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 Fo od f o Re n F e oz s Fr ic et c sm sti Co Pla r pe od Pa Fo f by on Ba s/C v k ac Be od Sn olic Fo oh ble lc ta A S flic g el ho y Sh lco H -A em on / F N rs pe ia are D C e om are H C h lt ea H od Fo ar e t C Pe al on rs Pe % 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