Grocery stores comprise a more than $500 billion industry in the U.S., according to U.S. Census figures. Not surprisingly, there is fierce competition for a pie that large. As a result, profit margins are razor-thin.
Grocers use pricing strategies to make ends meet. These pricing models -- deployed over tens of thousands of items in a typical supermarket -- allow retailers to offer just enough in discounts without giving away the store.
4 pricing strategies
The four major grocery pricing strategies are:
High-low: Popular with savvy bargain hunters who save by stocking up, these supermarkets offer deep markdowns on some items. Typically, high-low grocers offer an enticing array of weekly grocery coupons, promotions, buy-one-get-one-free, or BOGO, offers and special discounts for loyalty-card holders. The grocers recoup their lost profits by charging slightly higher margins on other items. High-low grocers also typically charge vendors for warehousing, shelf space and promotional displays. High-low chains include Kroger, Publix, Safeway and Winn-Dixie.
“Consumers now have more weapons than they have ever had.”
Everyday low prices: Popular with price-sensitive shoppers, EDLP retailers negotiate rock-bottom wholesale prices from their vendors in lieu of charging fees. They then pass on the savings to customers. EDLP chains include Walmart, Target, Food Lion and Lucky.
Discount clubs: Discount clubs make their profits from membership fees and reduced overhead. As a result, their markup is usually half that of supermarkets. Their warehouse stores typically stock a small fraction of a supermarket's inventory (1,500 items or so) and package it in large quantities to maximize the savings to members. Discount clubs include Costco, BJ's Wholesale Club and Sam's Club.
Aggressive pricing: Although these retailers generally carry fewer than 1,000 items, they specialize in selling name-brand products packaged to sell at attractive prices. Aggressive pricing stores include Dollar General, Family Dollar and Dollar Tree.
Each pricing strategy offers bargains for shoppers willing to put in the work, says Neil Stern, a senior partner at McMillanDoolittle LLP, a retail consulting firm in Chicago.