IFL/Grocery/Our-Story
*Founded in 1926
*Company philosophy grounded in innovation
*Affiliates with Independent Grocers Alliance
*Dissolves affiliation to begin own services focused
on nationally advertised brands
*Places emphasis on distribution /third party
logistics
*Acquired Albertsons in 2006 (1,100 stores)
*2009 NI: ($-2,885 million)
http://www.supervalu.com/sv-webapp/about/history.jsp
http://www.supervalu.com/sv-webapp/about/history.jsp
2009
2008
2007
2006
2005
Kroger
76,733,000
76,000,000
70,235,000
66,111,000
60,553,000
Safeway
40,850,700
44,104,000
42,286,000
40,185,000
38,416,000
Supervalu
44,564,000
44,048,000
37,406,000
19,863,000
19,543,240
Mergent Online
Profit Oriented
Sales Oriented
Status Quo
• Higher Prices
• i.e. specialty
stores
• Goal to be
lowest in
market
• Price is the
driving factor
• i.e. limited
assortment
• Not trying to
cut into
market with
price
• Pricing to
match a
competitor
• i.e.
conventional
supermarkets
AEM4480: Food Merchandising, Professor Perosio
 Every
Day Low Pricing (EDLP)
 Hi-Lo
or Promo Pricing
 Hybrid
Pricing
 Little
reliance on
promotional
pricing strategies
such as temporary
price cuts
 Prices consistently
low across the
board
 Wal-Mart
the king
of EDLP
Supermarket Pricing Strategies
 Targets
customers that preferring a single
trip
 EDLP will need to carry a larger inventory
 Conducive to those who want to stock up and
save
 Favored by larger, vertically integrated
organizations
Supermarket Pricing Strategies
 Kroger

“We are seeing signs that prices of staple items
are increasingly becoming a deciding factor for
customers in determining where they should
spend their grocery dollars.”
 Safeway


Uses EDLP thousands of items
Recently lowered the “prices on the 5,000 items
you buy most”
 Supervalu

“Big Relief” price cutting program
http://www.thekrogerco.com/corpnews/corpnewsinfo_pr_speeches_speecharchives_12092008.htm
SN: Supermarket News; 4/20/2009, Vol. 57 Issue 16, p24-24, 1/3p, 1
It doesn’t really get
people
excited…c’mon
everyone loves a
good sale
 Deep
discounting on select categories at
various times throughout the year
 Advertising based
 Capitalizes on manufacturer discounts
 Higher average price than EDLP
 Second degree price discrimination
Supermarket Pricing Strategies
 Targets
the time-constrained service
sector of consumers
The effect of multi-purpose shopping on pricing and location strategy for grocery stores
 May
be a more-competitive niche than
EDLP
The effect of multi-purpose shopping on pricing and location strategy for grocery stores
 Causes
spikes in consumer demand
 Requires inventory
 Causes sales slump after the promotion
 If the demand is over forecast, the retailer
owns expensive inventory
 Manufacturer has to produce enough product
AEM4480: Food Merchandising, Professor Perosio
What is it?
“A mixture of EDLP and PROMO, where firms choose to vary
either the number of categories they put on sale or change the
frequency of sales across some or all categories of products.”
We are seeing a move
toward hybrid pricing
across the entire
industry…why?
http://www.gsb.stanford.edu/facseminars/pdfs/2006_11-17_Ellickson.pdf
2006
Supermarket Pricing Strategies
 Loyalty
Programs
 Private Label
 Quantity Discounts/Quantity Surcharges
 Coupons
 Slotting Allowances
 Spatial Competition
 Psychological Pricing
 2005—60%
of
European and
American
consumers in a
loyalty program
 Data-rich
information
provided
Grocery retail loyalty program effects: self-selection of purchase behavior change?
Deriving and exploring behavior segments within a retail loyalty card program
 Less
price sensitive
 Increases
organizational
profitability
 Less likely to consider
the marketing efforts
of competitors
 Allows companies to
devote their energies
to other matters
Deriving and exploring behavior segments within a retail loyalty card program
The use of loyalty-cards databases: Differences in regular price and discount sensitivity in the brand choice decision between
card and non-card holder.
 Once
enrolled—
repeat purchase
should increase so
long as the
program provides
an adequate level
of utilities and
lower costs
 Short-term—
”points pressure”
 Long-term—
”rewarded
behavior”
 Loyalty sufficiently
rewarded—repeat
buying should
persist
Grocery retail loyalty program effects: self-selection or purchase behavior change?
 Aim
to create
loyalty, but do
they really?
 Multiplicity of
cards
 Retain the
programs—data
and few loyal
consumers
Grocery retail loyalty program effects: self-selection or purchase behavior change?
Industry overview
Private
label accounts for ~11% of
supermarket sales
Dairy & Grain; Beverage product
segments make up the greatest
percentage of private label foods
Why is it on the rise?
IBISWorld

Kroger



Tradition & Cabbage
Operates 40 processing
plants to create 14,000
private label products
3 Tier labels

Private, Banner, and
Value

Safeway


Boasts one of the most
extensive private label
programs in North
America
Supervalu


3 Tier system
Helps build brand
loyalty
http://www.thekrogerco.com/corpnews/corpnewsinfo_history.htm
http://www.safeway.com/IFL/Grocery/Our-Story
• Builds the store as a brand
•High quality pl products build shopper trust and loyalty to the
retailer
• Consistent value vs. branded products across categories drives
a strong consumer value proposition across all shopper
segments
Generates traffic
•Innovation within premium-tier products helps establish the retailer’s
products as destination items in the category
•Focusing on earning a high category share in high volume high
household penetration growth categories with short purchase cycles
drives shoppers into the store
Drives profitability
• PL volume growth in low margin categories reduces reliance on loss leaders
to drive sales while improving total category profitability.
• Trading consumers over to private label allows retailers to profitably serve even
the most price sensitive shoppers.
• Successful innovation within the premium tier increased average dollar ring
and category margin performance
Source: IRI, 2008:; AEM4480: Food Merchandising, Professor Perosio
Store Brands
Avg Unit Sales Growth:
4.6
4.8
4.1
3.6
Trend Drivers:
Consumables*
Departments:
Fresh Produce,
Alcoholic Bevs,
Pkg’d Meat, Deli,
Fresh Meat, HBA,
Non-Food Grocery,
Frozen Foods, Dairy,
Dry Grocery
3
2
% Unit Sales Growth for last 6 (4-week)
periods
Branded
1.1
0.3
* Latest Quarter
Avg Unit Sales Growth:
0.1
-0.5
+ 3.7%
-0.2%
Trend Drivers:
Discretionary*
Departments:
General Merch,
Non-Food Grocery,
HBA
-0.7
* Latest Quarter
-1.5
Source: Scantrack®, a service of The Nielsen Company; (FDM w/ Walmart) ending 12/26/2009 (versus prior year); AEM4480: Food Merchandising, Professor Perosio
U.S. Retailing & Consumer Trends
Page 42
Private Label Price Differential Versus Manufacturer Brands
0
-5
-10
-15
-16
-20
-20 -20
-25
-27
-30
-35
-37
-40
-45
-50
-36
-34
-24
-26 -26 -24
-32
-42
-46
od
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od
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% difference in price
AEM4480: Food Merchandising, Professor Perosio
Consumer Perspective
Their store brands are a big
reason why I shop there
% agreeing
AEM4480: Food Merchandising, Professor Perosio
Kroger Private Label
Supervalu Private
Label Program
 Quantity
discount
 Quantity surcharge
 Surcharges
used to price
discriminate against those who
expect there to be a discount and
increase profits at the consumers
expense
Grocery Price Setting and Quantity Surcharges
Brands
more likely to include a
surcharge when one of the smaller
brand-sizes is a top-mover and
substantially outsells at least one of
the larger counter parts.
Grocery Price Setting and Quantity Surcharges
Grocery Trends
Coupons distributed in the first half of 2009
increased 12% while the number of coupons
redeemed increased 19%
 Internet coupons, not favored but on the rise
(83% increase since 2005)
 75% of coupon users say the coupons had at least
some influence on their decision to purchase a
new product

http://www.couponsherpa.com/ask-coupon-sherpa/clip-this-top-22-coupon-trends/




A form of second-degree
price discrimination
Used to reduce heterogeneity
in consumer search costs
Enables retailers to attract
informed customers by
discounting
Firm should offer coupons if
increased profit from new
informed customers at the
discounted price exceeds the
cost arising from the
uninformed buying at the
discounted price plus the cost
of administering the discount
Beyond the Many Faces of Price: An Integration of Pricing Strategies


A Problem to Consider…
A firm has a minimum average economic cost of $30.
There exists a distribution of prices for the same
product between $30 and $50 because there are several
other firms that produce this particular good. $50 is the
maximum consumers will pay for the good. It takes one
hour to search for the lowest price, $30. If a consumer
does not search but buys from the first seller, he or she
may get lucky and pay the lowest price, $30, or may get
unlucky and pay the highest price, $50. Assume the
consumers’ opportunity cost ranges from $0 to more
than $20 per hour.
Beyond the Many Faces of Price: An Integration of Pricing Strategies






What is the optimal pricing
strategy?
Strategy of Random discountsmaintaining a high price of $50
and randomly discounting to
$30.
Manner of discounting is
crucial!
Should be indiscernible or
random to the uninformed
consumer and infrequent so
these consumers do not “get
lucky” too often
Informed consumer will wait
for discount
In this way, firm tries to
maximize the number of
uninformed buying good at
high rather than low price
Beyond the Many Faces of Price: An Integration of Pricing Strategies
Nielson.com
Odd
Cent
 $1.99
not $2.00 seems less
Multiple
Unit
3
for $1.98
 People will buy 3, not less
Prestige
 High
quality, high price
 “The higher the price, the better it is”
AEM4480: Food Merchandising, Professor Perosio
Slotting
Allowances are lump-sum,
up-front transfer payments from
manufacturer to retailer when the
manufacturer launches a new product
Relatively recent trend with
significant implications ($2-$10/case)
The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances
Theoretical
Justification
Retailers point to problem of adverse
selection
Information asymmetries
Explosion of new product
introductions, limited shelf space
Signaling effect
The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances
However,
in reality…
Modern retailers possess sophisticated
research abilities (scanner data, shopper card
purchases)
Charging and paying of slotting allowances
are primarily affected by the relative strength
of the players
The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances
Well
informed retailers extract slotting
allowances from relatively uninformed
manufacturers even when the expectation of
new product success is high
Manufacturers who are market leaders are
seemingly able to negotiate more favorable
terms and thus pay lower amounts as slotting
allowances
The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances
The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances
Surprisingly,
research
has shown a weak
association between
average prices for a
consumer bundle and the
characteristic of the
population by census
tract
Distance
between rival food chains
shown to provide the greatest amount of
explained variation in price
Spatial Competition and Price Reporting in Retail Food Markets
Spatial Competition and Price Reporting in Retail Food Markets
Steady
and significant
amount of negative spatial
dependence
Spatial concentration of
firms has been proven an
important consideration in
the geography of price
In practice, these findings
translate to oligopoly power
for those firms operating in
an environment with few
competitors
Spatial Competition and Price Reporting in Retail Food Markets
Local Players
 Operates
70 company-owned supermarkets
and five franchised stores in Western New
York
 Owned by private equity unit of Morgan
Stanley
 Bought Penn Traffic on January 25, 2010,
adding an additional 79 stores
 Announced in March of 2010 that they would
close one Ithaca branch
 Hi-Lo pricing
Hoover’s Online
 Currently
operate 75 stores
 Usually much larger than typical
supermarkets
 Known for gourmet cooking classes and
extensive employee training program
 Lowered price levels in fall of 2008 in
anticipation of weakening economy
 Offers strong private label offering
 EDLP pricing strategy
Hoover’s Online
http://www.youtube.com/watch?v=AKNiNKm-k_8
 Short
for Albrecht Discounts
 Operates 9000 stores worldwide
 Does not advertise
 90% of products are Private Label
 Appeals to broad-basket consumer
 Albrecht Brothers also own Trader Joe’s
 Discount
Hoover’s Online
* Briagate, no Heinz brand available
SimplyMap
SimplyMap
SimplyMap
Ithaca Market Basket Value and Captive Population
Market Basket Value ($)
30
y = 0.0007x + 13.588
R² = 0.8222
25
20
15
Series1
Linear (Series1)
10
5
0
0
5000
10000
Captive Population
15000
20000
Market Basket and Pricing Strategy
Grocery
Chain
Market
Basket Total
Expected
Value
Error
Wegmans
$22.90
$21.06
$1.84
Tops
$24.02
$24.84
-$0.82
Aldi
$16.98
$17.99
$1.02
 Penetrate
unexplored markets where little
competition exists
 In markets where several competing chains
have entered, focus on experiential
differentiation to build brand loyalty and
increase margins
 Increase market share nationally to enhance
purchaser bargaining power
 Negotiate flexible pricing to create buffer for
economic conditions
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